Last year was a peculiar one for many reasons and it was no different in the technology world. Big Tech performed well but small-cap internet stocks did not. And with a few exceptions, those stocks that benefited from Covid were last year’s losers.
A year on, lasting behavioural change is being called into question. Perhaps technology fatigue was inevitable and it was likely that many of our lockdown activities would not prove durable? Working from home stocks, for example, have given up most of – and in some case, more than – their earlier pandemic gains.
This year, the invasion of Ukraine has added a new and difficult-to-quantify risk. We hope we are near a point of maximum uncertainty, but no-one – apart from Putin – can know that. Rising inflation and interest rates provide another headwind.
Throughout all this, the Polar Capital Technology team has continued to look at those themes that accelerated during the pandemic (AI; automotive; healthcare; cybersecurity) as well as other longer-term themes (metaverse; crypto) that are seeing huge interest and development but with an uncertain future path.
Explore the following chapters for more analysis and opinion on all these themes.
Another busy year
Cybercrime incidents continue to grow in both volume and sophistication. Cybersecurity has now been elevated from an IT problem to a business imperative and should translate into healthy spend, having grown from 4.8% of IT budgets in 2011 to 8.4% in 2021.
This sector has historically been one that investors ‘trade around’, considered to be more cyclical than core enterprise software and more sensitive to news headlines. With the emergence of new platforms, a shift towards recurring revenue models and larger opportunities resulting from digital transformation and an evolving threat landscape, we are hopeful this will change over time.
Tech giants fighting for supremacy
Natural language processing (NLP) remains a key battleground for tech giants fighting for supremacy in artificial intelligence (AI). Elsewhere, digital twin adoption has been increasing steadily, particularly in aerospace and high-value manufacturing such as automotive. The digital twin market is expected to reach $86bn by 2028, a CAGR of 42.7% from 2021 to 2028.
AI is likely to play a pivotal role across multiple industries over the coming years, to convert information (data) into knowledge thereby increasing business productivity and efficiency as well as helping society through, for example, reducing greenhouse gas emissions. It has certainly come a long way from playing board games.
Balancing supply and demand
2021 was a frustrating year for the automotive industry, despite strong demand, as production was severely hampered by supply-chain constraints.
However, global plug-in electric vehicle sales growth accelerated to 108% year on year. With a rapid decarbonisation of the sector underway, auto stocks may find a new role in investors’ ESG portfolios. In addition, whilst meaningful volumes of fully autonomous vehicles (AV) are likely several years away, our view remains that autos are at the leading edge of the Internet of Things.
Supply is the near-term driver, but we continue to believe electrification, autonomy and connectivity are megatrends that will prove great investment opportunities over the coming decade.
A year of progress
On the face of it, healthcare delivered another year of strong absolute growth in 2021, however this masks significant underlying volatility, where the tide went out for more high growth, speculative and early-stage biotechnology companies.
Share price performance aside, what we saw, and continue to see, is a structural step forward in the adoption of technology across healthcare. A number of trends are developing, generating and utilising a great deal of data.
Following a trajectory we have observed time and time again in other areas of technology, this data can be used to continuously improve patient outcomes and develop healthcare solutions into the gold standard of the future.
A(nother) good year for crypto
2021 was another breakout year for cryptocurrencies, with the total crypto market cap reaching $2.3bn, up from $782m in 2020. Nearly one in four US households owns crypto.
Investor appetite remained elevated as venture capitalists poured $27bn into crypto start-ups in 2021 and a July survey found seven out of 10 institutional investors expect to invest in digital assets in the future.
While we are excited by the speed and scale of innovation in the crypto space, it is worth highlighting that the vast majority of crypto uses beyond trading still perform functions related to the crypto world. There is no doubt that crypto is here to stay, and we retain an open mind.
A new digital frontier?
First coined in the 1992 cyberpunk novel Snow Crash, the word ‘metaverse’ entered the investment vernacular late last year following Facebook’s decision to pivot towards the metaverse opportunity, renaming itself Meta to underline its intent.
The size of the prize, together with the asymmetric risk associated with missing out has seen many, varied companies declare an early interest in the metaverse. The narrative may be somewhat ahead of itself, but this is a normal technology response to the enormity of the opportunity and despite its nascency, a framework for understanding the metaverse is beginning to take shape. In time, it could represent the next stage of the internet.