Investing in digitalization: easier to avoid the losers than find the winners

Investing in digitalization: easier to avoid the losers than find the winners

21-01-2016 | Jahresausblick

We are already digital consumers and we are set to become digital producers. We are connected to the digital financial network and have a digital doctor who keeps an eye on us. Digitalization is the engine for economic growth and Henk Grootveld explains how investors can take advantage of this.

  • Henk Grootveld
    Head of the Trends Investing Equity team and Portfolio Manager

Speed read

  • Digitalization will create more losers than winners
  • Investors are aware of the digital revolution, but underestimate its speed 
  • Financial services and health care are making up lost ground in terms of digitalization

They say that every revolution devours its children and the digital revolution will be no exception. While Booking.com and Expedia are still driving the travel agents off our streets, Airbnb has decided to take on these two mega travel operators. The digital revolution is so extensive that it creates more victims than winners. In certain sectors the winners are already becoming apparent. Google, Facebook and Amazon.com respectively dominate search and advertising on internet, social media, and online shopping. In the meantime numerous physical shops are falling by the wayside. In other areas, such as the evolution of the self-driving car the battle is still in full swing. "Our whole life is already digital", says Henk Grootveld, head of Trend Investing at Robeco. "We do our grocery shopping via internet and find our partner online. We get up in the morning and go to bed at night with our smartphone and tablet."

In addition to being digital consumers we are set to become digital producers too, according to Grootveld. "There is nothing to stop us designing something, having it made with a 3D printer, for example, and then selling it online. I can buy something via internet directly from the maker, without middlemen such as importers, wholesalers and shops."

Grootveld is convinced that everyone is going to become their own energy producer. "Within 25 years we will no longer be using fossil fuels. Cars will be powered by electricity that people generate themselves with solar panels or a windmill on the roof."

These examples make the rules of the game for digitalization quite clear: there are no barriers to enter a market, middlemen are cut out and the winner takes all.

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Sharing economy and new business models

"Internet connects people and the next step is a connection between objects, known as the Internet of Things. My refrigerator sends a signal to my smartphone to say that there is no more milk", explains Grootveld. "The next e-commerce phase is the evolution of a sharing economy. We share cars via SnappCar and use Peerby to share our tools. This means we use things far more efficiently."

"Currently 94 percent of cars are not used during the day", continues Grootveld. "Imagine how much more efficient car use would be with self-driving cars that you could call up to take you wherever you want to go. You wouldn't need to own a car, you could just order one when you need it."

Trend investor Grootveld sees new business models evolving. "The emphasis is shifting from delivering a product to delivering a service. From capex to opex – from investing in capital goods to investing in exploitation. No more buying a car every six years - just book the self-driving transport you need on a daily basis. It's not rocket science - it's more a question of intelligently combining existing techniques and expertise.

Digitalization creates more losers than winners. How can investors find the winners?

"Investing in digitalization is not looking for winners –something we are used to – it’s just about avoiding the losers. This makes it much easier – the focus is on not losing. Tomorrow’s losers are very often today’s monopolies – businesses that are too inflexible or frightened to fully embrace digital techniques. From Kodak to Dutch chain store V&D, and from newspapers to fossil fuel power stations. It's not difficult to find examples." 

You talk about the 'bucket-and-spade-strategy' when investing in digitalization. What does this entail?

"Compare it to the gold rush. If everyone is looking for gold, you're better off investing in suppliers of the equipment used to find gold than on betting on who is going to strike it lucky. Many companies in the biotechnology sector are trying to develop drugs to combat cancer. No one yet knows which ones will end up on the market, which is why I invest in companies that supply test equipment to biotech companies.

The same approach applies to the self-driving car. Who will launch the world’s first self-driving car – Google, Tesla, Apple or maybe a traditional car maker? I don't know. What I do know is that these cars are full of sensors and powered by electricity so I invest in manufacturers of sensors and batteries. 

What sort of questions do clients/investors have about digitalization?

“I often hear people say that things won't happen all that quickly. They see things moving, but underestimate the speed. During presentations, I sometimes ask those present whether they had an iPad six years ago. About half raise their hands. But the iPad didn’t exist six years ago and was only unveiled to the public in January 2010. This shows how fast things happen and how quickly we become accustomed to them." 

Which sectors are particularly susceptible to digitalization?

Digitalization is occurring in every sector. The trend is most advanced in consumer discretionary, things are happening in the production sector, and financial services and health care are lagging behind. But the financial sector is catching up fast. More and more digital payment methods are emerging. Blockchain, the technology behind the digital currency bitcoin, could simplify the administration of financial transactions, making banks and brokers obsolete. In addition, robot investment advisors are appearing and fully online banks like BUNQ are gaining ground.

The health care sector is more conservative and will be the last sector to become digitized. But it too is already experiencing the advantages. Google has developed a contact lens that measures the amount of insulin in the ocular fluid of diabetes patients. If this level falls too much the lens gives a signal so that the patient can intervene. 

Are there certain regions that are leading the field in digitalization?

"Digitalization is not limited to one region. Don't make the mistake of thinking that the West is ahead of the game. In fact it's more a case of the ‘law of the handicap of a head start’; China is further ahead when it comes to e-commerce. There are not many shops in the Chinese hinterland and everybody buys online."

What will be the dominant theme this year in terms of digitalization?

“Something that is known as cyber insecurity. We have all seen that hackers can make payment details and patient files public knowledge. They will continue to paralyze high profile websites and expose more data. Ensuring the security of all this digital data will become increasingly important and thus also forms an investment trend. 

Isn’t it often a question of ' Don't believe the hype' in the world of digitalization?

"It is riddled with hypes. But hype doesn't necessarily mean that something isn't real, just that it is exaggerated. But it isn’t like children's games that are all the rage one day and over the next. The underlying trend towards digitalization will continue but in many areas it may happen rather gradually."

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