PGIM’s latest megatrend research, The Technology Frontier: Investment Implications of Disruptive Change, examines how technology is unleashing disruption beyond Silicon Valley and transforming investment opportunities across industries, asset classes and geographies.
What does the spread of technology mean for investors’ portfolios, and what steps should investors take to re-evaluate their own investment as a result?
To answer this question, PGIM’s research draws on the insights and expertise of more than 30 PGIM investment professionals across public and private asset classes – as well as leading academics, policymakers and technologists – to explore the unexpected interplay between technological change and productivity growth, the changing landscape faced by firms across the economy, and the resulting implications for institutional investors.
1. Technology and the Productivity Puzzle
Despite its effect on many aspects of life and work, rapid technological change hasn’t yet translated into a boost in productivity for four primary reasons. However, in the Technology Frontier, PGIM argues that this current era of rapid technological change will drive significant global labor productivity growth, but it hasn’t yet been picked up by macroeconomic statics:
|Slow Diffusion Across Sectors||Winner |
|Productivity as a Lagging Indicator||The Global Digital |
|Technology diffuses slowly and unevenly across sectors||Productivity gains can be concentrated in a small group of monopoly-like firms||It takes years before impact appears in productivity statistics||Stark differences in the level of digital access prevents some countries from benefiting|
2. Technology Beyond the Tech Borders Sectoral implications
Here PGIM examines three “real world” industries to show how advances in “digital world” technologies and rewriting the standard playbook.
- Real Estate
- The elastic mile.
Investors will need to evaluate investment opportunities keeping in mind the shifting time-distance trade-offs in a world with a higher share of flexible work locations, on-line delivery options, and autonomous vehicles.
- “Future proofing” real estate.
Investors must begin adapting their investment strategies today to navigate an evolving, and inherently illiquid, real estate market.
- Retail, reinvented.
The “tale of two sectors” is playing out between physical retail and logistics markets, as E-commerce sales have grown, and the demand for physical retail has weakened.
- The elastic mile.
Diversifying across production methods and geographies.
Investors should look for producers that have taken steps to complement long-term, capital-intensive projects like deepwater exploration with shorter-cycle (and capital light) shale opportunities in North America.
Capturing cost advantages beyond fracking.
Asset owners should carefully evaluate their investments in the sector to ensure their portfolio companies are investing appropriately in cost-saving technologies and staying ahead of the sector’s relentless cost pressures.
Emergence of cost-effective renewable power.
For investors, the increasing demand for energy storage technologies may create attractive investment opportunities.
- Consumer Goods
Small brands go global – and wholesalers suffer.
As a greater share of customers’ brand discovery moves into the digital world, investors will need to carefully evaluate the firms in their portfolios.
Predictive analytics become table stakes.
Investors need to understand how their portfolio companies – smaller, niche brands and global retailers alike – are investing in, and executing on, the cutting-edge technologies that hold the promise of cementing customer loyalty over the long term.
3. Portfolio-Wide Implications of Technological Change
The potential impact of technological change varies significantly across sectors, regions and asset classes. Yet long-term institutional investors should recognize these five possible actions to reap the benefits and avoid the risks of the current wave of disruptive technologies.
- Position the portfolio for obsolescence risk
- Develop a framework to identify technology leaders
- Look beyond venture capital
- Evaluate how data and analytics can be used
- Brace for a “techlash”
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