The structural slowdown opens the field to disruptive technologies

 

As the global economy slows down, the need to find new solutions and increase productivity ought to rapidly materialize in the most inefficient service industries. The EU is anticipating this with the NextGenEU fiscal package to encourage digitalization, the beginning of a series of such packages from the EU, but also from the US or China and India to be rolled out in the coming years. Digitalization is an ongoing process that is evident in the banking industry with its very high cost to income ratio, challenged by the lighter and more nimble fintech industry. We expect this to rapidly widen out from banks and delivery companies (e.g. Amazon) to the rest of the service industry. It needs government support but crucially so the ability to correctly anticipate future demand.

The US and increasingly China are hubs of innovation and behind it Western Europe, but printing patent as Japan and France used to do doesn’t help if the infrastructure to bring ideas to market and understanding demand is not there. This has been rapidly changing in Europe with the rise of a new breed of venture capitalists and risk takers.

Source: Nordea Investment Funds S.A. and Bloomberg

The rise of Growth companies

Growth companies in the service industry are the leaders of change and rising productivity. Amazon has vast automated warehouses for example and the number of robots it deploys is only set to rise at the expense of human labor. Amazon has chosen a strategy of generating losses for years as it has underpriced its services to protect itself from competition and win a dominant position in the market so that it can extract rent as a monopoly or quasi-monopoly. Companies that follow this approach then buy off potential competitors and new technologies they need or are threatened by. The trick therefore is to pick the right companies early on (such as Tesla) before they become mature. One key reason is that they eventually become exposed to regulatory pressure as we have witnessed in China.

An economy structurally slowing down

In an economy structurally slowing down, the pressure to make services more productive through the deployment of new technologies and better training ought to rapidly increase. The race for talents and investments is constantly evolving and winners of the last technology revolution might find it difficult to compete with emerging innovations.

The experience of Japan in this respect is important, because it shows that innovation alone is not enough. Currently, within the Global Innovation Index, covering 132 countries, is Japan at the 13th position, behind China and far behind the United States. What once was a hub of great companies and innovators found it difficult to adapt and compete increasingly with the likes of South Korea and China. In essence, an economy of rigid command found the transition difficult as the economy slowed and demand for services grew and did not manage to translate innovation into sales. Lack of investment in the right markets such as AI has put pressure on Japanese government to take a new course.

What does it mean?

The need for innovation and government support are therefore not enough. One must correctly identify the upcoming changes to the global economy and start positioning for it years and decades in advance which requires the patience of a long-term investor and proper analysis of business plan as well as country selection. Such disruption companies abound and they will eventually change everything. The art is picking which and at what time.

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