Disruptive
technology

Our world is being transformed as a new wave of innovation, often technology-led, challenges every aspect of how we live and work. Driving these technological advancements is the unending quest for productivity improvement. For investors, this trend is creating new investment opportunities, offering exposure to potential growth strategies other than traditional equity investments.

The disruptive force named technology

It has become something of a cliché, but technology really is changing the way we live and work. The growing use of data for technological advances, the drive for efficiency and the quest for sustainability are together shaping our future society. These new technologies are increasingly prompting changes in a wide range of industries globally. In some cases, technological advances are creating entire new industries that would have not been feasible 30 years ago.

So what are the key megatrends that are driving forward this new wave of technological innovation?

Robotics, automation and AI

Robotics industry expected to grow to $1.2 trillion by 2025
Myria Research, The Chief Robotics Report, Jan 2015

The investment opportunity

Technological advancements are enabling robots to perform increasingly sophisticated knowledge-based work, thereby widening their application. As human labour costs increase and production costs for robots fall, it is hardly surprising that automated systems are rapidly transforming a wide range of industries. Advances in artificial intelligence (AI) and sensor development, for example, mean that robots are acquiring a broader range of skills, diagnosing diseases; driving cars; and understanding natural language.

By seeking to improve productivity – reducing production costs and, in turn, improving profitability – businesses are increasingly adopting robotics and automation systems, therefore investing heavily in new technologies. This augurs well for innovative companies engaged in this evolving megatrend.

The investment challenge

The automation megatrend is very much in its infancy, with automation penetration still low in most industries. Investors should therefore be aware that growth may be volatile and is not guaranteed; the disrupters may themselves be disrupted. Secondly, the implications of a given technology can be hard to predict and may not always come into fruition. The initial application of an autonomous system can be seen as a testing ground, in which a technology is refined and enhanced – before it finds other applications elsewhere.

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Cyber security

Annual cost of cybercrime expected to reach $3-$6 billion by 2021
Cybersecurity Ventures, Cybersecurity Market Report, Oct 2016

The investment opportunity

With the number of internet connected devices expected to exceed 200 billion by 2020 1, the world is becoming ever more inter-connected electronically. As governments, corporations and individuals collect, process and store vast amounts of confidential information on integrated cloud systems, cyber security has never been more important in order to protect data from theft and fraud.

To safeguard against sophisticated hackers, corporations and governments are expected to increase their investment in cybersecurity systems to more than $101.6 billion by 2020 2. This not only helps to protect the financial interests of themselves and their clients, but importantly mitigates the risk of reputational damage associated with data security breaches.

The investment challenge

Companies in the cyber security industry face intense competition, both domestically and internationally, as products often become obsolete quickly due to rapid technological developments. Consequently, such companies may face unpredictable changes in growth rates which may have an adverse effect on profit margins.

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1 Business Insider Intelligence, Cyber Security Report, Apr 2016

2 International Data Corporation, Worldwide Semi-annual Security Spending Guide, 2016

Battery technology

Market for advanced battery and fuel cell materials expected to reach $32 billion in 2022
BCC Research, Advanced Materials for Advanced Batteries and Fuel Cells, Mar 2017

The investment opportunity

Innovative energy storage is changing the world, from functional applications like electric vehicles (EVs), hybrid vehicles, and consumer electronics to stationary applications like backup and distributed storage. Strict emission regulation and grid storage mandates have created opportunities for companies in the battery value-chain.

Demand for lithium, for example – a material used in the manufacture of some of the most efficient batteries – is expected to grow at the highest Compound Average Growth Rate ('CAGR') of 13.7% from 2017 to 2022, partly due to the anticipated boom in EV production 1.

As well as rising demand from the consumer electronics and EV segments, batteries are increasingly being used by electricity generators. Dwindling fossil fuel reserves means there is an increasing focus on grid storage; in particular storing power generated from renewable sources as power generation from such sources is not 'on demand'.

The investment challenge

Battery-producing companies may rely on a combination of patents, copyrights and trade secret laws to establish and protect their proprietary rights in their products and technologies. There can be no assurance that the steps taken by these companies to protect their proprietary rights will be adequate to prevent the misappropriation of their technology.

