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The 'Fourth Industrial Revolution'

Overview

  • Mankind is advancing into uncharted territory in materials science, robotics and artificial intelligence (AI) to name just a few of the more high profile areas
  • Identifying the winners from such widespread technological advance is a tricky endeavour
  • A diversified bet 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 physical, digital and biological spheres”. There are few times in history which match up to the current pace of technological advancement, let alone the breadth across different sectors for which this disruption is permeating through.

However, we should exhibit a degree of humility when attempting to identify the specific companies which will be at the forefront of this frontier of change. For every Google, there is a Yahoo.

Evolving benchmarks

A US index of stocks that was once dominated by railroad barons at the end of the 19th century is now governed by technology powerhouses (Figure 1).

Technology powerhouses

These companies’ ability to profitably adapt through a variety of political, economical and regulatory regimes is reflected in their remarkable ascent in the indices which represent them. Just as the sector continues to evolve, so do the indices in which they are quoted.

A rare reformation of the GICS industry classifications – designed to reflect the evolution in which people communicate and access information/entertainment content – pays testament to the idea that the definition of what constitutes a technology company now is perhaps blurrier than in the past.

A call option on future human productivity

In our view, the global technology sector represents a type of focused call option on future human productivity. Excessive valuations are often touted, but scars from prior tech bubbles likely help fuel this narrative – from our vantage point, the sector is attractively priced at the moment. There is also significant secular attraction in 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 more structural attractions are happily augmented by more cyclical appeal in the case of both industrials and technology, particularly as we see a sustained trend in investment, despite some fears of wavering demand within certain pockets of the sector. 

Nonetheless, more broadly, 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).

Corporate profits