Every year, the Milken Institute, a think tank in Santa Monica, California, hosts a global conference, where leaders from a range of fields discuss some of the most important economic and social issues of our day. I recently attended my first one, and it reminded me of heading to college for the first time. Whatever you accomplished before suddenly felt somewhat small; there were simply too many new classmates with more impressive backgrounds. That plus the logistical challenge of placing in close proximity 4,000 well-coiffed, Type A individuals, all of whom are bent on compressing a lifetime of networking into 72 hours, makes for an interesting experience.
That said, it was highly worthwhile, if only to hear from a number of people you rarely get to see up close. For me, three big themes emerged that most resonated:
Technology will remain a powerful, deflationary force for a very long time.
We all know this. We see the evidence every time we pull out our smart phones and shop online. What is less obvious is the potential for an acceleration in this trend. One very well placed tech investor spoke about a one-million fold increase in processing power over the coming decades. That would open up fields that have hitherto remained less impacted by technology, notably health care. The potential for robotic diagnostics and remote medicine becomes much more realistic as computing power continues to expand.
Finance is not immune.
Health care is not the only industry that is likely to get remade. By far the most interesting presentation I attended was from the CEO of a leading financial tech (fin tech) firm. The talk was about using an algorithmic approach to credit scoring. What was both fascinating and intimidating was the efficacy and speed of this approach, particularly when applied to high volume consumer lending. The statistic that stuck with me: By providing just five items of personal data, which did not include a social security number, in less than a second the firm’s algorithm would access hundreds of thousands of data points in arriving at a loan decision.
The better part of emerging market (EM) potential remains untapped.
No offense to any of the other presenters, but from my perspective the prize for the most memorable speaker went to Jim Yong Kim, President of the World Bank. Leaving aside an absurdly impressive resume, his discussion of the opportunity to match capital with structural needs in emerging markets reinforced the long-term potential in this space. EM is still coming off a cyclical downturn that left it with near pariah status with many investors. While the stocks have rallied sharply year-to-date, the real potential lies in the future, particularly for EM infrastructure. The vast majority of emerging and frontier markets remain at a very early stage of development. Investment in EM infrastructure will be additive in almost all EM countries and offers the potential for attractive yield in a yield starved world.
None of these trends are likely to dominate over the short or even intermediate term. However, these are three trends that investors will want to keep in the back of their minds. They should inform long-term tilts and remind us of the potential of new technology and new markets to change the investing landscape.
Russ Koesterich, CFA, is Portfolio Manager for BlackRock’s Global Allocation team and is a regular contributor to The Blog.