Digital economy: an ubiquitous investment theme - in just two digits
The exchange of information in binary code and its networking and distribution to countless applications is proving to be a game-changing combination: the digital economy is ubiquitous, but its potential is likely only just beginning to be realised. This makes it interesting for investors with a long-term view.
Authors: Bertrand Born, portfolio manager, und Aryestis Vlahakis, senior analyst
Artificial intelligence (AI) is dominating the headlines. However, ‘news’ is not actually the technology of the future: the concept for it has existed since the 1950s, but for a long time it remained only a theory. The fact that AI is now apparently beginning its triumphal march is thanks to relatively new drivers of digitalisation: in particular, easier access to huge amounts of data and the massive increase in computing power.
These same drivers are also paving the way from digitisation to the digital economy (see box below). The digital economy is now pervasive and is expected to become even more so in the coming years. From an investor's perspective, this gives it the potential to become an investment theme that not only looks attractive in the long term, but can also play a role in terms of sustainability.
Bits conquer the world
It all starts with two digits - information is converted into the values 0 and 1, known as binary digits, or 'bits' for short. This binary code allows information to be transmitted as electrical impulses. With 0, electricity flows; with 1, it does not. The technology is centuries old: for example, the circuits described by the German Georg Ohm in the 1820s or the battery designed by the Italian Alessandro Volta in 1799.
Since then, these electrical impulses have become globally accessible thanks to the World Wide Web, which in turn can be traced back to the first undersea telegraph cable laid between Europe and America in 1866 and, some 120 years later, the commercialisation of the TCP/IP protocol by the US military's Arpanet. This made global information networking possible.
The second major effect has been convergence. Whereas information used to be tied to a carrier medium - texts to books, music to tapes, videos to celluloid film - digitisation has freed it from its physical form, leaving it only virtually present as bits. This means that it can be read by software and received and processed on almost any computer device.
Long-term drivers
Digitalisation, global networking and convergence have laid the foundations for the digital economy. However, we are likely to see only the beginning of this development. The digital economy continues to evolve through cross-industry innovation. Several factors are driving this theme:
- Technological progress: The underlying technologies, such as microchips, sensors and processors, algorithms and available data, are becoming increasingly powerful, smaller, more energy-efficient and, last but not least, cheaper. In the early days of IT, a mainframe computer filled an entire room. Today, a computer can be found in the frame of ‘smart glasses’. Technical evolution has made digital solutions more accessible in all industries, from industrial manufacturing to personal devices.
- Ubiquity: Smaller, cheaper and connected devices are also turning almost every object into a computer: from watches to cars to factories to 'smart cities'. Meanwhile, the Internet of Things (IoT) is penetrating everyday life, enabling further innovation and increasing productivity and efficiency across all sectors of the economy. The consultancy firm Pricewaterhouse Coopers (PwC) predicts that by 2027, there will be over 25 billion IoT devices in use, up from 11 billion in 2021 (see chart below).
- The digital economy's contribution to GDP is growing. Over the past decade, the digital economy has grown two to three times faster than the global economy. Experts believe this trend could continue. In an interview with Forbes magazine in 2022, Microsoft CEO Satya Nadella estimated that technology spending will double as a percentage of GDP over the coming years.
Internet of Things: 30 billion networked devices predicted
Sustainability takes centre stage
In this context, we also expect the digital economy to grow dynamically over the longer term – and thus could be attractive for investors. In our view, there is another compelling reason to embrace the investment theme: namely, its potential to address the pressing challenge of sustainability.
In this context, we also expect the digital economy to grow dynamically over the longer term – and thus could be attractive for investors. In our view, there is another compelling reason to embrace the investment theme: namely, its potential to address the pressing challenge of sustainability:
- Digital infrastructure: semiconductors, hardware, undersea cables, mobile communications, fibre-optic lines, satellite systems and data centres are what make the digital economy possible. Recently, cloud infrastructure in particular has developed rapidly as companies move their operations online and store large amounts of data. According to research firm Market.us the global market for cloud computing in IT could reach more than USD 2,300 billion by 2032 (see graphic below). Building infrastructure is also crucial to addressing the digital divide and allowing the other half of the world to participate in modern economic services. It is estimated that 2,7 billion people still have no access to the internet.
- Digital empowerment: Digitalisation allows us to perform a wide range of tasks more efficiently and productively. For example, digital health solutions such as telemedicine and wearables enable remote diagnosis, surgical robots enable minimally invasive and more precise surgery, and AI can help develop new drugs and conduct clinical trials. Meanwhile, e-learning promises easier access to education, while online payment systems can speed up transfers and have the potential to bring financial services to a wider range of people.
- Digital security: More and more of our data is transmitted over the internet: from posts on social media to financial transactions, health data and information for traffic control. This opens up the risk of misuse and attacks. Accordingly, there is a growing need for solutions for cyber security, data encryption and data protection. The statistics portal Statista estimates that the global market for cyber security will reach a volume of over USD 270 billion by 2029.
- Digital environmental solutions: Digital technologies, particularly sensors and IoT devices, can measure almost anything from water quality to air composition, enabling better environmental and health management. For example, sensors can detect leaks in water systems or dangerous levels of pollutants in real time. Software can analyse these data streams and provide actionable insights to help industries minimise their environmental footprint. Such advances are critical to both government and corporate sustainability initiatives. They also offer opportunities to tackle the climate crisis, conserve resources and improve public health.
Global cloud computing market expected to grow
The Digital Economy investment theme allows investors to participate in exciting innovations, disruptive technologies and the long-term growth of digital solutions through companies across a range of sectors that are helping to address sustainability challenges.
