Picking the winners and losers from tech advances
Technology is transforming the finance industry and investable universe, but debate as to the benefits of those changes continued at a forum last week organised by industry body Asia IRP in partnership with AsianInvestor.
While innovation leads to quality-of-life improvements – as developed countries 'digitalise' their economies – cash flows will become more concentrated in the hands of the few, argued Sean Maher, strategist at London-based consultancy Entext Economics & Strategy.
He noted that some economists say automation may cap potential growth in developed markets and possibly lead to long-term unemployment.
But others were more positive on the opportunities created by the proliferation of technology.
Salvatore Ferraro, founder of research firm Evidente, cited the improvements that smartphones have enabled, such as mobile payments and better connectivity. “None of those are captured by statistics bureaus.”
As to the winners and losers in this brave new world, panellists said banks unwilling to innovate and TV broadcasters were likely to take a hit, while Google and innovative banks would shape their respective industries. Samsung was singled out as an electronics business that was likely to suffer.
Banks face a raft of legal issues associated with high-frequency trading and the fixing of foreign exchange rates, stricter new collateral requirements, moves that may force banks in some countries to convert their overseas branches into subsidiaries, and increased capital-adequacy requirements under regulations, such as Basel III.
Against this backdrop, banks will close many of their physical branches, noted Paul Schulte, chairman of Schulte Research, with JP Morgan and Santander having already made public such plans.
Banks returning 1% on capital are unviable institutions, he argued, but firms like Commonwealth Bank of Australia and Santander that are embracing the newest technologies will likely win out.
Technology is raising stock market prices in every industry, but also risk and volatility, argued Cyrus Mewawalla, head of research at technology, media and telecoms firm CM Research. He pointed to cyber security as a key risk that’s putting pressure on IT departments.
“Half the companies on the FTSE 100 and S&P 500 are not insured against the major types of cyber risks they face, according to insurers we have spoken to,” he said.
Meanwhile, Mewawalla was optimistic about internet TV. Though the medium hasn’t yet taken off, accounting for just 2% of TV industry revenue last year, he forecast that it will transform the industry within the next 12 months, when Google is expected to launch a TV that comprises an integrated internet platform. That development would benefit content providers but challenge cable operators, he argued.
Mewawalla singled out Samsung as a company that will be challenged by technological developments. On October 6, the Korean firm issued a profit warning, saying it anticipated a decline of some 60% in operating profit and a 20% drop in sales in the third quarter.
Samsung’s vertically integrated model and economies of scale had been thought to be unchallengeable, said Maher. But Chinese firms have taken Google’s Android operating system and off-the-shelf components to produce products that challenge Samsung’s value proposition, he added.
Three factors spell trouble for the Korean firm, said Mewawalla. Firstly, in China and India, cheaper suppliers are undermining its market share.
Second, while it makes great hardware, Samsung doesn’t make software. Its TVs, fridges, printers and phones can’t talk to each other unless they use Android, but Google is increasingly making the once open-source platform proprietary. “Samsung is slowly being locked out,” Mewawalla noted.
Thirdly, the advent of internet TV will hit profits as well, he said, because Samsung doesn’t have an integrated platform for it.
Meanwhile, although opinion was generally divided on the impact of technology on employment, one area of consensus was that improvements to quality of life have not been properly accounted for in standard measures of productivity and inflation.
Low interest rates and extremely low funding costs have not translated into sustainable capital expenditure, wage growth or consumer price index growth in the recent past, noted Maher.
He said economists are only just waking up to the fact that this is probably due to the use of technology not being picked up in productivity data. “US productivity numbers are far, far better than they appear to be,” he argued, adding that use of technology is being reflected in corporate margins and cash flow.
The way productivity is measured is more suited to countries with a high proportion of heavy industry, such as China, and it misses the value of intellectual property, improvements to the quality of life through increased convenience and other intangibles, he added.
“Targeting inflation is an increasingly meaningless concept,” Ferraro argued. “Real GDP is understated because CPI is overstated. Central banks should move away from targeting inflation to targeting nominal GDP.”