Investors will have to work harder to plug into technology winners as the global trend modulates from frenzy to maturity, according to a new AMP Capital paper.
The paper, authored by AMP Capital global equities investment manager, Andy Gardner, argues that technology has shifted from a speculative bubble phase to a more nuanced era where traditional business fundamentals hold sway.
Gardner says in the report that despite the “limited use” of judging specific companies against historical business cycles “it would be ignorant to suggest we cannot learn from the past”.
“What we tend to find is that very few things are truly unprecedented, and it is not always different this time,” the paper says. “It can provide useful context to aid (or indeed challenge) our understanding of the current environment and provide clues as to what we should be looking out for as companies and industries evolve.”
History is littered with boom-and-crash technology-based cycles – such as the railroad boom of the 19th century and the IT revolution of the late 20th – where speculative bubbles laid the groundwork for more sustainable business models.
The study says while each rapid technological advance upended incumbents and established new entrepreneurial elites, the transformative periods “also featured speculative bubbles, losses in private savings, and quite often instances of social and political upheaval”.
“Investing in new technology per se does not necessarily generate high returns, and private savings are rarely appropriate for funding ultra-long-term economic infrastructure where the payoff is super long dated, and the value widely distributed to users,” the AMP Capital report says.
Instead, investors benefit most as next-stage companies build more long-term wealth-generating operations on “the new infrastructure” left behind after the bubble pops.
“Secondly, a confluence of new technologies are then developed on top of the new infrastructure, and eventually converge,” the paper says.
The report says the latest tech revolution has passed the “turning point” into later-stage dynamics as some firms leverage on synergies while others hit maturity.
For instance, many of the so-called FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) have established dominant market positions but face growth hurdles as regulation, among other challenges, emerge.
“The past decade, where some of the largest technology stocks in the index had been some of the best performers, has been a dream scenario for passive investors,” the AMP Capital study says. “The decade ahead may be less smooth sailing.”
Technology has already swept through many areas of the economy such as manufacturing, media and retail, lowering costs and opening up new business models.
“Prices of white goods, clothing, and even cars have become more affordable in real terms over the past 20 years. On a like for like basis, the cost of a TV has fallen a whopping 97% since 1998,” the paper says. “You get substantially more for less.”
However, other sectors such as healthcare and education have yet to fully adopt technological solutions, resulting in higher costs and unevenly-distributed benefits.
“It is imperative that we bend the arc of the cost growth in these sectors before they cripple our household budgets, and reducing the digital deficit by embracing technology will provide our best chance,” the report says.
Within the tech sector itself, the AMP Capital Global Companies fund (which Gardner helps manage) leans to enterprise-focused firms rather than consumer stocks and software over hardware producers.
But the technology sector per se may not be the best place to hunt for sustainable long-term returns.
“We believe some of the most attractive opportunities for investing alongside technological trends fall outside of the technology ‘sector’ itself,” the paper says. “Healthcare would be a prime example.”
Investors must also consider the impact of technology as it flows through trends such as artificial intelligence, the ‘gig’ work economy and climate change in the search for sustainable returns.
“With a recession bearing down on the economy, and indexes increasingly dictated by a few large companies, we believe continuing to deliver strong risk-adjusted returns will not only require a more targeted approach, but also differentiated holdings,” Gardner says.
“Some of the most attractive ways to invest in the next 10 years are likely to be found in specific technologies, profit pools, and industry verticals that are generally less well understood – but where many of the strongest competitive advantages and structural growth stories are to be found.”
The last five major technology disruptions dating back to the late 18th century industrial revolution have occurred every 40 to 60 years – but the next one could break with historical averages.
“While the above provides a plethora of opportunities to the truly unconstrained global investor, there are of course risks that emerge too,” the AMP Capital report says. “It does mean that there is the potential for new disruptive business models, products, and innovations to emerge from nowhere.”