The four mega forces driving investment returns in the 2020’s
Most financial commentators think stocks are overvalued and that global growth is slowing as we emerge from 18 months of Covid-19 lockdowns. We don’t think so. In fact, we believe society is about to enter a period of explosive exponential growth driven by emerging technology platforms. Those platforms include artificial intelligence (AI), machine learning, electric vehicles, autonomous driving, space, 5G and 6G communications, gene editing, Internet-of-Things (IoT), virtual reality (VR/AR), blockchain and cryptocurrencies.
People are adopting these Web 3.0 technologies at twice the rate they adopted Web 2.0 (the likes of blogs and social media), and adoption of Web 3.0 will likely accelerate as new technology platforms emerge over the next decade.
There are four mega forces that are underpinning this exponential growth that will create a new economy and help drive a fresh period of above-average returns for investors, particularly those exposed to these forces.
1. The energy revolution
With global leaders converging on Glasgow for COP26, there is now near-unanimous consensus that the world is facing an environmental crisis which will lead to a revolution in how we consume energy.
Consumers are increasingly demanding that energy be generated from solar and wind, and most countries are slowly shifting their energy dependence away from coal and oil (Figure 1). Advances in battery technology will also allow power utilities to store renewable energy for peak demand periods. Nuclear power is also likely to be seen as a possible solution, allowing the further closure of coal-fired power stations.
Figure 1 – Over 80% of the world’s primary energy still comes from fossil fuels
But one of the biggest changes in how we use energy will be using dramatically less oil over the next three decades as we shift away from internal combustion engine (ICE) vehicles towards electric vehicles (EV). Holon’s recently released Tesla Report outlined the growth of EVs as one of the biggest economic and consumer trends – and investment opportunities – in our lifetimes.
The report predicts that the global EV fleet will reach two billion vehicles by 2050, with almost all Governments to ban ICE vehicles. Building electric charging infrastructure from 100% renewable energy could reduce greenhouse gas emissions by over 25%.
This energy transition is throwing up amazing investment opportunities. Most notably is Tesla which has a substantial lead time, manufacturing expertise, and world class brand that will see it capture more than 25% of annual global EV sales for the next 20 years. We believe that it should be amongst the largest positions in any long-term investment portfolio.
2. Smarter contracts
The second mega force that will power Web 3.0’s potential is smart contracts. Smart contracts were created by computer scientist and legal scholar Nick Szabo in 1994(1). Smart contracts use blockchain technology to directly write terms of agreements into code, making them self-executing.
A smart contract, for example, can be attached to an artist’s painting or a song with terms that stipulate a royalty payment of 5% be paid into the artist’s digital wallet every time the painting is sold for the next 100 years. Failure to follow the terms of this agreement carries the same legal and tortious penalties as traditional contracts.
Smart contracts can be used in every type of transaction imaginable, allowing anonymous parties to operate in a trustless environment. They look set to be amongst the most disruptive technologies of the 21st century.
3. New digital money
The third mega force is digital money that will dramatically lower transaction costs of payments and enhance their effectiveness. Under current payment and banking channels, banks act as intermediaries to ensure trust between counterparties. The downside is slow transaction speeds and substantial costs. Money transfer companies charge up to 15% on international transfers.
But an alternative world of digital money is emerging. Cryptocurrencies can be sent instantaneously for near-zero cost. Blockchain-enabled smart contracts also provide the same protection as a traditional bank by validating the transactions.
This process involves checking the authenticity of funds (is the money real?) and its location (is the real money in the account that is about to transact?). If both are correct, the funds are sent, and the transaction is complete. This can take as little as five seconds, versus two days for the same transaction using our current fiat banking system.
Digital money will not only slash the cost of transactions but change payment models by shifting to a consignment-type revenue model. Under that model, once an item is sold, the digital payment can be immediately divided according to the terms of a smart contract and sent to each participating party’s digital wallet. For musicians, this means they can receive micro-payments each time someone downloads their songs from Spotify or iTunes. For painters, this means they can receive a portion of the future value of their artwork each time that it is sold.
