瑞士百达集团
Investors need to face the consequences of disruptive innovation
Moving from industrial to knowledge capitalism
We have identified a number of drivers of economic and asset-class performance over the next 10 years and beyond, including climate change and demographic shifts, the move from industrial to knowledge capitalism, the challenges facing liberal economies and the phenomenon of concentration, notably of value creation. But before all of these comes innovation, which we believe remains central to the opportunities (and risks) asset allocators and investors alike will face in the years to come.
Simply, innovation is and will remain the main dynamic driving economic and social progress as well as inflation. The very foundations of liberal capitalism would be endangered should innovation whither. Fortunately, we believe that we will see new forms of innovation emerge that will reward investors who are appropriately positioned.
Our vision of innovation is wider than that of many other investment strategists, seeing it stretch across three dimensions: technological, policy and cognitive. The importance of technological innovation is the easiest to grasp, with the most innovative companies and societies generally the fastest-growing ones.
Technological innovation: the future is bright
Proponents of the ‘secular stagnation’ thesis argue that there is a growing lack of investment opportunities linked to waning technological innovation and ageing populations. We do not share this pessimism. We believe we are in the midst of an era of radical innovation across several domains whose benefits will progressively become apparent and could well generate additional growth again, just as new computing and communications technologies in the mid-1990s propelled real annual GDP growth in the US beyond its long-term growth potential. We believe the acceleration in technological change forced upon humanity by the coronavirus pandemic forms the basis for a wave of radical innovation that opens a new avenue for growth and will ultimately raise productivity. Beyond the huge strides made by biotech innovation, we expect to see accelerated developments in areas from preventive medicine to distance learning to artificial learning. Climate change is also proving an enormous catalyst for innovation. Important advances are taking place in genomics, artificial intelligence, nanotechnologies. We believe the present leaps in innovation could drive economic performance and increase the long-term competitiveness of companies and countries like the US and China (see chart 1) that know how to harness it.
Chart 1: Top 10 countries by R&D expenditure (Billion PPP$)
Technological innovation is a major factor in our long-term return estimates. We expect it will be a source of extra returns for many years to come, particularly for equities, in an environment that will be enduringly marked by low returns. While unlikely to be repeated, the Nasdaq index, skewed toward innovative tech companies, made a total return of 45% in 2020 (in USD), compared with 17% for the MSCI AC World. More meaningfully, our index of top-down innovation themes shows significant outperformance since 1997 (see chart 2).
Chart 2: Global innovation has generated significant excess returns over the past two decades
The pandemic spurs policy innovation
But innovation will continue to cause headaches for policy makers. The rise in a handful of digital giants has displaced whole industries and is seen as guilty of fostering social inequality. This in turn has contributed to a populist backlash. Innovation has also led to a resurgence of economic nationalism, as witnessed by American ban on the sale of components to Chinese semiconductor and telecom equipment makers.
Innovation disrupters are also capable of buying up other innovators that threaten their domination. The result is that value creation is concentrated in just a few operators. GAFAM stocks now represent over a fifth of the S&P 500’s capitalisation while a quarter of companies account for 80% of earnings growth (see chart 3). Continued market concentration tends to damage competition and ultimately hurt long-term returns, particularly for equities.
Chart 3: Number of innovation-led companies that account for 80% of earnings growth on the S&P 500
But the slowdown in structural growth and the issues raised by technological innovation are leading to a revival of economic and social policy innovation (closely tied to what we call cognitive innovation). This form of innovation stems in part from the realisation that the most effective, durable way to boost productivity, head off stagnation, deal with climate change and at the same time prevent social polarisation is to promote a more inclusive form of innovation.
The pandemic would well give a boost to new approaches to capitalism. Among talk of “building back better”, post-pandemic recovery plans contain large incentives for innovative ‘green’ businesses. Realising how vital the open exchange of knowledge is to scientific research could convince governments to promote collective intelligence and increased awareness of the benefits of socialising both risks and rewards. All this could be considered a form of cognitive innovation. One can imagine forms of policy innovation stretching in other directions too. Policy innovation will also be needed to reimagine the future of mobility and to narrow the digital divide, for example.
Overall, while investors will have to pay attention to rising regulation—and better coordinated regulation—we still expect disruption to occur as successive ‘waves’ of innovation break across society, holding out the prospect of attractive long-term returns.
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