PGIM: Beware of the hype around blockchain and autonomous vehicles

For futurists, blockchain and autonomous vehicles are sure to transform everyday life and global economies. But that doesn’t mean investors should invest money in the underlying companies.

The exuberance around these technologies “is often well ahead of today’s investment reality,” says global asset manager PGIM in a new report. While institutional investors are often rewarded for being among the first to discover new asset classes, low-traffic sectors and start-ups exploiting new innovations, this also carries risks.

“As these evolving technologies mature, institutional investors should consider tangible investment opportunities such as private blockchains and infrastructure for greener and smarter vehicles,” the study said, which discusses the investment implications of technological disruption in the service sector.

Taimur Hyat, chief operating officer at PGIM, Prudential Financial’s $ 1.5 trillion public and private asset management firm, stressed that investors should be aware of the positions of regulators in different countries. In China, for example, autonomous vehicles enjoy significant regulatory support, while in Europe there are serious concerns about the employment impact that autonomous vehicles could have on workers who currently use vehicles. traditional means of transport, such as trucks. and taxi drivers.

“Try to focus on tangible, tangible technology now,” Hyat said. Institutional investor. “One of the things that makes us a little more wary is the tech-lash risk, which [exists] in all these sectors. These issues include privacy and regulatory issues around big data mining, know-your-customer rules when financial services firms use public blockchain, and the use of machine learning and AI algorithms. in regulated sectors such as insurance and banking.

“We’re less bullish on blockchain and crypto than maybe some of the others,” Hyat said. He explains that the public blockchain comes with environmental, social, and governance issues, such as the massive energy needs of cryptocurrency mining. “With cryptocurrency, we are already seeing the regulatory backlash.”

PGIM focused its most recent Megatrends Report, which includes contributions from a wide range of portfolio managers, analysts and others, on the potential of technology to disrupt the service economy, for several reasons. .

First, that’s where the jobs are. Two-thirds of global GDP is in services, and three-quarters of the workforce in developed markets is in services. Even advanced emerging markets depend on these industries, with almost half of their workforce employed in these sectors. If technology disrupts services like manufacturing and retailing, the impact will be huge.

“One-third of a typical institutional portfolio would be made up of companies in the service sector, whether investors hold debt or equity in private and public companies,” Hyat said.

PGIM has led the research now because Covid-19 has pushed businesses, individuals, governments and others to use technology applications that they may not have adopted in years. Everything from telehealth and online payments to logistics networks that help speed up parcel delivery took off during the pandemic. Many had no other choice. Hyat pointed out that outside of big cities, for example, small businesses rarely do non-cash transactions. Everything has changed now, he says.

But investors shouldn’t expect the impact of technology on services to mirror the manufacturing or retail cycle.

Hyat attributes this to several factors, including the higher cost to acquire customers. “People don’t change their financial advisor or their medical provider like they could change the way they shop online for a bottle of raspberry jam,” he said. “Getting to the right customer is [also] much more expensive, and these relationships are much more sticky.

Two of the largest industries, notably financial services and healthcare, are also heavily regulated, creating what Hyat calls “technological inertia.” This creates higher barriers to entry, as regulators remain more skeptical of technological innovation in healthcare, for example, than of innovation in areas such as social media or electronic games.

But don’t rule out incumbents, argues PGIM. In fact, many can come out stronger.

“They saw the movie, and they saw the decimation in retail and manufacturing. Therefore, at least the [vanguard is] embrace innovation, even if it cannibalizes their own businesses – even if it’s expensive – because they know survival is essential.

At the same time, new entrants will have opportunities in certain niches. PGIM recommends that investors analyze which companies have technology directors on their executive committees, [which ones are] involved in technology-driven acquisitions, and who are bold enough to invest in technology that could very well cannibalize their existing business model. “This subset is what our PMs think they are doing,” said PGIM’s COO.


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