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The Fourth Industrial Revolution

Overview

  • Mankind is advancing into uncharted territory in materials science, robotics, artificial intelligence (AI) and genetic engineering to name just a few of the more high profile areas
  • Picking the winners from such widespread technological advance is easier said than done
  • Diversified investment in likely adopters and broader cyclical sectors can be a more effective way to profit

Broad-based disruption

As described by the famous engineer and economist, Klaus Schwab, the ‘Fourth Industrial Revolution’ is characterised by a fusion of technologies that are “blurring the lines between the physical, digital and biological spheres”. It is hard to find a historical precedent for the velocity and scope of these breakthroughs and the degree of likely disruption across sectors. There will be few areas left untouched or unchanged. However, history tells us that we should be wary of our ability to perfectly pinpoint which companies will thrive or even survive amidst such tumultuous change. For every Google, there is a Yahoo.

Ever-changing benchmarks

The companies that will continue to dominate our investment portfolios are forged in the white heat of global competition. They have generally survived and flourished due to their ability to find a way to adapt and grow profits under a variety of political, technological and economic regimes. The exchanges on which these companies are quoted reflect this ever-changing world as it happens. A US index of stocks that was dominated by railroad barons at the end of the 19th century is now dominated by technology titans (Figure 1), selling products and services that would be unrecongisable to many of our ancestors.

A more focused bet

For investors looking to benefit from these widely feared advances, the global technology sector, in PBOS Investment Division’s view, represents a type of focused call option on future human productivity – one that we still feel is attractively priced at the moment. There is also significant secular attraction to the global industrial sector, which should, in whatever shape it evolves into, be one of the primary beneficiaries of these technological advances.

For example, the increasing use of algorithms that predict machine failure and dial in maintenance needs. Or artificial intelligence that uses historic data to optimise a plant and adjust to changing dynamics more quickly than humans could. These structural attractions are happily augmented by more cyclical appeal in the case of both industrials and technology, particularly as we finally seem to be amidst a long overdue upswing in investment and capital expenditure in much of the world.

Nonetheless, in our view, innovation and its adoption is the ultimate force that drives corporate profits higher in aggregate – essentially a bet on the inventors of new technology and its wider adoption. The stock market indices will adapt to the brave new world, and reward the faithful (Figure 2).

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