The next decade will see an urgent and widespread boom in investments in innovation across all economic sectors. This technology wave will be in both private and public sectors, with much of it driven by geopolitical imperatives, not just economic value. Deep water waves represent the powerful, long-term drivers that face investors, fundamentally altering the economic, political, and public-policy foundations for asset prices. Accelerated by COVID-19 and intensified by socioeconomic pressures, climate change, and geopolitics, these forces will exert themselves on every facet of investment portfolios for years to come:
- Driven by national security as much as economic considerations, wealthy nations at least appear set to urgently invest in technological innovations. The use of automation will accelerate across all sectors.
- Widespread adoption of automation requires urgent deployments of certain enabling technologies such as 5G, but also accelerating the development and implementation of artificial intelligence (AI), machine learning applications, and quantum computing, across sectors.
- In most cases, innovation breakthroughs require new or updated legislation to account for the transparency of algorithms, safety, and fundamental rights. This adds a layer of complexity that that most impacts in democracies.
- The usage of innovative technologies in service sectors has the potential to revolutionize the structure of job markets in advanced economies that have become more service-sector driven. The disadvantages are the capital requirements and the relatively long lead-time to reaping the resultant boosts to productivity, and the geopolitical struggles between the United States and China will be an important additional driver beyond economic value considerations.
- The biggest impact of the “innovation wave” likely will be felt in the boosts to productivity provided by the relatively easy rollout of automation in the most underpenetrated industries and countries.
One potentially underappreciated side effect of this drive to “digitalize” will be to demonstrate an increasingly outdated convention in asset management: labelling “developed” and “emerging” markets; Investors should first identify the best-in-class companies and then be clear-eyed on the limitations of the countries where they are operating. For further in-depth analyses, please read the Franklin Templeton Investment Institute’s Deep Water Waves.
What Are the Risks?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Past performance is not an indicator or a guarantee of future results. Stocks historically have outperformed other asset classes over the long term, but tend to fluctuate more dramatically over the short term. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size and lesser liquidity. Investments in fast-growing industries like the technology and health care sectors (which have historically been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement or regulatory approval for new drugs and medical instruments. Small- and mid-capitalization companies can be particularly sensitive to changing economic conditions, and their prospects for growth are less certain than those of larger, more established companies.
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