Technology at the service of humans
Technology stocks have rallied significantly since we launched our Supertrends. Yet, the sector has recently been the subject of controversy regarding data protection. Both developments have left investors wondering whether technology is still the place to be in equity investments. In our view, a number of factors continue to speak for technology as part of our multiyear conviction themes. We therefore retain our focus on "Technology at the service of humans" and now include blockchain technology, which offers numerous interesting applications, in our digitalization sub-theme.
Despite recent controversy, several factors speak in favor of technology companies. Contrary to the tech bubble at the turn of the century, technology firms have significant cash piles and low financial leverage. This puts them in a good position to uphold the strong growth of recent years.
The world is preparing its first steps into data transmission networks of the fifth generation (5G), which is expected to enable the next level of digitalization with billions of devices (e.g. cars) connected to the internet and generating high volumes of data. Meanwhile, our digital world already gave rise to blockchain, a technology that could help create a new network of trust, with many applications much more interesting than last year’s cryptocurrency hype.
These developments are just two examples of why we retain a focus on our Supertrend "Technology at the service of humans" with all the sub-themes. We are newly introducing blockchain to our digitalization sub-theme. We believe that improving efficiency forms the core principle of technological advances in such areas as artificial intelligence, internet of things and blockchain. According to the McKinsey Global Institute, the advent of these new technologies should boost the global economy at a time of weak productivity growth and population aging. In fact, McKinsey estimates that automation could enhance global productivity growth at a compound annual growth rate (CAGR) of 0.8% to 1.4% between 2015 and 2065.
The adoption and roll-out of 5G data transmission networks is one of the most meaningful new catalysts of the technology theme, in our view. 5G enables the establishment of intelligent ecosystems of connected devices and people, which can be self-operating and autonomous. Given this kind of technological advance, the global digitalized world would become like a digital womb where digital infrastructure/ networks connect billions of devices and exchange ever larger amounts of data each day. In our view, this will be the primary reason why organizations will continue to have to fully embed digitalization into their business strategies rather than consider it a mere optimization project.
Regulatory scrutiny warrants diversification
However, tech giants such as Alphabet or Amazon, which might become even stronger in a 5G world, have come under increased regulatory scrutiny in the USA and Europe. Policymakers are criticizing these large firms over privacy issues and increasingly examining tax payments and market dominance to control their size.
In Europe, the new General Data Protection Regulation (GDPR) in place since May 2018 contains material sanctions for firms that do not inform affected parties immediately after a data breach in their networks. It also includes sanctions for companies that use private data without users’ consent. After the Facebook data breach, the USA is discussing the introduction of a similar law. While we acknowledge that the big internet firms might remain in the spotlight, we do not believe that their business model is in danger long term. Yet it is prudent to consciously structure a technology equity portfolio and diversify it well so it is not overly exposed to single-company risk.
Eye on blockchain technology
One area that offers diversification potential in our digitalization sub-theme is the blockchain technology. While we at Credit Suisse have stayed away from the cryptocurrency hype, we believe that blockchain could provide a new network of trust. At its core, it enables processes of collaboration with different parties in a more reliable, transparent and secure way. The so-called tokenization of products/ services in particular allows the involved parties to verify all necessary information at all steps of a transaction in real time. Consequently, a blockchain-style collaboration in many cases eliminates the middle men.
The blockchain technology has numerous merits and, we believe, is here to stay with numerous applications only beginning to have an impact. One very meaningful area of application is logistics. Using smart contracts will enable companies to automate purchasing processes, improve transaction flows, secure supply chains and reduce risks such as cargo theft. Semiconductor as well as software and services firms should benefit from the growing demand for processing power in the blockchain industry and IT services companies. Additionally, companies that act as first movers are likely to gain market share as they use the technology to their competitive advantage.
3.2 Virtual reality/Augmented reality
Some investors think of our virtual reality/augmented reality (VR/AR) theme as a niche area concentrated on gaming. However, VR/AR has tremendous growth ahead, with 5G an important next catalyst. New innovations continue to make gaming devices more convenient and further improve user experience. In December 2017, Magic Leap unveiled its AR system, The Magic Leap One. Though its success remains doubtful, investors have poured some USD 2.7 billion into the system to date. We believe that the involvement of highly reliable investors such as Alibaba, Google, Temasek and Fidelity lends further credibility to the capability of VR and AR.
In fact, VR/AR will soon leap into everybody’s home as TV experience is revolutionized thanks to 5G, which will treat sports event viewers, for example, to a near-live experience. In that context, it is interesting to note the acquisition of BamTech by Walt Disney. BamTech, the former spin-off of MLB Advanced Media (digital media arm of Major League Baseball), is seen as the best video streaming service provider from a technology point of view. It aims to provide VR live streams for sports events.
We expect more and more companies to embrace VR/AR and to see continuous improvement in the application of these technologies in the years ahead, ultimately turning VR/AR into a mainstream mass media technology. The market for VR/AR hardware and software could therefore increase to the size of the current smartphone market (USD 600–700 billion) and grow at the same pace that smartphones witnessed in 2001–2015. In 2018, IDC expects worldwide spending on VR/AR to reach USD 17.8 billion, almost twice what was spent in 2017. Moreover, it expects growth to remain at these levels until 2021, with an estimated CAGR 2017E-21E of around 99%.
3.3 Artificial intelligence
We continue to see the artificial intelligence (AI) market as benefiting structurally from the increasing digitalization of our homes, our industries and our cities. After all, digitalization offers solutions to the challenges society faces, for instance energy consumption, traffic flow and healthcare costs, to name but a few. In September 2017, the first AI-based active equity investment exchange traded funds started trading. Concurrently, Tencent launched a medical imaging AI product, Mi Ying, which it claims helps detect deadly diseases at an early stage. Meanwhile, Amazon has continued to disrupt the retail industry with the launch of the Amazon Go store, which uses some of the most advanced technology in the industry. All of these examples confirm our conviction that the use of AI is set to grow materially in the next 3–5 years.
