When markets plummeted earlier this month, the tech sector was hit hardest, experiencing some of its steepest drops of the decade. And while no one is about to sound the death knell on FAANG stocks – Facebook, Amazon, Apple, Netflix and Google – it’s likely only a matter of time before emerging technologies become the next generation of tech titans to push the S&P 500 to new heights.
It could happen sooner than you think. According to a 2018 study by consulting firm Innosight, about half of S&P 500 companies will be replaced over the next 10 years, with the average tenure of companies on the index expected to shrink to just 12 years by 2027.
The trillion-dollar question for fund managers and investors is, which technologies will be the future drivers of stock market growth?
Tech will underlie every sector
Unlike the technology boom of the 1990s, which was highly focused on internet, hardware and software, the current generation of “technology” growth will be seen across all industries, says Sadiq S. Adatia, Chief Investment Officer at Sun Life Global Investments.
“We used to think about the ‘tech sector’ in a limited way, but now technology is being used in every aspect of our lives whether it be social media, smartphones or online shopping.,” he says. “Technology is also ever changing, so, companies that may have been dominant for the past 10 years may not necessarily be leaders in the next phase of the industry.”
The key is to finding players in industries that are on the brink of disruption and can successfully use technology to be competitive will likely be the winners. This is essentially what Amazon did in the retail sector, Facebook did in media and Netflix did in entertainment.
“Media and entertainment companies were the canaries in the coal mine in terms of adapting to the digital transformation,” says Sean Moffitt, managing director of Wikibrands. “Now it’s all about how the disruption will play out in financial services, transportation, healthcare, education and government. These five areas are fast-maturing industries when it comes to tech.”
You have to understand which companies are maximizing technology to enhance client experience, improve efficiency and innovate. Those will be companies that are going to be the winners.
Look for disruptors
Most experts agree that artificial intelligence (AI) is among the big technologies to watch. At a conference last month, Brian Burke, Gartner Research’s chief of research, said AI will “underlie pretty much everything we do in technology,” calling it a megatrend that the industry will continue to talk about for the next 20 years. By 2022, Gartner predicts that at least 40 per cent of new application development projects will have AI co-developers on their teams.
Wikibrands also ranks AI as the top technology of the next decade on its 2018-19 Digital & Technology Periscope, followed by the Internet of Things, the mobile and social internet, blockchain and big data.
“AI is changing every industry – including financial services, the automotive sector and healthcare,” agrees Mr. Adatia. “It allows you to be more predictive, and you can do things much faster and more targeted which increases value.”
For example, instead of getting a dozen research analysts to review financial data and put together a report, AI can crunch the numbers and provide insights at a fraction of the cost.
Some specific technologies Mr. Moffit is excited about include innovations in healthcare that rely on sensors, wearables and the Internet of Things . Waterloo, Ont.’s Medella Health, for example, has developed a contact lens with a sensor that can detect the glucose or sugar levels by testing a person’s tears. That could improve the lives of diabetics and save the government money. “About 20 per cent of Canada’s healthcare budget is spent on managing diabetes,” says Mr. Moffitt.
Distinguish hype from commercial promise
Then there’s blockchain, the technology that enables a decentralized form of digital accountability and trust. Instead of relying on a single gatekeeper or auditor to verify data or transactions, blockchain creates a “chain” of transparent, permanent, indisputable and shared records stored in uniquely identified “blocks.”
At the moment it’s bitcoin that makes the most use of blockchain – every bitcoin transaction is recorded on the blockchain – but it will play a role in many other industries, too. Banks could use it as a way to track their own financial transactions, while manufacturers will be able to keep a more accurate eye on inventory and where shipments are sent and received, says futurist Jim Carroll.
The challenge, as always, is timing. “Blockchain’s not ready for primetime just yet – maybe not until 2021,” says Mr. Moffitt. For its part, Gartner Research predicts blockchain will create $3.1 trillion in business value by 2030.
While the promise of these technologies may take longer than expected to be realized, Mr. Carroll is willing to bet AI will deliver in certain areas, such as self-driving cars, within the next three-to-five years. “Audi now has a prototype truck that can be driven by someone 3,000 miles away,” he notes.
Do your due diligence and diversify
Investing in the next big disruptive company is difficult – it’s hard to know which ones will come out ahead – but Mr. Adatia does have some broad advice for advisors and investors when it comes to startups. First, bigger isn’t always better. “We’re seeing smaller tech startups emerge and grow with minimal capital,” he says. “Unlike big box stores, they don’t need a big budget on day one.”
He also advises people to proceed with caution following any high-profile acquisitions involving a specific technology, product or service. “If there’s a big acquisition in an industry, valuations go up across that industry,” he says. But that’s not necessarily an indication of anything more than speculation, he explains.
Instead, advisers and investors could consider adopting Warren Buffett’s strategy that looks “for solid long-term stories – companies you think will still be around 10 years from now – and hold in there,” says Mr. Adatia.
Finally, short of a crystal ball, it’s important to diversify single company risk. “Don’t just invest in one or two startups,” says Mr. Adatia. “You should diversify across different industries and different types of technologies, and you need a mix of mature and new companies.”
Advertising feature produced by Globe Content Studio. The Globe’s editorial department was not involved.