Last year the US economist Robert Gordon created a stir with the publication of The Rise and Fall of American Growth, a work in which he challenged the assumption that economic growth will continue unabated through the digital age. He argued that the developments in information technology since the 1970s will have a relatively muted impact on economic growth rates when compared with the innovations that powered western economies between 1870 and 1970: electricity, mass railway linkage, advances in petro-chemicals and pharmaceuticals, the internal combustion engine and modern communications – to name but a few.
During that period, the standard of living doubled roughly every 30 years; at current growth rates, you would be looking at a figure beyond a human lifespan. Worse still, Professor Gordon doesn’t believe that the average growth rates that accompanied the rollout of these technologies are attainable again – at least not in developed economies. Perhaps we’ve arrived at a kind of stasis in economic terms.
Although growth rates in developed economies have been anaemic since the global financial crisis unwound, publicly listed companies have remained attractive to investors because they have retained their profitability, even allowing for quantitative easing, resultant asset price bubbles and the distorting effects of share buybacks. Anyway, there’s only so much stock prices tell us about the state of the global economy – and vice a versa. Even in an era of ‘secular stagnation’ – a somewhat overworked term – sub-sectors and entire industries will outgun national growth rates.
Just consider the growth of mobile telephony. By the end of 2016, two-thirds of the world’s population had a mobile subscription – from virtually zero 30-years earlier. Last year mobile technologies and services generated 4.4 per cent of GDP globally, equivalent to around $3.3 trillion (£2.4 trillion) of economic value, according to figures from trade body GSMA. This is forecast to increase to more than $4.2 trillion (4.9 per cent of GDP) by 2020.
The point is there are a range of emerging technologies that investors should familiarise themselves with if they want to capture the potential for exceptional growth rates – next generation batteries, 3D printing and blockchain readily spring to mind. Investors need to identify the point at which theory meets applied science, although remaining mindful of the fact that existing innovations may take a while to impact productivity and/or translate into profitability.
Caveats aside, there is one technology that is already being utilised across numerous applications, but that still offers tremendous growth potential – unmanned aerial vehicles (UAV) or ‘drones’ and the ancillary technologies that support them. Anyone who has followed the industry will know that Israel was one of its pioneers, particularly in the military field where it remains the biggest military drone exporter in the world, supplying around 60 per cent of drones since the mid-1980s. This isn’t all that surprising given the logistics of Israel’s security situation, but the end result is that technologies developed by companies such as Elbit Systems (US: ESLT) have been adopted around the globe – and increasingly in civilian markets.
According to market research conducted by Fact.MR, the compound annual growth rate (CAGR) of the global UAV market is expected to average 22.8 per cent through 2017-22. In dollar terms, the market is expected is be worth around $22.2bn by 2022, up from $5.93bn in 2015. That’s small beer compared with, say, the lithium battery industry, but UAV technology is in early-stage commercial development, particularly in terms of civil applications. A separate report published by Goldman Sachs predicts that although military procurement would still account for the lion’s share of revenue, the commercial segment would be the fastest-growing area of the UAV market through to 2020.
Unfortunately, many people still view drones in one of two ways: namely as a wholly inadvisable birthday gift for your nephew; or a means of blasting a jihadist out of his bed in Waziristan from the safety of a windowless room in Nevada. The reality is that it’s already employed across numerous business strands – and utilisation rates are increasing rapidly. Amazon generated column inches last December when it announced it had successfully trialled its Prime Air drone delivery service in the UK, by delivering a TV streaming stick and bag of popcorn. It’s hard to view this as anything other than a publicity stunt for the e-tailer’s signature service, as it remains to be seen whether express shipping and delivery via UAVs in built-up areas is even practical given the inherent logistical challenges. (As sales of civilian drones have increased so, too, safety concerns among regulators and law enforcement agencies.)
Nevertheless, drones are increasingly being utilised in civil applications, ranging from safety inspections in the extractive industries to precision crop monitoring. They’re now in widespread use in law enforcement and border control surveillance and are routinely employed by meteorological agencies in storm tracking and disaster management. Add in thermal sensor drones for search and rescue operations and aerial photography for journalism and film – and you get some idea of the commercial potential.
From an investment perspective, it’s easy enough to gain exposure to the growth of the UAV market, particularly in the military sphere, where aerospace heavyweights such as Boeing (US:BA), Thales SA (TCFP.PA) or BAE Systems (BA.) remain at the forefront of development. However, given the breadth of these group’s activities, growth rates relating to their UAV activities – and by extension, investor returns – are effectively diluted. It is possible to invest directly in companies such as AeroVironment (US:AVAV) whose performance correlates more closely to the expansion of UAV technology, although the consumer and 'hobbyist' drone market has become increasingly dominated by Da-Jiang Innovations (DJI), a private Shenzhen-based entity that has attained 50 per cent market share across all price points in the North American consumer UAV market. Little wonder that competitors such as Paris-based Parrot SA (EPA:PARRO) and GoPro (US:GPRO) have been forced to significantly reduce headcount in a bid to compete over the past year. The latter company, a manufacturer of the Karma range of drone technologies and high-definition mounted camera units, was admitted to trading on Nasdaq three years ago in what was the largest consumer-electronics IPO since Duracell International debuted at the beginning of the 1990s.
