How To Invest In The Future: The New Digital Economy

Today I asked a question I initially thought was going to be easy to answer:

 

If we assume that the rate of technological progress remains constant or increases exponentially, what then are the best macro investment opportunities to employ?

 

Essentially, what emerging technologies represent the best CAGR (Compound Annual Growth Rate) if our goal is to maximize yield within a ten year timeframe? 

 

Additionally, I wanted to determine the efficacy of looking at a blended approach, e.g., Blockchain & Internet Of Things (IoT) produce better results together than apart, and represent a better opportunity blend than, say, Social Media & Blockchain.

So, right away we need to identify those standout emerging technologies that will form the basis of the New Digital Economy, which is defined as the sum of economic activity that results from billions of everyday online connections among people, businesses, devices, data, and processes. The backbone of the New Digital Economy is hyperconnectivity which means growing interconnectedness of people, organisations, and machines that results from the Internet.

Think about this in a way of innovation and disruption, or simply just innovative disruption: The introduction of a technologically enabled new product or service that will transform economic activity by creating simplicity and accessibility while driving down costs.

 

Of course, that’s the purpose of technology, is it not? 

 

It’s true that the central premises of the New Digital Technology — Hyperconnectivity and Innovative Disruption — will affect all industries in different ways.

 

Asset-heavy industries like chemicals and mining do better from investment in hardware, with robotics more productive than the Internet of Things. Meanwhile, asset-light industries like professional and financial services do much better with investment in software — cognitive technologies and social/mobile media.

But let’s not get ahead of ourselves here. 

 

Instead of looking at broad definitions, let’s define the New Digital Economy by its 5 standout emerging technologies:

 

Blockchain Technology 

Genome Sequencing 

Artificial Intelligence 

Robotics & IoT

Energy Storage

Purely from an investment perspective, these are each extremely promising innovation platform with potential multiple trillions in market capitalization creation over the next decade, enabling further innovation. 

 

Let’s put this in a graph, shall we?

The global economy is undergoing the largest technological transformation in history. The potential estimated impact of these innovation platforms on economic activity is like nothing we’ve ever seen before.

And, importantly, this visual, while a little on the subjective side, demonstrates my central thesis beautifully:

 

It is not one technology or one innovation platform driving this potential impact: It is the synthesis of the many. 

 

Furthermore, this graphic also clearly highlights something I’ve discussed in the past: the Fourth Industrial revolution, both in how technological progress is cyclical and how it is compounding. 

Let’s quickly explore that idea. 

 

After all, some of the language around technological progress is grandiose and often lacks the practical insight into exactly how technical innovation disruption occurs. 

 

It’s actually pretty simple, and we’ve seen it many times before. 

 

True disruptive innovation causes rapid cost declines and demand growth, cuts across sectors

and geographies, and spawns further innovation. This stimulates growth over extended time horizons.

 

As a quick example, let’s look at the introduction of electricity — a massive technological innovation platform that defined the Second Industrial Revolution. 

 

And, importantly, we are still compounding that innovation platform today. 

 

Electric Vehicles [EVs], Energy Storage, & Battery manufacturers will all represent a massive opportunity over the next decade.  

 

EVs are forecasted to break 25% of all light duty vehicle sales by 2030 and hit 50% before 2040.

That represents a 9x increase in just the next seven years.

Importantly, Energy Storage is one of the 5 Technology innovation platforms I listed as being part of the New Digital Economy. It will involve home, office, and commercial mostly using lithium-ion batteries, and for large scale utility vanadium redox flow batteries (VRFBs).

You can directly invest in this innovation by investing in EV companies (TSLA, BYDDY, BMW, BAIC, NSANY), Li-ion battery manufacturers (LGCLF, CATL, PCRFY, TSLA), Lithium Metal Miners (ALB, SQM, LTHM), and even hedge plays like the only major company outside China manufacturing rare earth metals (LYSCF).

What’s the broader play here? Thanks to battery cost declines, EVs should be cheaper than  comparable gas-powered cars by 2022. As battery costs decline, energy storage will become competitive with “peaker” plants and other underutilized generators. 

The large-scale deployment of energy storage could overturn business as usual for many electricity markets. In developed countries, for example, central or bulk generation traditionally has been used to satisfy instantaneous demand, with ancillary services helping to smooth out discrepancies between generation and load. Energy storage is well suited to provide such ancillary services. Eventually, as costs fall, it could move beyond that role, providing more and more power to the grid, displacing plants. 

That moment is not imminent. But it is important to recognize that energy storage has the potential to upend the industry structures, both physical and economic, that have defined power markets for the last century or more.

Essentially, building and operating new utility-scale energy storage will be more cost-effective than operating underutilized plants.

 

Right now the addressable market for utility-scale energy storage is $800 billion, and it’s about to reach a tipping point.

 

And, of course, let’s consider the broader implications of this. 

 

Better batteries would enable the democratisation of electricity. 

 

If I tell you I can develop a battery that can be charged in 15 seconds and last one week, what does that open up in terms of innovative disruption?

 

Hopefully what I’m getting you to think about is blending those 5 innovation platforms of the New Digital Economy.

 

For example, combining the Robotic & IoT platform with the Energy Storage one will yield some really impressive results. 

 

Currently, IoT applications allow the collection of data from sensor nodes practically anywhere in the environment, and give non-electronic objects the ability to communicate, opening up a whole new sphere of applications for electronic systems.

 

But they are limited in their ability to be autonomous, to be “things”, by how long they can stay self-sufficient. If they constantly need recharging that seriously limits their abilities. 

 

Or how about Energy Storage and Blockchain?

 

The combination of the rising cost of energy and more affordable renewable energy technologies has made it more compelling for homes to generate and store their own electricity.

Energy systems are evolving towards a more decentralized model. This will enable peer to peer energy transactions through microgrids architectures.

How cool is that?

 

So, hopefully I’ve got you thinking about the broader implications, the wider market, and the opportunities affronted by the New Digital Economy and the blending of emerging technologies. 

 

It’s a brave new world.