Benji Dawes
Co-fund manager Premier Miton Responsible UK Equity Fund
Britain needs you
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
Chancellor Jeremy Hunt has told those who left the workforce during the pandemic and not returned that “Britain needs you.” Referencing data that shows that millions of people have chosen to exit the workforce, Mr Hunt said that businesses would struggle to grow if they cannot find enough staff. He said that employment was a vital part of his plan to help Britain get back to growth.
Referencing classic economics, there is a simple theoretical relationship when identifying the sources of economic growth:
Growth rate of gross domestic product (GDP) = Growth rate of population + growth rate of GDP per capita
Another way of looking at the same idea is that the change in economic output is related to the changes in capital invested, size of the labour force, and productivity, largely enabled by technological advancements. The Prime Minister is attempting to tackle the UK’s labour force problem of an increasing number of retirees who are no longer in the workforce and are expected to live longer. Instead, should we be looking at the problem from the angle of investment in technological improvements?
Technological advances
To sustain economic growth, we need either the birth rate to increase significantly, or for productivity to improve. The UK’s “productivity puzzle” is aptly named. The moniker refers to the drop in average hourly output of a UK worker following the recession of 2009. In the half century before 2009, productivity growth had been steady at around 2% per annum.
Since then, the UK has experienced a period of lower productivity, relative to its own history but also compared with many other developed countries. There are structural arguments for the decline, including increased (non-productive) regulatory compliance in many large industries, and the decline of the North Sea oil and gas industry, which is one of the highest for labour productivity. There may also be measurement issues muddying the picture. However, none of these explanations adequately describes the UK’s shortfall, nor do they provide solutions for a brighter future.
To grow productivity, workers need to work harder or smarter. Harnessing technology enables each worker to contribute more economic output without having to work themselves into the ground. Technological progress, therefore, should be at the heart of a healthy economy in the future. In terms of technology, several developments are maturing at just the right time, in particular industrial robotics, AI and 5G networks. People have been talking about these developments for decades, but we are now experiencing them drive operating benefits for companies.
Born in the 80’s
A critical issue for the economic outlook is whether after an extended period of stagnant productivity growth, we are poised to enter a productivity revolution, in a similar vein to what happened in the mid-1980s. Out of the windows went typewriters and paper ledgers and in came spreadsheets and word processors.
In 1991, the World Wide Web was made available for public use. The combination of PCs and the internet allowed businesses to transform their processes and drove a surge in productivity and economic growth. However, it was not a sudden exponential growth curve, it happened over decades as businesses worked out how best to use the new tools.
Consumers first, commerce second
You might think that the 2010s were also a period of massive technological innovation. Apple launched the iPhone in 2007 and we also saw the launch of the first 4G network in 2010. A combination of smartphones, high-speed networks and cloud computing should theoretically be a powerful combination for productivity. Much of the innovation in the 2010s was aimed at consumers – e-commerce, social media, and video streaming. How many of us felt at the time that our own domestic tech was more advanced than that issued by our employers?
A pandemic tech adoption surge
The pandemic led to a surge in usage of work collaboration tools, particularly Microsoft Teams, which took much of the technology developed for consumer facing apps and leveraged them for the businesses. Productivity growth did increase during the pandemic and there is a trend of companies starting to really leverage these technological developments.
Tech wreck part II?
While the valuations of technology stocks, particularly the FAANG stocks have rightly come under scrutiny post pandemic, the fundamentals of tech companies today are much better than those during the peak of the dotcom bust.
These companies have proven business models and capable management. The companies during the late 90s were start-ups, and the technology sector was starting to pick up. Internet companies had just entered the markets and experimented with new technologies, many of which were still unproven. The valuations were based on speculation and not on the business that these companies could generate.
Science fact rather than science fiction
People may associate AI with Star Trek like science-fiction, but that stereotype is waning as AI develops and becomes more commonplace in our daily lives. Today, AI is a household name and sometimes even a household presence through Hey Google and Alexa type devices.
In business, AI is being used on an increasingly broad basis. In fact, most of us interact with AI in some form or another daily. A fact not lost on software majors such as Microsoft. Microsoft announced in January that it has extended its partnership with Chat GPT owner Open AI with a further $10 billion investment.
They invested $1 billion in Open AI in 2019 and last year unveiled plans to integrate image-generation software from Open AI into its search engine Bing. They plan to leverage their investment in ChatGPT to take on market leader Google Search. The integration of software opens communication between applications – for us it is key to cost savings and seamless customer experience and ultimately greater efficiency within businesses.
Embracing the idea of software optimising business processes, we hold an investment in software and robotic process automation (RPA) company, Netcall. Netcall’s software helps save money and deliver IT projects faster for its financial services and public sector customers, using a market leading ‘low code’ solution that does not require teams of software engineers.
There is a whole data value chain to consider as an investor though and without question AI brings potential up and downstream beneficiaries. For example, semiconductors are like the brains of modern electronics, enabling AI technologies to conduct their roles in delivering business efficiencies. If semiconductors are the brains of modern tech, the lifeblood might be 5G, which will make bandwidth-intensive processes, like real-time data transfer and analysis, all of which demand reliable high speed and low latency, possible at a larger scale.
This could have impacts in all areas of business. In this respect we have an investment in Spirent, who provide automated testing and assurance solutions for networks, ensuring that as AI adoption increases for businesses it is as safe and secure as possible.
The smarter way to invest?
These AI and machine learning technologies will, given time, transform the nature of work and the workplace itself. As these technologies help us improve efficiency, they will enable further innovations beyond what we can think up today. Some business systems and processes will decline, others will grow; change will touch every industry.
It is our job as investors to identify those for which change will be a positive catalyst, and particularly the companies with the products and services that are key enablers of that change.
