Firm looks ahead to what might shape our future and where the innovation might come from
Many of us are guilty of focusing on the short term rather than the long term. In investment terms, that could mean the next two years rather than the next 10 years.
The team at Capital Group have, therefore, taken a trip to 2030 to try to imagine what the trends could shape the future. They put forward 10 themes to consider.
1. The big keep getting bigger
Simply, size matters, especially when it comes to market share in the digital era. It’s a theme most obvious in online advertising where Google (Alphabet) and Facebook control 37% of the market. Contrast this to the fragmented days of 2007, when the top two competitors combined for just 4%.
Equity analyst Brad Barrett said: “Because of their size, they are driving the best returns for advertisers. They are growing by driving more usage and showing more relevant ads — not by raising prices.
He believes that high barriers to entry and scale advantages that favour global instead of regional players are two reasons this trend could continue well into the next decade.
“There is also now a very tight feedback loop related to a company’s service quality and the scale of its business,” explains Barrett. An example is that consumers tend to prefer social media sites that already have a large and growing user base. Search engines provide better results when more people use them. And the bigger a streaming platform gets, the more it can reinvest in content, which could help lower costs and attract even more users.
2. Cloud demand is sky-high
Microsoft has experienced two years of growth in two months for cloud services during the pandemic. Capital Group equity portfolio manager Cheryl Frank believes an ever-larger number of companies will go cloud-first or cloud-only, adding that with global information technology spend around US$3.7 trillion in 2019, even a moderate increase in companies switching to the cloud could have a massive impact on the bottom line for market leaders.
This is another case where the big get bigger and the well-entrenched — such as Amazon’s AWS and Microsoft’s Azure — are more likely to maintain staying power.
Capital puts forward that the barriers to entry, switching costs and the ecosystem effects are significant, making it tough for new players to reach competitive scale. Frank also expects the big cloud providers to influence the tech supply chain, based on what they decide to produce themselves and what to outsource. Vendors who supply equipment needed to grow data centres, such as CPUs, batteries and cooling equipment, may become vulnerable as a result.
3. Innovative leaders may emerge in emerging markets
When it comes to innovation, large U.S. tech companies hog the headlines. That conversation is likely to shift towards China and other emerging markets, according to portfolio manager Chris Thomsen.
“We’re likely going to see emerging markets companies move from copycats to true innovators,” Thomsen said. “We used to refer to companies like Alibaba as the ‘the Amazon of China’ or Baidu as the ‘Google of China’, but these companies have really developed and localized their technology, while accelerating their growth in ways different from the U.S.”
Successful new entrants may scale more quickly than older companies. “Consider Pinduoduo, which is an e-commerce company in China that is less than 10 years old but has already surpassed a US$100 billion market cap. Likewise, the US$150 billion multi-service platform Meituan has over 450 million active users. There are going to be a lot more of these cropping up across industries.”
4. The prognosis looks good for a cancer cure
A cure for cancer? Really? According to Frank, this is closer than you think thanks to breakthroughs in gene therapy and new applications of artificial intelligence, which are accelerating drug development.
She said: “I believe some cancers will be functionally cured with cell therapy between now and 2030. New, reliable tests should enable very early detection of cancer formation and location. Beyond 2030, cancer could be largely eradicated as a major cause of death through early diagnosis.”
She added: “I expect to see many global blockbuster drugs from China by 2030. The country has the biggest population of cancer patients in the world, and it’s significantly easier to enroll those patients in clinical trials. I expect they will begin to produce novel drugs within five to 10 years and sell them at one-tenth of the cost in the U.S.”
5. House calls are coming to health care
Just a few months ago, the idea of meeting with a doctor through a laptop screen may have seemed impractical, impersonal and ineffective. But after months of social distancing, many of us have had our first telehealth experience and realized it works.
Frank believes this could be a tipping point that leads to a vastly different landscape by 2030.
“I believe the combination of telehealth, at-home diagnostics and medicine delivery will enable almost everything to become treatable from home. Personal devices will use this data to help us improve our health, while physical doctor visits may evolve to be only diagnostics and procedures. Wearable and implantable technologies will essentially become an extension of ourselves.”
6. Content is king, but streaming is the kingdom
The shift to streaming content is another consumer trend that got turbocharged as a result of COVID-19. However, Barrett thinks this is just the beginning. He said: “Roughly one-third of all content consumption is currently done over streaming platforms, but by 2030 I think that’s going to increase to more than 80%.”
Even if consumers moderate their TV bingeing in a post-COVID world, the trend toward streaming could still remain in place. This is great news for platforms like Netflix, Amazon Prime Video and Disney+ that could continue to see robust subscriber growth. Barrett added: “It’s an enormous market. TV continues to dominate people’s leisure time. And it’s shifting rapidly from linear to streaming. You have this incredible combination of streaming being both better and cheaper than traditional television, and I don’t see that changing.”
7. Artificial intelligence could spark the next tech revolution
Machine learning — a form of artificial intelligence in which computer algorithms improve themselves in real time by processing tons of data — is already all around us. “Machine learning is now core to the entire online ecosystem. It drives recommendation engines we see on platforms such as Facebook, Netflix and Amazon, which can influence much of our social and commerce experiences,” Barrett said.
From speech recognition to fraud detection the applications are vast, and computers are getting smarter and more capable every day. “I think image recognition is one area where computers have already surpassed humans,” he added.
8. Self-driving cars may rule the roads
“They're incredibly precise. Their lane centering and turning is probably already better than ours,” Barrett stated, based on his experience riding in autonomous vehicles from Google and Zoox, a startup that Amazon offered to purchase for $1.3 billion earlier this year.
The world could look vastly different if autonomous vehicles eat into the 15 trillion miles that are driven annually. “There are big implications for land use, energy consumption, real estate, the ways cities are designed — really for everything.”
“Ultimately, I think it's going to be cheaper and safer, and you're not going to have to pay attention to the road. That's a pretty compelling value proposition.”
9. ESG could be a pillar of portfolios
Socially responsible investing has been around for years, but a desire for asset managers to screen companies with an ESG has risen in 2020. “As we sit in the middle of a pandemic with the renewed rise of calls to eliminate social injustice, there’s no question that ESG will be a major investing theme over the next 10 years,” says Frank.
Companies that are more environmentally focused and promote diversity may appeal to consumers that increasingly prefer to align with businesses that match their personal values, while strong corporate governance could potentially reduce investment risk due to improved transparency and better capital allocation. Those are but two reasons why businesses with a focus on ESG may appeal to investors like Capital Group.
10. The U.S.-China rivalry may define geopolitics
Thomsen cautioned that the frosty relationship between the two superpowers could remain one of the top investment themes over the next decade.
“It’s not just geopolitics. It will also have a direct impact on businesses as they are forced to take sides and perhaps adjust the way they operate on both sides of the fence,” he said. Earlier this month, the U.S. issued executive orders to ban popular apps TikTok and WeChat if the U.S. segments are not sold by their Chinese-owned parent companies.
“Purely domestic Chinese internet companies, for example Alibaba and Baidu, aren’t going to be hurt by a trade war. I also look across industries at innovative startups led by amazing entrepreneurs.”
