Quick Thoughts: Innovation Builds Deep Water Technology Waves

CONTRIBUTORS

Stephen Dover, CFA

Chief Market Strategist, Head of Franklin Templeton Investment Institute

Kim Catechis

Investment Strategist,
Franklin Templeton Investment Institute

PREVIEW

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One potentially underappreciated side effect of this drive to “digitalize” will be to demonstrate an increasingly outdated convention in asset management: labelling “developed” and “emerging” markets; Investors should first identify the best-in-class companies and then be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.

Stephen Dover, CFA
Chief Market Strategist,
Franklin Templeton Investment Institute

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