Long-term investment themes
Some themes are obvious. We expect that with an ageing population we will see a consequent increased demand for related spending, such as healthcare, but also discretionary consumer expenditure on leisure, such as cruises. Less obvious, however, is demand for financial advice as strategic pension planning becomes critical as we all spend much longer in retirement.
Other obvious themes can be found in the automotive industry. The transition from fossil fuelled transport to electric provides opportunities, but also the threats to incumbent vehicle manufacturers. The inclusion of artificially intelligent engineering and potentially self-driving, speed restricted vehicles threatens the performance car, but then opens up opportunity for the extensive hiring of cars for standard travelling, hence the ability of Uber to recently successfully float on the US stock exchange, despite being loss-making.
We should be wary when competing in a crowded marketplace
The latest successful round of financing for Tesla was based on a similar belief that they possess a product which will change all of our lives. However, this is where we must be careful, as those with a high profile today may not be the eventual winners. Twenty years ago, in May 1999, those old enough will remember the predictions of the internet revolution and the stratospheric valuations of dotcom businesses at the time. The last profitless flotation that promised to revolutionise discount retail was lastminute.com - an ironic title - and where are they today?
Actually, they are still going but competing in a crowded marketplace with the likes of Booking.com, Kayak, Trivago, Groupon and many others where low economic barriers to entry have competed away any first mover advantage they may have initially had.
At the same time, Yahoo was the internet search engine of choice with no hint of the future dominance of Google. The growth theme was the demand for internet search engines, so an open mind to the successful players was vital. This is the same today with electric cars. Battery charging technology defining range will be the key, with many combustion engine manufacturers pouring millions into development.
The same can be said of Purplebricks, which has shaken up the estate agency industry. Unfortunately, lots of secondary mover businesses have also set up, competing away the super-normal profits in the UK whilst Purplebricks were spending all that first mover profit on lossmaking overseas expansion. The CEO has gone, and investors are now regretting not selling when they had enjoyed a five-fold share price increase. The wonders of hindsight! Then there is the rise of Amazon and the demise of the high street – secular and irreversible trends.
The companies of today
Amongst the largest companies of today are Apple, Microsoft, Google, Netflix, Facebook and Amazon and we all know why. To illustrate their penetration into everyday life, I have used the first three of these in the preparation of this article.
Then there is the social media revolution involving Facebook and the like, with ‘youtubing’ now being an advertising career based upon followers and views, rather than paying subscribers, making millionaires out of teenagers. Additionally, we have witnessed the move into domestic TV-on-demand and box-set binging that we are all able to do, instead of making do with scheduled terrestrial TV. All of these are examples of technology-enabled consumer evolution and all have delivered investment opportunities and disturbed the incumbent status quo.
Looking to the future
Returning to the flotation of Uber, many have questioned how a loss-making business could attract a valuation of $82bn and have noted that the prospectus stated that the business may never make a profit. One clue is revealed by the fact that PayPal took a $500m stake. The key here is not what Uber achieves today, it is what it could become in the future with self-driving cars and a captive passenger who can be sold to whilst travelling. Investors, and PayPal, are obviously prepared to gamble on that future. If you have ever used Uber, you will be astounded at how convenient, quick and cheap it is. No need for cash, lots of availability and most convenient of all, they will pick you up from wherever you are. There are alternatives to Uber such as Lyft, but the former has first mover advantage and for the consumer, there are few downsides. And remember, Facebook was unprofitable when it floated with many sceptical commentators.
The same can be said of battery technology. The company that creates a rechargeable battery powerful enough that mobile phones will only need charging once a week, or enables electric cars to travel for as long as fossil fuelled cars, will be the largest company in the world. The same goes for artificial intelligence applications. Many of us will be familiar with the frustration of poor service from call-centres and being passed around a large organisation where no-one appears to be able to help or even want to. In time, artificial intelligence will provide this, but as we have seen tragically with Boeing, allowing the machine too much control can be catastrophic.
We wish we had the answers as to who will emerge victorious in each of these markets. Those that do will be the billionaires of the future. Observing all the security paranoia over Huawei at the moment, just imagine if China became the source of these inventions and not the US? In fact, electric car sales in China were twice that of the US in the year to the end of December 2018 (Source: Google, not Baidu, the Chinese equivalent). This is probably influenced by the availability of US oil reserves, population density and the US desire for gas-guzzling pick-ups. So, as Android enabled phones stop supplying US applications as part of the Huawei/trade negotiations, will China really care that much if they have their own alternative, with equivalent or better functionality?
Expanding outside the Western Economy
The US is feeling that its global dominance is under threat, having had it all its own way for so long. This is no bad thing and they should be the last to complain, being such advocates of free market competition and capitalism. However, that is probably only okay whilst they are the dominant player. We recall China quietly landing on the dark side of the moon in January, just after Trump had announced his planned space force for US domination. Observe how US Western allies, including the UK, are being careful not to aggressively join the anti-Huawei US assault, nor support the US aggression towards Iran. These are all potential allies of China (and Russia) and smaller nations need to be careful how they play their cards.
This influences investment as most equity portions of portfolios are significantly exposed to Western businesses. If the future technological revolution is going to come from the east, so much so that the West may subsequently be in decline, then we need to take heed. History is littered with the rise and fall of great empires.
Who will win the wealth of the future?
Clearly, the US is using any means at its disposal to protect its global monopoly on technological evolution and it has been accused by China of being a bully in the latest trade negotiations where intellectual property theft is a perceived stumbling block. We are all familiar with the demand from the east for our universities and fee-paying schools – this will be all part of the centrally controlled future strategy of the People’s Republic of China. Regardless of your views on the political system, Western democracy is hardly covering itself in glory at the moment. Meanwhile, under the bonnet, there is a technological war going on which will define the winners and the wealth of the future. As investors, we need to keep a very close eye on this as the US plays hard ball with China. We have a second superpower in the making and the first is feeling threatened. The rise of the east is cause for concern, but also opportunity as we monitor asset allocation. Hopefully the power struggle will be peaceful but if we refer to history, that has been far from the case. Let’s hope the human race has evolved somewhat so that we all benefit.