Of course, the breakneck speed at which this "rise of the machines" is taking place has some people worried about the ethical and uncontrolled use of AI. We believe that the discussion about these issues is positive, as it should lead to better products that benefit society. In our view, the positive aspects clearly outweigh the negative ones. And it is not only larger firms such as Amazon, Alphabet and SAP that continue to expand their AI capabilities. Smaller firms and start-ups have also seen increased funding and stronger interest for mergers and acquisitions. One of the most important developments in terms of investment exposure is the rise of Chinese AI capabilities. Investors can benefit from this trend by buying into selected data platform managers, IT services and application software providers, datacenter managers, semiconductor manufacturers, and AI-exposed Chinese companies.
3.4 Industry 4.0
Robotics has been an interesting example of how technology can enter old economy sectors like manufacturing (secondary sector) or even agriculture (primary sector). We continue to believe in the merit of this sub-theme.
Today, with the exception of Japan, there are still just 74 robots for 10,000 workers in the manufacturing sector of developed countries, according to IFR World Robotics. At 15, the ratio of robots to workers is considerably lower in emerging markets. As labor markets tighten and full employment is attained in a number of economies, the gradual adoption of so-called cobots (from collaborative robot) is almost a given. Such cobots make repetitive or hard tasks for workers safer, ensure higher quality and are more productive. For example, Teradyne, a leading manufacturer of cobots, reported 72% sales growth for its robot division in 2017 and continues to expect 50%+ annual growth going forward. In addition to being applied in industry, these robots may someday assist people in their everyday lives or help in areas like elder care. Amazon is a front runner in using robots to automate its fulfillment centers. The number of robots in operation has reached 80,000, which implies a YoY growth acceleration in 2017 to 35,000 from 15,000 p.a. in the three years before.
All these examples support our view that the longer-term demand outlook for automation remains attractive, driven by progress in IT that has enabled much smarter and cheaper automation solutions. Automation is also transforming industries (e.g. self-driving cars), impacting business models of companies that have missed the trend, and lowering barriers to entry.
Health technology (healthtech) has been a sub-theme of our Supertrend since the very beginning. It is a market that has shown strong growth in recent years and is forecast to continue growing. We therefore continue to believe in the potential of this theme and also see this sub-theme as a vital complement to our "Silver economy" Supertrend.
The global digital health market has been valued at USD 118 billion worldwide, according to industry research firm Statista. It is expected to reach a size of USD 206 billion by 2020, driven in particular by the mobile and wireless healthtech market. Managing patient data, applications of telehealth as well as fitness and wellness, and consultation or remote control solutions via smartphones are all driving growth in this area. In short, healthtech technologies help to improve health outcomes, be it through the promotion of healthy living, disease prevention and diagnosis or treatment and rehabilitation. These technologies include classic digitization solutions, the use of biotechnology, big data approaches or the use of artificial intelligence (AI) in healthcare research and development or delivery.
Care at a distance
With regard to digital tools, we have highlighted the potential for delivering care at a distance. It has been reassuring to see that Teladoc, a leader in virtual care delivery solutions (i.e. virtual visits through mobile/tablet/PC), remains on a strong growth trajectory. The company now expects close to two million virtual physician visits in 2018 – a doubling in merely two years. As ever more healthcare devices are interconnected, we see vast improvement potential ahead with regard to healthcare insights generated in less time and regardless of the geographical location of the patient or physician.
Great strides have also been made in biotechnology with the development of gene therapies and technologies such as RNA interference. The approval of a gene therapy product for retinal disease from Spark Therapeutics just before the turn of the year was followed by a flurry of gene therapy data presented for products aiming to treat conditions as diverse as spinal muscular atrophy, hemophilia or phenylketonuria.
The value of AI in healthtech
Artificial intelligence (AI) has also made inroads into healthcare. The technology is now used by many companies in drug development (e.g. to mine databases to identify drug candidates) as well as in diagnosis. It comes as little surprise that medical image analysis is particularly important. In fact, research firm Tractica identifies this area as the most important use case in the healthcare AI software, hardware and services market, which it expects to reach USD 19.3 billion by 2025.
The key beneficiaries of this third Supertrend are, in our view:
- Internet platform and cloud computing companies that have internet ecosystems to collect, manage, analyze and monetize materially increasing data traffic growth; firms that can benefit from the blockchain technology (e.g. data management and/or network security solutions providers);
- Companies engaged in VR and AR, software services firms that offer AI within their subscription packages, online gaming and online education companies (using AI and VR/AR), IT services companies, vendors of robots, providers of factory automation and maintenance software providers, semiconductor firms involved in blockchain and automotive/industrial end markets, logistics and precision farming specialists;
- Biotechnology firms using big data and AI and specialized on immunotherapy and gene therapy, remote patient monitoring solutions providers, health online education and management portals.
For more information, please contact your Credit Suisse advisor.
- Blockchain technology: A blockchain is a distributed, peer-to-peer transaction system that stores information in an immutable, decentralized way, enabling transactions among unknown participants. Blockchain may be used in cryptocurrencies, finance, logistics etc.
- Tokenization: Tokenization is the process of converting rights to real assets into a digital token on a blockchain, making them easier to trade.
- Artificial Intelligence: AI is the simulation of human intelligence processes (learning, reasoning, self-correction) by machines. AI applications include expert systems, speech recognition and machine vision.