4. New ways to store torrents of data
The fourth mega force are innovations to store the deluge of data. The world produced 64 zettabytes (ZB) of data in 2020. To visualize how big that is, if we assume one data byte is the same size as a $1 coin, a 64 ZB stack of $1 coins would go around the circumference of the earth 5 trillion times.
With new technology platforms emerging over the next few decades, leading data forecaster IDC predicts that global datasphere will hit 2,140 ZB in 2035(2) (Figure 2).
Figure 2 – Data is set to explode over the next 15 years
Our recent work on Tesla leads us to believe that IDC’s current forecasts underestimate the volume of data likely to be produced in 2035, by as much as 10 times. If Tesla reaches Level 4 or 5 autonomous driving capabilities before 2030 and its EV fleet reaches Holon’s estimate of 165 million by 2035, our research suggests it alone would generate 5,000 ZB of data per year in 2035. Extending this to the entire global EV fleet would raise this estimate to as high as 15,000ZB. Add in all the other sources of data and 20,000 ZB in 2035 is a real possibility.
The challenge however is not creating data, it is the cost of storing and moving it.
There is currently only 2 ZB of storage capacity in data centers today, with another 5 ZB of capacity in laptops, PCs, and smartphones. If data production reaches 20,000 ZB in 2035, saving just 5% of this data would require 500x greater than storage capacity today. Storage would need to grow by 50% every year from now until 2035 to hit this target.
But data storage is concentrated in too few hands. Just five companies (Amazon AWS, Microsoft, Google, Alibaba, and IBM) control 72% of global public cloud storage capacity. In a concentrated market, data storage prices can remain high for longer, with consumers having little option to store their data elsewhere. Therefore, they are forced to throw it away.
Total storage hardware costs to reach our estimated storage capacity target of 1000 ZB (or 500-fold) by 2035 would t more thanUS$100 trillion. That’s too rich even for today’s global technology giants to fund themselves.
At the same time the big players face rising government oversight and regulations, particularly in the areas of data security and market pricing of data storage, transfer, and analytics. They risk becoming a highly regulated utility (data network) that trades at a substantially lower valuation multiple (and lower share price), which could mean that owning and operating the public cloud no longer makes economic sense.
New storage alternatives will have to emerge. One is a Web 3.0 project called Filecoin, which pays storage providers to add storage capacity (hardware) onto the filecoin network. If Filecoin can expand its network to millions of individual providers, the cost of storage will shift from the current approach that allows Web 2.0 storage providers to charge the highest fee possible, towards market pricing that is determined by the lowest price a provider is willing to accept. As a result, Filecoin will provide storage at a fraction of the cost of current prices, creating ideal conditions for data volumes to explode higher.
Sparking a new round of growth and returns
These four mega forces are providing a platform that will allow technologies, such as autonomous driving, AI, and virtual reality to flourish right across the world. It is in this environment that exciting concepts like Facebook’s ‘Metaverse'(3), a 3D virtual reality world that is the digital equivalent of real-world society today, will emerge.
Investors can expect to see government and industry trying to resist these forces, particularly cryptocurrencies. But resistance will eventually be overcome, as the economic benefits surpass the social costs. Identifying the best companies that are likely to be the biggest beneficiaries should pay handsome long-term returns.
Many investors are fretting about valuations and slowing growth, as well as other short-term issues. But they are missing the bigger picture that the four mega forces will confound sceptics and doomsayers and create a new round of economic growth and spur strong returns well into the future through the emergence of Web 3.0 investment opportunities.
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Tim has worked at Goldman Sachs in London and New York, covering European and UK based hedge funds, and in Australia as an investment analyst and China-focused portfolio manager at Consolidated Press Holdings, Ellerston Capital and Caledonia.
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