In addition, the emergence of more advanced, price competitive and new battery technologies could have a material adverse effect on the revenues of certain battery-producing companies and, accordingly, may lead to a decline in the value of such companies.

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1 Zion Research, Lithium-Ion Battery Market by Power Capacity Segment, Dec 2017

eCommerce logistics

Online retail sales growth exceeds 10% per year in most markets
TI Insight, Global eCommerce Logistics Report, Feb 2017

The investment opportunity

The popularity of shopping online shows no signs of abating. In fact, the evolving digital habits of consumers, combined with greater internet penetration – especially in emerging markets with high populations – suggests the global internet shopping revolution will continue to gather pace.

The trend is having an impact on the logistics associated with the transportation of goods ordered online. In pursuit of quicker and more flexible delivery options, specialist companies are influencing the planning, control and flow of products from retailer to end consumer.

Logistics service providers, that can overcome the infrastructural and technical challenges that eCommerce activity brings, are well placed to experience further growth. The global eCommerce logistics market was valued at €176 billion in 2016, which is an increase of +18.1% compared to 2015, and is projected to grow at a CAGR of 15.6% from 2016 to 2020 1, underlining the potential investment opportunities associated with this megatrend.

The investment challenge

The industry is challenged by some companies deriving some or a substantial portion of its revenues from business segments that may be unrelated to logistics services and/or technology solutions provided to logistic service providers in connection with ecommerce. Consequently, such companies shall also be subject to risks that are associated with other business segments.

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1 TI Insight, Global eCommerce Logistics Report, Feb 2017

Pharmaceutical breakthroughs

7,000 rare diseases are affecting 25+ million people in the US alone
National Institutes of Health 2017

The investment opportunity

An “orphan drug” is a pharmaceutical product that has been developed specifically to treat rare diseases or disorders. Pharmaceutical companies often deprioritise orphan drugs. Rare diseases typically offer small markets and low participation rates in clinical trials, meaning lower revenue potential. However, recent regulation in Europe and the US has been favourable for those developing orphan drugs. Revenues grew at a 9.4% CAGR from 2011 to 2016, and are expected to grow at 11.0% CAGR from 2017 to 2022 1, comfortably outpacing growth in the broader pharmaceutical sector.

Developed countries are increasingly implementing tax credits, grants, increased probability of regulatory approvals and reduced timelines for clinical development. Other commercial incentives including premium pricing, faster uptake, lower marketing costs and longer market exclusivity mean many more companies are deploying research and development spend into this area, providing key investment in orphan drug development. In fact, revenues from orphan drugs are expected to increase 11% annually between 2017 and 2022 2, comfortably outpacing growth in the broader pharmaceutical sector.

The investment challenge

There is the risk that a new drug may not ultimately enter into revenue-generating commercial production as a result of (i) clinical trial failures, (ii) governmental intervention or refusal to grant appropriate approvals and/or licenses for clinical trials or commercial production, (iii) a lack of commercially viability. Additionally, even if an orphan drug successfully enters into commercial production, the emergence of cheaper or more effective drugs could lead to a decline in the revenues of the relevant orphan drug producing company in respect thereof.

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1 EvaluatePharma®, Orphan Drug Report, Feb 2017

2 EvaluatePharma®, Orphan Drug Report, Feb 2017

Why gain investment exposure to these megatrends?

These megatrends are interesting from an investment perspective. The premise of equity investing suggests investors allocate capital towards companies that aim to generate and maintain growth rates and which are most likely to generate favourable long-term returns for shareholders.

For investors looking to gain exposure to these trends, there are some important considerations. It is often hard to predict where the next breakthrough will come from, as many of these megatrends are still in their infancy. Investors should therefore be aware that growth may be volatile and is not guaranteed. Furthermore, there is more need to have a broad exposure across the theme. Not only does this position portfolios for the unexpected breakouts, but it also ensures that they are not overexposed to the biggest names in the business.

Important Information

The value of an investment and any income taken from it is not guaranteed and can go down as well as up, you may not get back the amount you originally invested. Past performance is no guarantee of future results. You should consult an independent investment adviser prior to making any investment in order to determine its suitability to your circumstances.

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