As equity portfolio managers, we are regularly challenged to identify opportunities concerning equities that might, at some future point, make a major contribution to our daily lives. The impact of the Covid-19 pandemic has meant that the 4th Industrial Revolution has arrived earlier than any of us could ever have dreamed it would.
Morningstar, in a recent research paper, highlighted several new technological themes:
- Big data and analytics: The potential of data sets too large and complicated to manipulate or process by using standardised methods. Sub-themes here include the Internet of Things, machine learning, and artificial intelligence.
- Networks and computer systems: Technological leaps, ranging from hyperconnectivity and integrated systems to service continuity and new software-defined architectures will inevitably have an enormous impact on the ways in which people connect software with hardware.
- Nanotechnology: The division of technology dealing with dimensions and tolerances of less than 100 nanometres. There are a variety of potential applications in this area, including in medicine, computers, manufacturing and travel.
- Medicine and neurosciences: Sciences like neurochemistry and biotechnology can radically change the ways in which we treat diseases.
- Energy and environmental systems: This area concerns the exploration of renewable energy sources – among them solar, wind, water and battery power. There is increasing demand for metals such as copper and platinum for use in electric motors, as well as for use in the catalysts used in modern petrol engines.
- Robotics: The area of technology concerned with the design, construction, operation and application of robots. Applications here stretch across technological, industrial, medical and consumer-oriented channels.
- 3D printing: A process by which a physical object is made from a three-dimensional digital model. The technology has sufficient potential to disrupt a few industries, from industrial manufacturing and medicine to consumer products and retail.
- Bioinformatics: The science of collecting and analysing complex biological data. The modern tendency to gather data quantifying aspects of the daily life of individuals has enormous potential to positively influence human life expectancy and quality of life.
- Financial Services Innovation: This involves new financing sources and platforms, as well as currencies, value transfer and payment methods.
- E-commerce (electronic commerce): The purchase or sale of products by electronic means using online services or via the Internet.
Company exposure to the themes
The names of some of the major market capitalisation companies with exposure to these themes are listed below. Along with the company exposure, the price/earnings ratio for each of these companies over the next 12 months is also noted – a good measure of valuation and one that also accounts for future growth.
|Theme||Company||PE next 12 months|
|1. Big data and analytics||Microsoft||34|
|2. Networks and computer systems||Apple||26|
|4. Medicine and neurosciences||Roche||19|
|Johnson & Johnson||17|
|5. Energy and environmental systems||Tesla||116|
|6. Robotics||Intuitive Surgical||68|
|9. Financial services innovation||Tencent/Naspers||26|
Source: Bloomberg, Morningstar
Although most of these companies have ample opportunity for growth, their valuation must still be considered. The valuation paid at the inception of an investment can have a significant effect on its future returns over the long term.