For futurists, blockchain and autonomous vehicles are sure to transform everyday life and global economies. But that doesn’t mean investors should pour money into the underlying businesses.
The exuberance around these technologies “is often way ahead of today’s investable reality,” argues global asset manager PGIM in a new report. While institutional investors are often rewarded for being among the first to new asset classes, uncrowded sectors, and start-ups exploiting new innovations, it also comes with risk.
“As these evolving technologies mature, institutional investors should consider tangible investment opportunities like private blockchains and infrastructure for greener and smarter vehicles,” said the study, which addresses the investment implications of technology disruption in the services sector.
Taimur Hyat, chief operating officer at PGIM, Prudential Financial’s $1.5 trillion public and private asset management business, pointed out that investors need to be aware of the stances of regulators in different countries. In China, for example, there is a lot of regulatory support behind autonomous vehicles, while in Europe, there are serious concerns about the employment impact that self-driving vehicles could have on the workers who currently operate traditional means of transportation, such as truck and taxicab drivers.
“Try to focus on tech that is tangible and touchable now,” Hyat told Institutional Investor. “One of the things that makes us a little more circumspect is the tech-lash risk, which [exists] in all of these sectors.” These issues include privacy and regulatory concerns about leveraging big data, know-your-customer rules when financial services firms use the public block chain, and the use of machine learning and AI algorithms in regulated sectors like insurance and banking.
“We are less bullish on blockchain and crypto than perhaps some others,” said Hyat. He explains that the public blockchain comes with environmental, social, and governance issues, such as the massive energy requirements of cryptocurrency mining. “With cryptocurrency, we’re already seeing the regulatory backlash.”
PGIM focused its most recent megatrends report, which includes input from a wide range of portfolio managers, analysts and others, on the potential for technology to disrupt the service economy, for a handful of reasons.
First, that’s where the jobs are. Two-thirds of global GDP is in services, and three quarters of the workforce in developed markets is in services. Even advanced emerging markets are dependent on these industries, with almost half of their labor force employed in these sectors. If technology disrupts services the way it has manufacturing and retail, the impact will be massive.
“One-third of a typical institutional portfolio would be companies in the services sector, whether investors own the debt or equity of private and public companies,” said Hyat.
PGIM conducted the research now because Covid-19 has pushed companies, individuals, governments, and others to use technology applications that they may not have adopted for years. Everything from telehealth and online payments to logistics networks that help speed package delivery took off during the pandemic. Many had no other choices. Hyat pointed out that outside big cities, for example, small businesses rarely did non-cash transactions. That’s all changed now, he said.
But investors shouldn’t expect the impact of technology on services to mirror the cycle in manufacturing or retail.
Hyat attributes that to several factors, including the higher cost to acquire customers. “People don’t change their financial adviser or their medical provider the way they might change the way they shop online for a bottle of raspberry jam,” he said. “Accessing the right customer is [also] much more costly, and those relationships are much stickier.”
Two of the biggest sectors, including financial services and health care, are also highly regulated, creating what Hyat calls “tech inertia.” That creates higher barriers to entry as regulators remain more skeptical of technological innovation in, say, health care than they do of innovation in fields such as social media or e-gaming.
But don’t write off the incumbents, argues PGIM. In fact, many may emerge stronger.
“They’ve seen the movie, and they’ve seen the decimation in retail and manufacturing. Therefore, at least the [vanguard is] embracing innovation, even if it cannibalizes their own businesses — even if it’s costly — because they know it’s essential to survive.”
At the same time, new entrants will have opportunities in certain niches. PGIM recommends that investors analyze which companies have chief technology officers on their executive committees, [which ones are] involved in tech-driven acquisitions, and which are daring enough to invest in technology that may very well cannibalize their existing business model. “That subset is what our PMs think will succeed,” said PGIM's chief operating officer.