The FTSE is now comfortably above the 6,900 peak first reached in December 1999. As with the recent rise in the S&P, this has been driven by the expectations of monetary reflation under Donald Trump. But in the US, while the President proposes, Congress disposes. Even a Republican Congress may not be inclined to accept trillions of dollars of deficit financing.
Investing risks
Counting chickens before the eggs are hatched is one immediate risk, but others are even more significant. Financial Times journalists recently held forth on the industries likely to be affected by technology over the coming decade. They identified advisory services as first in line for difficulty. Online booking of holidays will be bad news for travel agents, while financial services will be hit by automated advice on portfolio construction.
In addition, the metal-bashing industry will change radically through the proliferation of 3D printing, also known as additive manufacturing. They also envisaged automotive insurance as a major victim, and this is an important warning for all investors.
It is not only that car insurance is at the core of insurance profitability, but also that this business model is under threat from an about-to-happen revolution of which most of us are completely unaware. Partly it is because of the electric car, but mostly it is because of the driverless car.
An electric car engine probably has fewer than a couple of dozen parts compared to the several thousand of an internal combustion engine, and the battery is something that neither we nor our local mechanic will have anything to do with, except to recharge it or replace it.
Battery design has advanced so rapidly in recent years that electric cars, while being environmentally cleaner, can now compete with the internal combustion engine.
The real tech revolution
The real change will come with the driverless car. Battle is already joined between car companies – Mercedes, Toyota and their likes – and tech companies such as Google, Uber and Tesla.
At stake is the future nature of motoring: will cars remain status symbols, owned by individuals, or will they become a public service, a small-scale, but personalised bus available via a telephone call and a credit card?
Driverless cars are already being tested in many major cities and, while safety concerns worry some local authorities, others are excited by the prospects. These include fewer cars on the road, assuming that the vision of the technologists wins out, as well as a reduction in road accidents and a gain in publically useful space as the need for garages and public car parks declines.
Town planners are already getting excited by the possibility of restoring towns to their inhabitants, significantly reducing the flow of heavy goods vehicles through urban areas, redesigning high streets as social areas for socialising and purchasing locally produced artisanal products, making shopping fun again and rebuilding the community spirit.
Much of this depends on a continuation of the changes that are already taking place in supermarkets, and being encouraged by Amazon’s entry into the grocery sector.
Already many chains have built dedicated delivery stores for those who buy online. The best of the online ordering systems compare this week’s shopping list with that of last week, and recommend other products that the shopper might like.
The next stage will be the computer approaching the householder, recommending a shopping list, confirming it and then arranging for delivery to the door by driverless van.
The rise of artificial intelligence
This is happening because artificial intelligence [AI] and powerful computers have become exponentially better in understanding the world. This began to happen not much more than 12 years ago when scientists, rather than attempting to explain the world to computers, gave them access to ‘big data’ and instructed them to find the patterns in what they saw and experienced. These neural networks – very much simpler and smaller than those of children – quickly turned automatic language translation into the word-perfect systems we now know.
For example, in 1998, Kodak had 170,000 employees and sold 85 per cent of all photo paper worldwide. It also invented the digital camera. Although the first only had 10,000 pixels, the product rapidly improved, in accordance with Moore’s law of exponential technology changes. Developments such as tablets and phones meant that within just a few years Kodak’s business model disappeared and it went bankrupt.
Similar events will now happen with AI – to health, shopping and transport, education, agriculture and professional jobs. What happened to Kodak will happen to others, for software will disrupt most traditional industries, upend property values, and many investors won’t see it coming. After all, Uber is just a software tool, owning no cars, and yet it is now the biggest taxi service in the world. Airbnb is the biggest hotel company in the world, but it does not own any properties.
Watson and the future
One of the most notable of these super-computers is IBM’s Watson. Already young US lawyers find life hard because Watson gives basic legal advice within seconds, and to 90 per cent accuracy.
Watson is already helping medical professionals diagnose cancer four times more accurately than they can themselves, while Facebook now has pattern-recognition software that can recognize faces better than humans. Welcome to the fourth Industrial Revolution, or the Exponential Age.
The right funds
Therefore investors need technology shares in their portfolios. But since this is a sector requiring knowledge and courage – shares are both boom and doom – this is best entered through closed-ended investment trusts.
The outstanding choices are those of Baillie Gifford, the investment manager wholly owned by its 41 partners, all of whom work within the firm. Founded in Edinburgh in 1908, it still has its headquarters in that City, controls some £150bn of assets, and is meritocratic and democratic.
Information is shared across the firm, and ideas of the future are discussed, but individual managers and their teams then decide on the share purchases of the investment trusts they run.
Although all have a tendency towards technology, there is surprisingly little overlap in the individual holdings of the four trusts. This reflects the youth and the vitality of this new industrial sector.
Scottish Mortgage is known for its early picking of technology shares, and its willingness to run them on regardless of price. To some purists, this means the portfolio looks overbalanced with high volatility. Edinburgh Worldwide Investment Trust is beginning to follow in the steps of its larger sibling, but with a preference for smaller companies and a younger portfolio, it seems less volatile.
Monks Investment Trust is more diversified than either, but it still comes with a good technological flavouring, while Scottish American Investment Trust is constrained by an income target.
Between these four, any investor can choose the style of investment they want and, to a reasonable level, the level of volatility risk they are prepared to accept.
