Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
Spotting the next big trend in markets and profiting from it is an invariably difficult two-stage process. In the late 1990s investors thought they were about to accomplish just that, as they invested in the early enablers and adopters of the internet in great numbers. With the monetisation of technology related ideas still in its infancy however, a bubble in stock valuations burst even more quickly than it had formed. Investors were right to be inspired but they had backed their hunches too early.
Lessons have been learned. New technologies generally meet with understandable scepticism about whether they will open routes to new and profitable investments. Rarely a day passes without some discussion about the valuations of America’s technology behemoths – Apple, Alphabet, Amazon, Facebook, Tesla, among others – and whether or not they are justified.
There are two big differences today compared with two decades ago. The first is that technology stocks now have a long track record of providing investors with attractive returns, although investors should note that past performance is no guide to future returns. The second is that many technology companies are now highly profitable. Debates about the future growth being pencilled in and whether or not it will actually be achieved persist, however.
It’s tempting to assign the lessons learnt during the technology boom and bust with the recent meteoric rise of bitcoin and a raft of other cryptocurrencies. Doing so might suggest the ideas backing bitcoin are right; it’s the valuation of that idea that should be met with caution. Bitcoin’s past volatility may count it out as a useable currency for the time being leaving it, for now, ostensibly a risk asset. That might change given time, but there is no guarantee it will.
Advocates will point to the absolute, finite supply of bitcoins that even gold can’t match as a reason for investing, as well as the fact that bitcoin lies beyond the reach of central banks. In an increasingly digital world, it also makes sense that digital wallets using digital currencies are the way of the future. In China, estimates suggest nearly half of the population are now using mobile and digital wallets and adoption in the UK, at 24%, has been impressive too¹.
Perhaps the most reliable way of spotting the next big trend lies in identifying an innovation with the potential to do something genuinely useful. A technology that raises the efficiency and profitability of businesses, improves the lifestyles of consumers or assists governments and communities in achieving their environmental goals may have a better than average chance of succeeding.
The world’s so-called mega-trends have not changed over the past year and neither have the challenges involved in addressing them. Climate change; feeding and caring for growing and aging populations; a shift in power and influence from west to east; a process of rapid urbanisation in emerging countries; and finite supplies of natural resources continue to demand solutions and present companies able to provide them with great opportunities.
Developments in technology can make a more equitable distribution of wealth and resources more achievable. In just the past year, we have witnessed strides forward in terms of drug development, the creation of efficient supply chains and the increased use of digital technologies. An important question for investors now is did the pandemic alter the longer term paths of companies and markets and, if so, how?
I was struck this week by news of disappointing subscriber additions at Netflix, which drove a short, sharp fall in the company’s shares. The pandemic undoubtedly provided a big boost to on-demand content providers, however, there is some evidence now that demand has subsided as some of the world’s economies start to reopen.
It’s unclear, in Netflix’s case, that the pandemic caused a further, permanent shift from broadcast to on-demand programming. However, that shift was evident before the pandemic and there seems to be little reason to expect it to reverse now, even as the world approaches a new normal. Part of the reason for a slowdown in new customers in the last quarter was ascribed to film production delays last year. We shall see.
Arguably, social distancing during the pandemic played in strongly to a longer term trend to automate processes in the industrial and services sectors. It probably accelerated the adoption of nascent drone and robot technologies, for example, in the remote care of hospital patients, e-commerce fulfilment, enforcement of lockdowns or cleaning of public spaces².
Some businesses implemented shifts to cloud computing, artificial intelligence and sophisticated cybersecurity in 2020, enabling their employees to work more effectively from home. A global business survey commissioned by Xerox last summer showed more than half of the world’s companies were increasing their technology budgets to support a hybrid model of remote/in-office working and around a third were planning to speed up their digital transformation³.
Industrial robots proved their worth in manufacturing and warehouse settings during the pandemic and their use is only expected to grow as robotic capabilities increase⁴. There seems to be little incentive for businesses to reverse such changes – robots that can take over simple functions or work collaboratively with people are probably here to stay. Meanwhile, e-commerce businesses that used new software and data in 2020 to help them grow and strengthen their relationships with customers are unlikely to want to cede such advantages as economies reopen.
Quite apart from these trends, other themes may unfold faster than might otherwise have been the case owing to government-led responses to the pandemic. The idea of rebuilding economies in their old images has become increasingly unacceptable in a world challenged by climate change and intensifying pressures on natural resources.
The providers of renewable energy, electric powered transport and the infrastructure associated with both look set to be among the winners in the next world about to be built. The information provider IHS Markit forecasts compound annual growth in sales of electric vehicles of nearly 52% between now and 2025⁵. Last month, Rolls Royce unveiled a project aimed at producing an all-electric passenger plane to be ready for commercial service in 2026⁶. These are themes that have legs because they offer partial solutions to two of the great challenges of our age – climate change and pollution.
A number of funds on Fidelity’s Select 50 list are providing investors with exposures to growth themes set to substantially outlast the pandemic. For example, the Baillie Gifford Japanese Fund has large positions in Japan’s machinery and electronics sectors and includes top-10 holdings in Fanuc, one of the world’s big-four makers of industrial robots, and the heavy equipment manufacturer, Kubota.
Another Select 50 choice, the FP Foresight UK Infrastructure Income Fund, offers an exposure to investment companies dedicated to renewable energy and infrastructure projects and targets an attractive annual income from its investments of 5%, although this level of income is not guaranteed. The Fund’s largest investments currently are: Greencoat UK Wind, a leading investor in operating UK wind farms, and Sequoia Economic Infrastructure, which itself owns a diversified portfolio of renewable energy, transportation, communications technology and accommodation assets.
The Stewart Investors Asia Pacific Leaders Sustainability Fund plays into at least three mega-trends: A shift in economic power eastwards, emerging markets growth and the increasing importance of delivering growth through economically and environmentally sustainable means. Investments centre on high quality Asian companies positioned to benefit from, and contribute to, the sustainable development of the countries in which they operate.
¹ Payments Cards & Mobile, 09.11.20
² National Geographic, 03.09.20, and IEEE Spectrum, 30.09.20
³ Xerox, 15.06.20
⁴ International Federation of Robotics, 25.02.21
⁵ IHS Markit, 19.01.21
⁶ Rolls Royce, 11.03.21
Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. The Foresight UK Infrastructure Income Fund investment policy means it invests mainly in units in collective investment schemes. The Stewart Investors Asia Pacific Leaders Sustainability Fund invests in a relatively small number of companies so may carry more risk than funds that are more diversified. The Foresight UK Infrastructure Income Fund and Stewart Investors Asia Pacific Fund may use derivatives to reduce risk or to manage the funds more efficiently. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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