Investment Opportunities Resulting from Accelerated Disruption and Innovation


Investment Opportunities Resulting from Accelerated Disruption and Innovation

August 18, 2020

Host: Hello and welcome to Talking Markets: exclusive and unique insights from Franklin Templeton.

Ahead on this episode: how the pandemic may be accelerating investments in innovation.

Matt Moberg, portfolio manager with Franklin Equity Group, breaks down themes and sectors that are benefitting in the current environment and what they may look like years from now. Plus, quick investment takes on everything from 5G, health care technology, and space…to gaming, cryptocurrencies and cannabis.

Here’s Renee Anderson with the conversation.

Transcript

Renee Anderson: Thank you for joining us, Matt.

Matt Moberg: Hi, Renee. It's great to be here.

Renee Anderson: Let’s start high level—your big picture view of investing in innovation and why you see so much opportunity in this area.

Matt Moberg: We've always had the same philosophy and that philosophy really is that wealth is created by the innovators and, therefore, we should focus our investments in innovation because that's where the wealth is created in any economy. And as a result, what we're trying to do is we're trying to find companies, buy companies, and invest in companies and then hold them over the long-term as they continue to compound. We also think that it's very important to understand that this is one of the most misunderstood parts of the market. Innovation is often deeply misunderstood both by investors, as well as by popular press. And so many of these companies, if you anchor off of a trailing one-year earnings basis, appear to be expensive. But in fact, from our perspective, the market often misprices the longevity or the durability of growth, or they misprice the pace, which is how quickly growth can occur in a global marketplace. And, that makes it a really great place to be an active manager.

The other reason why investing in innovation demands active management is because we are trying to find where innovation clicks and matches with great investments and great business models and that is actually somewhat of a separate thing.

Renee Anderson: So with that backdrop, what is your view of the impact of the pandemic, and what’s your market outlook going forward?

Matt Moberg: I think about outlooks in longer arcs than in one or two years. And so, from a longer arc perspective, my outlook is that we are going through the very beginning of the fourth industrial revolution and I think the fourth industrial revolution could last basically for the rest of my career. And, what that means is that innovation is accelerating. It's accelerating to all parts of the economy.

The third revolution was really—and these are sort of Klaus Schwab's definitions—was really 1980 until maybe five years ago. And so, that was really just the early stages of computers and digitization.

The fourth industrial revolution is when all of that sort of starts to expand across the entire economy, which I think is happening now. And so, when I think about this, I really feel that this period of time we're in is very similar to the late 1800s and the early 1900s in which we had the combustible engine which led to the auto industry, the locomotive industry, the steel industry, even the rubber industry and the oil industry, indoor plumbing, electricity, photography, and you had a bunch of different types of innovations happen pervasively throughout the economy. And during that period of time, in one generation, you had people create a tremendous amount of wealth. So, that's why you had the Vanderbilts and the Rockefellers and the Morgans and the Fords, et cetera. And so today, we're going through a very similar period of time. The names, of course, are different, but these companies that have been created are often five times the size of what was previously, these “Great American Companies.”

The other thing that happens during that period of time, when you have this tremendous amount of change, is you have a tremendous amount of disruption. And when you have disruption, it's sort of the other side of this coin. I think, you know, if you take 2010 and take the previous 50 years, indisputably mean reversion or value investing outperformed the market. And, I think that's been academically proven.

But now we're watching things like oil. It's hard pressed for me to imagine, that, that commodity goes back to $80 to a $100. It's hard to imagine that network television is going to come back and get the ratings back that they did. You can look at companies who lost half their audience over the past five years. In our opinion, when you go through a period like a recession, it's actually when those weaker companies start to go away. We're certainly seeing that in the retail space now and in many classic, generational brands actually starting to go bankrupt. And so, that's what I think could be happening.

Renee Anderson: What about valuations – markets have experienced an incredible bounce back and surge the last few months. Do you worry about where valuations are right now?

Matt Moberg: That's a great question, and one we think about a lot, too. We try to think about things in these longer-term time horizons. And what that means is, is that your chances of success depend on how long you can invest. What really matters is being involved and being in the market and having that long-term view. I'll mention that first.

To get very granular on the actual question, I don't know. I mean, I just don't have always a good feel of what's going to happen, over the next three to six months. My confidence level is much higher in talking about what's going to happen over the next decade. But, I can say there are some things in the market that have been very counterintuitive in this market and that is some things have been really brought forward.

Diagnostics clearly have been brought forward and some of the diagnostics which are occurring, you know, you need gene sequencing and gene based—and I'm talking about, of course, diagnostics for COVID. The stay at home has also led to a real acceleration in e-commerce which has led to acceleration in the payments companies and has led to acceleration in e-commerce companies. And so, we have seen companies sort of make all time new highs, and we, too, have thought to ourselves, “Aren't we in one of the greatest recessions of our lifetime?” The stimulus has been so high that consumer spending is actually up year over year. And, that's due to the fact that everybody getting that extra $600 a week of unemployment, so spending is actually high. And then, what we're watching with the e-commerce companies and they're saying this on calls, they're saying, we're doing our 2023 plan, our 2025 plan this year. And so, we're seeing massive acceleration.

Matt Moberg: When I see companies that are saying we're three years ahead of plan because demand is so high, those companies should be worth more. That actually is worth more. So, then the question comes is this permanent or semi-permanent. And that is really the conversations that we're having on our team, is which one of these is really permanent or semi-permanent change?

Renee Anderson: How are you thinking about risk—especially considering the regulatory and political environment?

Matt Moberg: Yeah. So, the big risks that I think about are which one of these themes keeps moving further out and which ones are being pulled forward. So clearly, I just mentioned three which is e-commerce and payments and diagnostics, all being pulled forward.

