Quick Thoughts: The Opportunities in Innovation

Our recent investing in innovation roundtable confirmed that investing in innovation requires intuitive and fundamental knowledge. Matt Moberg, Senior Vice President and Portfolio Manager for Franklin Equity Group, Aram Green, Portfolio Manager and Managing Director for ClearBridge Investments, and Chief Market Strategist and Head of Franklin Templeton Investment Institute discuss areas to find equity market inefficiencies.

The second machine age is well underway—from automation of cognitive tasks to the rise of artificial intelligence (AI)—and with it, the economic impacts of innovation that measure beyond gross domestic product (GDP). Innovation advances business practices, services, and products, and when it permeates the economy, innovation increases productivity, and spurs economic wealth creation. But not all innovation will ultimately be successful or create value. I recently discussed investing in innovation as part of our “What Our Managers Think” series with Aram Green, Managing Director at ClearBridge Investments, and Matt Moberg, Senior Vice President with Franklin Equity Group.

  • We think the most likely case is that the inflation we are experiencing today is transitory. Current inflation tailwinds may fade later in the year as supply-chain detangling allows production and supply to finally meet demand, demand from fiscal stimulus slows, China’s economy decelerates, and the long-term structural factors that kept pricing—innovation and its productivity gains—continue. Inflation may, however, continue to look worrisome for the near to intermediate future as demand is strong and supply-chain issues crimp production.
  • Investing in innovation requires intuitive and fundamental knowledge of the underlying technology, how it will be implemented, and as Matt discussed, the trajectory, both in terms of duration and magnitude, of its growth.
  • Growth stocks, because of the longer duration of their earnings, can be very sensitive to rising interest rates and potential inflation. However, rising interest rates can be an advantage when an innovative company is competing for capital. Awareness and caution about potential long-term inflation are important investor considerations.
  • Innovation is one of the most inefficient parts of the equity market in large part because we have found innovative companies to be one of the most misunderstood parts of the market. Matt believes the most common areas that are misunderstood are either the pace of change (disruption) or the duration (length of time) that the innovation will last.