Identifying winning investments & innovations
#Articles — 01.12.2021

Identifying winning investments & innovations

THEME 2

Investment Theme 2 | BNP PARIBAS WEALTH MANAGEMENT

The COVID-19 pandemic forced companies to radically rethink the way they and their workforce operate, potentially unleashing a wave of productivity improvements.

Corporate investment in technology naturally accelerated as lockdowns enforced widespread remote working practices, supported by technology infrastructure upgrades.

Faster wage growth incentivises companies to invest: for many industries, especially Services, labour represents the largest cost. 

Creative destruction paves the way for accelerated innovation and productivity growth

COVID-19 has unleashed a huge wave of Darwinian Creative Destruction: we have seen an enormous wave of creative destruction from the pandemic and the various lockdowns.

Government spending has accelerated from pre-pandemic levels, now focusing on investment in essential infrastructure including renewable energy, transport and healthcare. The ultra-low cost of borrowing for governments lowers the threshold for spending on infrastructure investment, after years of underinvestment in the wake of the 2007-09 Great Financial Crisis.

Corporate investment has lagged profit growth: in the US, non-financial companies in aggregate grew their assets by 46% and their pre-tax profits by 53% from Q2 2015 to Q2 2021, while over the same six-year period, corporate investment did not increase at all.

The pandemic has accelerated the adoption of technologies: by July 2020, more than 60% of UK firms surveyed had adopted new digital technologies (e.g. remote working technologies or cloud computing) or new management practices since the start of the pandemic, and nearly 40% had invested in new digital capabilities. According to Be the Business, a not-for-profit organisation, and McKinsey, a management consulting firm (2020), UK SMEs carried out “3 years” worth of innovation in only 3 months of lockdown”.

Companies are also obliged to invest more for the first time in a decade or more, owing to the following factors:

  • supply chain disruptions, caused by the pandemic, are incentivising companies to “near-shore” more of their sourcing and production in order to make supply chains more robust;
  • investment in technology to enable widespread remote working is a second huge area of investment;
  • burgeoning wage inflation is emerging in a number of industries (fast food, dock workers, HGV lorry drivers) due to labour shortages, forcing companies to invest in order to offset these wage pressures with higher productivity and automation whenever possible.

Most listed companies, after reinforcing their balance sheets in the wake of the damage, suffered (to various degrees) during the pandemic, are in a much stronger position today. As a result, they plan to accelerate growth increasingly via acquisitions. Today’s environment is very supportive for mergers & acquisitions, smaller companies, private equity, and thus for investment banking in general. The UK has already seen a sharp increase in private equity buyouts, and we expect this trend to continue or accelerate in the months ahead.

Productivity gains require patience

  • Post-pandemic, companies are reassessing their “just in time” lean workflow methodologies to incorporate more robustness into their supply chains, and of course this all requires investment.
  • Reaping the real benefits of new technologies takes longer than one might think:
  • Healthcare is a key sector seeing an acceleration in innovation via Messenger (mRNA) therapeutic agents, AI in diagnosis and in drug candidate identification, and telemedicine.
  • The accelerated rate of entrepreneurial innovation and start-up companies should benefit both long-term economic growth and growth private equity funds.

Focus on innovation in technology and healthcare

Tech disruption is still in its infancy and continues to drive tremendous productivity gains. We are living through an industrial revolution in the form of Digitalisation. New technology adoption has accelerated by necessity during the pandemic, with huge further potential. 5G is still being deployed and not fully operational. Therefore, some top-end applications of Artificial Intelligence and other powerful computer applications e.g. (robotics, Blockchain, Internet of Things) have not yet matured. We do not yet know the full potential applications of these technologies.

However, one area where progress is very visible is healthcare. In surgery, robots are helping surgeons to operate, allowing much more stability and precision. A whole new range of other smart medical devices, equipment and research techniques have been launched and are becoming more and more powerful and precise. Think of the high quality of mRNA vaccines for instance. Genomics helps to understand and treat various diseases like never before.

Telemedicine has also made huge strides, given the need for social distancing, making people hesitant to visit a clinic or meet a doctor physically. Rapid progress in streaming and video call technologies have supported all these remote applications, thus improving doctors’ productivity. 

Companies are ready to invest again – how to gain from this?

Furlough and unemployment has spurred start-up acceleration: the formation of new businesses has accelerated sharply in the wake of lockdowns, as employees have reassessed their life goals. This wave of new businesses should stimulate long-term growth in general, and innovation in particular, leveraging all the possibilities that superfast internet access enable, lowering barriers to entry and enabling direct-to-consumer access.

Suggested implementations include:

  • Green bonds financing sustainable corporate investment and infrastructure spending;
  • Commercial real estate providing top-notch logistics and warehousing, 5G cell phone towers, and datacentres;
  • Growth and leveraged buyout private equity funds, which benefit from strong growth periods;
  • Equity solutions (direct stocks, funds, ETFs) exposed to Infrastructure, Capex growth, the energy transition, efficiency and storage, batteries, insulation, green mining and carbon offsetting;
  • Equity solutions (direct stocks, funds, ETFs) exposed to Innovation, particularly in technology (such as AI, robotics, Blockchain) but also in healthcare (med/health tech and telemedicine).