Some other risks are things that just keep getting pushed out. I mean, automated driving. If you asked me two years ago, I would have told you that that's probably three years away, you know, two years forward. It's, it's clearly not one year away. So, we try to think about it in terms of what are these thematic risks? One thing we worry about a little bit less, I think, than probably most is I actually think most of these big tech companies, generically speaking, if we broke up those companies, they would be worth more.

Now, there's other kinds of regulation which could be negative. It's hard to sort of read that, but that's kind of how we think about risks. We think of it more on, you know, which companies are moving forward and which are back. And then from a political standpoint, we monitor it carefully and there are some scenarios which would be negative for individual companies. But actually, overall big things like breakups and stuff, we would actually view more likely positive than not.

Renee Anderson: And what about, US/China relations?

Matt Moberg: Obviously, they're getting worse. And it's very clear that China has been trying to steal IP [intellectual property]. And so, if you have a company that's operating solely in China. We find that to be less risk than the cross-border risk. China clearly is taking some lead in semiconductor manufacturing. However, all the semi-cap equipment, which is how you make leading edge semiconductors, are all Western. They actually manufacture their equipment in the West and then, end up selling. So those are areas which we find two countries actually very much need each other and those are areas where we have those conversations about US/China relationships.

Renee Anderson: Certainly, a lot to digest on that topic. Ok, lets switch to a little word association now – I’ll give a theme, you share some quick thoughts on it, does that work?

Matt Moberg: I'll do my best.

Renee Anderson: All right. 5G.

Matt Moberg: 5G is real. It's going to change our life. Asia's ahead of the US and very difficult to find good investments.

Renee Anderson: Cybersecurity.

Matt Moberg: Somewhat similar, incredibly important, but often gets bundled into other products. There are a handful of pure plays. Very bullish on it. Not as many investments as you would think.

Renee Anderson: Autonomous cars.

Matt Moberg: Has been pushed out and still think it's likely to happen this decade and very excited about it. And I will go back to not as many investments as you think.

Renee Anderson: This one—there's a lot of that I kind of put together here, but solar versus lithium or quantum glass batteries versus traditional field technology. Let's talk about the fuel of the future.

Matt Moberg: Yes. I think we will move slowly. You know, I actually, I say slowly, but actually I think it's going to be exponential, but we are going to move to a post carbon world in the next 30 to 40 years, maybe 50 years, there will be some things that will stay, like maybe, jet fuel or something. But, I think battery technology is going to be cheaper than the combustible engine, which will really accelerate growth.

Renee Anderson: And what about space?

Matt Moberg: Un-investible right now. Space is, you know, genomics in 2003—very, very cool, no product. I mean, no real investible product yet.

Renee Anderson: Alright. Cryptocurrencies or digital currencies broadly.

Matt Moberg: I'm torn on crypto in the sense of, I mean, I understand there's a market that will continue. There's a lot of use for illegal activity and there's a lot of use for countries that are basically failed states. However, I think it's here to stay and I'll be interested to see how legitimate it becomes…I believe it will be not truly a currency, but more like gold of a stored value. And, no government is going to want to have a dual currency or lose control of their currency and that will be a limitation on crypto. But, with those limitations on it, as I just described, I think it's, I think it's here to stay.

Renee Anderson: Health care technology and the impact of COVID.

Matt Moberg: I'm very bullish on that. I think we'll have a vaccine, you know, next year at some time. And, in general, I think health care and the products that are being made within health care are, are really going to change our lives. So, so incredibly bullish on that.

Renee Anderson: Sort of related from a health care perspective potentially would be cannabis.

Matt Moberg: So cannabis is interesting. Cannabis reminds me of the power of the brand. So I don't think there's much to invest in, but when you think about what early brands were like in the 1900’s—and it's obvious that I like to study history—the reasons brands started to exist is because people didn't trust what they were buying. They wanted to buy, you know, a Coke or Pepsi or something along those lines where they could actually trust what the ingredients were inside and know that it was safe. Today, brands have changed, that it is now, sort of, a feeling that you have and it, sort of, sometimes, brings an emotional pull, a nostalgia, whatever. But the original purpose of brands was to say, “If you buy this brand, you know, you're getting what's in the jar.” And, I think the best opportunity in cannabis is in the branding because you don't really want to say drink something which has cannabis in it and you don't trust where it came from. And so, from that perspective, I think from the consumer staples companies, they have a really good and big opportunity there. However, in our opinion, there's not a lot of innovation there and it could get buried in much larger businesses, but we'll watch that unfold.

Renee Anderson: How about gaming and e-sports?

Matt Moberg: In gaming in particular. We are very, very bullish. I think if you look at a movie that was 15 years old and you watch it, you would say that was a great movie. And today, not much has changed from a movie 15 years ago to today. Some of the special effects might be a little better.

If you played a video game, 15 years ago or a 15-year-old video game, you would say that experience is incredibly outdated. The change that's going on in video games is truly substantial. And the amount of hours people are spending and the buy-in and people entering into these virtual worlds and the amount of time that they spend there is really taking up a tremendous amount of mind share. And, I think that's really one of the growth areas of entertainment in general.

Renee Anderson: Ok, we got through a lot! We are out of time but Matt, I want to thank you for joining us. Matt Moberg, portfolio manager with Franklin Equity Group, giving us his insights on investing in innovation.

Matt Moberg: Thank you so much.

HostAnd thank you for listening to this episode of Talking Markets with Franklin Templeton. If you’d like to hear more, visit our archive of previous episodes and subscribe on iTunes, Google Play, Spotify, or just about any other major podcast provider. And we hope you’ll join us next time, when we uncover more insights from our on the ground investment professionals.

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