The sheer complexity and diversity of these technological improvements can make it difficult to identify clear patterns in this process of disruptive change. We therefore focus on two of the fundamental forces that we believe underpin much of the change we observe: cloud computing and artificial intelligence.
The two fundamental drivers of disruptive technology: the cloud and AI
Cloud computing allows users to access computing services remotely. Unpacking the jargon for a second, the cloud involves three core elements:
- IaaS (Information as a Service), which provides computing resources such as storage and networking online
- SaaS (Software as a Service), which entails the delivery of applications from a third party provider;
- PaaS (Platform as a Service), which provides a platform for companies to develop software online.
Cloud computing creates the potential for huge efficiency gains within the corporate sector. Where once companies were obliged to invest in accumulating, maintaining and periodically updating their own stock of IT capital, companies can now access these services on a pay-as-you-go basis using the latest technology.
In effect, IT becomes an operating expense and a significant barrier to the entry and rapid expansion of companies is removed. The cloud allows companies to ramp up production without having to make huge investments in their IT capital stock.
Growing faster than the wider economy
Within less than two decades, the cloud has gone from zero to a quarter of a trillion dollar market.
Research and advisory company Gartner estimates that the public cloud will grow by in excess of a hundred billion dollars between 2019 and 2022, or around 12% per annum, far in excess of the trend rate of growth of the economy or the likely pace of increase in overall investment in IT.
Underpinning that forecast is an assumption about the penetration of cloud computing. Around one in four application are currently run in the cloud. That figure will likely rise to around one in two by the end of 2023.
There are numerous ways to invest in this trend given the complex ecosystem that underpins cloud computing:
- Innovative SaaS companies
- Platform and cloud service providers
- IT service providers
- Companies that help manage hybrid cloud deployments
- Networking equipment and semiconductor companies.
AI – coming into its full potential
Thebasicconcept of Artificial Intelligence dates back at least as far as the work of English mathematician Alan Turing in the 1930s. although the term itself derives from American computer scientist John McCarthy, who argued in 1955 that “every aspect of learning or any other feature of intelligence can in principle be so precisely described that a machine can be made to simulate it.”
However, it is only in the relative recent past that we have begun to harvest the full potential of genuine AI – thanks to the simultaneous expansion in computing processing power and access to data coupled with more advanced algorithms which enable computers to learn at far more rapid rate.
Ever more complex tasks from image recognition to natural language processing (NLP), from search engines to fraud detection can now be performed by computers.
Shifting through data to discover… COVID-19
One timely example of the transformative impact comes in the shape of an AI platform that is used to detect and track infectious disease outbreaks. It applies machine learning and NLP techniques to sift through news reports, press releases, animal disease developments, and flight data. Importantly, epidemiologists and other experts analyse the output to validate its conclusions.
It identified the outbreak of a pneumonia-like disease in Wuhan and alerted government and enterprise customers on 31 December 2019, before the US Centers for Disease Control and Prevention detected COVID-19 and before any official announcements by the Chinese authorities.
The Canadian government uses the disease analytics platform to support modelling and monitoring of COVID-19, as well as to guide decision-making. It also used by Air Canada, but also health agencies and hospitals.
Of course, there are many ways to invest in artificial intelligence.
- Many of the cloud service providers are also pioneers in AI.
- Virtually all modern software applications incorporate AI functionality to enhance their capabilities.
- AI is embedded in leading payment technologies as well as recommendation engines for companies that stream music and videos.
- There is a large market for specialized semiconductors capable of the parallel processing required to execute the AI algorithms.
Challenges on the horizon
We are firm believers in the thesis that disruptive technological change will remain a dominant investment theme in the years ahead. Indeed, we expect the pandemic to act as a catalyst that is likely to accelerate the pace of change along a number of dimensions.
It would appear that the case for investments in tech is straightforward and compelling. However, life is a little more complicated than that. There are, as always, issues around stock selection. The trick is being invested in the right companies to reap the full benefit of exposure to the disruptive tech theme. However, there are two specific challenges on the horizon that potentially complicate investments in this sector:
- Valuations: the technology sector has undeniably had a good year, significantly outperforming the broad index. Valuations do look stretched in some areas. However, we believe that valuations for the technology sector as a whole are nowhere near the over-extended levels reached during the Internet bubble levels, with tech currently trading at a relative multiple of 1.1 to the broader market, versus 2.2x during the bubble.
- Regulation: there has been a noticeable increase in the rhetoric around the need for increased regulation of the tech sector at the global level, in particular concerning the controls around data privacy and the need to preserve or even restore greater competition. There is a particular focus on the debate in the United States given the potential for the upcoming elections to change the personality and policy of US regulatory authorities. Clearly, significant changes in the regulatory backdrop can have a material impact on valuations.
Our investment philosophy
We believe in the thematic approach to investing in innovative technologies outlined in this note. We apply fundamental, bottom-up research to build a concentrated portfolio of specific companies – not just not just in the technology sector, but throughout the broader market – which we believe to be the best expression of the theme.
Exhibit 3: Applications across all sectors
Source: BNP Paribas Asset Management; August 2020
In common with our colleagues throughout the BNP Paribas Fundamental Active Equities group, we believe in the virtues of investing in companies with sustainable business models, solid balance sheets, enduring competitive advantages, and attractive valuations that can deliver excess returns over a long-term investment horizon.
And as with entire suite of investment strategies offered by BNP Paribas Asset Management, environmental, social and governance (ESG) considerations have been fully integrated into our investment process to identify both risks and opportunities.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed in this podcast do not in any way constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
 See Gartner Forecasts Worldwide Public Cloud Revenue to Grow 6.3% in 2020 onwww.gartner.com/en/newsroom/press-releases/2020-07-23-gartner-forecasts-worldwide-public-cloud-revenue-to-grow-6point3-percent-in-2020