The far-reaching implications of the global economy 'going digital' are no longer in dispute, but it is still unclear which industries will thrive and which will be stifled or superseded by the steady march of technological progress.
How can investors identify companies seizing opportunities and avoid those facing potential obsolescence? We have identified seven ways technology continues to shape the investment landscape and explain why investors need to be aware of these trends.
1. Millennials Come of Age
The millennial generation is the largest in U.S. history at 92 million individuals (U.S. Census Bureau, 2014). With a median age of 26, the millennial generation is transitioning into the age bracket associated with household formations and rising discretionary spending. However, baby boomers are aging out of their spending years. We believe consumer spending will be pressured by roughly 1% a year until 2019 then accelerate. However, millennials spend differently, preferring ecommerce transactions, renting over buying and health-conscious options. Addressing the millennial customer requires companies to change their strategic direction, which creates both opportunities and challenges.
2. Crossing the Digital Divide
Today's analog leaders could succumb to tomorrow's digital disruptors if they don't invest in crossing the analog-digital divide. Companies are re-thinking their business models and investment decisions to adapt to this shift.
As the digital consumer has taken hold, companies have differentiated their products by providing more customized, unique or readily available options, a shift that may change the logistics industry. Conversely, more heavily regulated industries are somewhat insulated. The implicit regulatory cost may slow the pace of digital innovation in financial services, energy and healthcare.
3. The Internet of Things Gets Personal
Mobility and cloud computing advancements have precipitated a surge in connectivity to monitor and manage devices, from appliances to automobiles. This concept,
dubbed the Internet of things, is expected to grow from approximately 10 billion connected devices today to 50 billion by 2020, creating rapid growth in personally identifiable information and other forms of data. From wearables to cars, we think the investment opportunity is in companies poised to benefit from data creation, storage and analysis, including companies focused on cyber security, data-center construction, or electric and sensor car components.
4. Data Wars
User trends continue to drive exponential data and traffic growth, with social media now accounting for 90% of mobile data traffic. Consumers expect immediate gratification but experience internet impatience because web pages actually load more slowly. Every 100-millisecond delay can cost an e-commerce site 1% of revenue. Web-scale and cloud companies are responding by reducing any network latency to improve performance.
5. Emerging Biotechnology Trends
The ability to consistently manufacture generic drugs is difficult but certainly not impossible. The prospect of creating commercially available biosimilars (generic copies of biotech drugs) has always been daunting because of investment costs, FDA-associated hurdles and doctor reluctance to switch from well-known drugs. Recently, the environment has changed. Many well-capitalized biotech firms have invested to create copies of some of the largest biotech drugs. The FDA also seems more open to approvals, perhaps because of progress in Europe where biosimilars have been a safe, cheaper alternative for several years.
6. Healthcare Digitalization
The government incentivized healthcare providers to go digital through the $20 billion Meaningful Use stimulus program. This established healthcare IT as the platform for change, benefiting many vendors of electronic medical record systems, clinical and practice management systems, and workflow solutions.
Employer and payers are shifting healthcare costs onto employees and consumers. We think opportunities abound for companies to provide digital tools that enable consumers to control their healthcare consumption and make informed decisions.
7. U.S. Energy Renaissance Isn't Dead
The collapse in commodity prices doesn't mean the U.S. energy renaissance is dead. We believe prices today are below threshold economics for most U.S. producers, creating a major speed bump for the energy industry. But it won't change the big picture; the U.S. is a major swing oil producer. Low prices will cause supply to fall and demand to rise. The world will probably need the U.S. to start ramping up production to meet demand by 2017.
Todd Wakefield is a CFA with The Boston Company Asset Management, LLC
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