Invest in “The Next Big Thing”

We think the next decade will reward investing in the companies using technology to disrupt other sectors.

Invest in “The Next Big Thing”

We think the next decade will reward investing in the companies using technology to disrupt other sectors. We expect “The Next Big Thing” to materialize within the fintech, healthtech, or greentech spaces, or to be enabled and accelerated by the global rollout of 5G technology.

Since 1973, if a US equity sector was a top two performer over the previous 10 years, it had only an 8% chance of staying there over the next 10 years, and a 25% chance of falling into the bottom two. This pattern suggests that “The Next Big Thing” probably won’t come from the top two sectors of the last decade: technology and consumer discretionary.

We’ve worked to identify market segments containing stocks that could see earnings more than triple over the next ten years thanks to a large potential market (over USD 200bn), a disruptive catalyst to spur growth for the decade ahead, and a cyclical catalyst to kick-start things in 2021.

Our conclusion: If the last decade was about investing in the technology sector itself, we think the next decade will reward investing in the disruptors in sectors undergoing technological transformation. We expect “The Next Big Thing” to materialize within the fintech, healthtech, or greentech spaces, or to be enabled and accelerated by the global rollout of 5G technology.

Why now?

Following the 2020 launch of Apple’s first 5G phone, the iPhone 12, we expect a wave of interest in 5G technology and its potential applications, a trend likely to persist for at least the next decade.

Why could 5G be “The Next Big Thing”?

5G enables myriad business models and could spur the growth of a new generation of platform leaders capable of harnessing 5G technology. A study conducted by IHS Markit revealed that about USD 13.2tr worth of economic value could be generated from 5G applications by 2035.

That sinking feeling when the “4G” icon on your smartphone switches to “3G” is all too familiar. Streaming high-quality videos or making video calls, browsing without interruption, and playing real-time mobile games were only made possible with 4G. The technology has played a key role in boosting the growth of the smartphone industry, social media platforms, and streaming services.

We now expect 5G connections, with download speeds of 20GB/s and latency of just 1–4ms (versus 1GB/s and 40–60ms for 4G), to drive a potentially even bigger change, enabling whole new series of applications that will transform the decade ahead.

The first set of beneficiaries will be the enablers: 1. companies that manufacture, install, and maintain the equipment involved in the expected 20x rise in annual 5G capex spending from 2019 (USD 7.5bn) to 2025 (USD 150bn); and 2. smartphone manufacturers, which should benefit from the more than one billion 5G connections we anticipate will be added in the next three years.

But just as cloud technology favors platform companies over hardware companies, we anticipate “The Next Big Thing” will be found among the platform leaders capable of successfully building 5G use cases. Potential applications enabled by 5G’s high speeds and low latency include fixed wireless access, autonomous driving, immersive augmented and virtual reality (AR/VR) technologies, tele-surgery, Industrial Internet of Things (IIoT), distributed “edge” computing, artificial intelligence, data-driven agritech, and highly connected smart cities.

5G creates opportunities in a number of industries

Source: Ericsson, UBS, as of 20 October 2020

Why now?

The pandemic has triggered a dramatic shift toward contactless and mobile payments, and e-commerce. Improvements in customer acquisition are allowing fintech firms to cross-sell across different products and services.

Fintech addressable market growth in the medium term
 

Payments

Payments

Insurtech

Insurtech

Online lending

Online lending

Proptech

Proptech

Others

Others

Total fintech

Total fintech

Payments

12%

Insurtech

25%

Online lending

16%

Proptech

30%

Others

12%

Total fintech

15%

Why could fintech be “The Next Big Thing”?

Technological innovation is facilitating banking and financial services, spurring significant growth of fintech firms. We see scope for continued growth in digital payments, driven both by increased use of contactless and mobile payment systems, and by higher online spending. In addition, enabling technologies like artificial intelligence are helping fintech expand into other areas like insurance (insurtech), property (proptech), lending, and investments. Overall, we expect fintech firms to enjoy earnings growth rates in the mid-to-high teens over the next decade, making the industry one of the fastest-growing globally. We think the industry has the potential to expand to USD 500bn by 2030 from USD 150bn in 2018.

Digital payments

We still see significant scope for growth in contactless and mobile payments, and e-commerce. Cash and checks still accounted for 39% of the USD 225tr global consumer and commercial payment flow as we entered 2020, according to Mastercard. With the COVID-19 pandemic boosting e-commerce and reducing the use of cash, fintech payment firms have seen rapid growth in volumes and customer acquisition in 2020. Once consumers have grown accustomed to using primarily digital payments, many will not revert to traditional means. We expect digital payments to post growth rates in the low teens over the coming decade.

Additional services

The next leg of growth for fintech companies will be generated by cross-selling other fintech services like insurtech, online lending, investment services, or proptech, all areas where not only growth rates are stronger, but also margins are higher. In each field, the use of artificial intelligence and blockchain technology is enabling new business models that are lower cost and easier to scale.

Central bank digital currencies

Further growth could come from the launch of central bank digital currencies (CBDCs), with the People's Bank of China and the European Central Bank both working on launches. Such currencies could prompt higher fintech adoption, particularly among late adopters, if governments start to use them. Through the data generated, they may also enable broader application of artificial intelligence in the fintech space.

Fintech revenues expected to post 10.5% CAGR during 2018–2030

Source: UBS estimates, as of September 2019

Why now?

The pandemic has simultaneously increased patient focus on health outcomes and reduced people’s ability to access care and governments’ capacity to pay for that care. We think health technology will play a critical role in improving the efficiency and quality of healthcare in the decade ahead. Meanwhile, the result of the US election should prove supportive for the healthcare sector as a whole.

Why could healthtech be “The Next Big Thing”?

Global healthcare spending reached USD 7.8tr (10% of GDP) in 2017, according to the World Health Organization. Yet a significant proportion of this—up to 25% in the US, according to the JAMA Network—was wasted in 2019 due to failures of coordination, pricing, or delivery, or overly complicated processes and treatments.

Against this backdrop, and with the global over-65 population set to grow 60% to one billion by 2030, we see significant growth potential if emergent technologies can help providers create a more efficient and holistic healthcare system.

We’re focused on three main areas of potential growth:

Telemedicine

The use of telemedicine has exploded since the onset of the pandemic, and we expect these higher utilization levels to persist, even if a near-term slowdown is possible as economies reopen. Over time, we think that healthcare will be transformed from an ¬episodic service into a lifelong process of managing and maintaining health, driven by technologically savvy health consumers. According to one estimate, the total US telemedicine market could grow by roughly 17% a year from 2019 to 2024 to USD 35bn, while the currently smaller Chinese market could grow by nearly 50% a year, overtaking the US market in size by 2023.

Transformative treatments

We also expect significant developments in transformative treatment technologies. Drugs to treat cancer, for example, are now one of the fastest-growing segments of the drug market, exceeding USD 150bn in sales. We anticipate this figure will jump to USD 250bn by 2025, driven by pipeline development and new treatment modalities. Elsewhere, the promise of gene editing, genetic therapies for common diseases, regenerative medicine, and 3D bioprinting could improve patient outcomes and spur growth for the firms developing these technologies. 5G technology could even allow robotic surgery to go “remote,” making medical expertise available on a bigger scale and from a greater distance.

Advanced diagnostics

Technologies could also enable enhanced diagnostics, boosting efficiency and improving patient outcomes. Liquid biopsies are under development for cancer detection, while combining connected sensors that gather data at the point of care with artificial intelligence could allow for quicker and more accurate diagnoses.

US and Chinese telemedicine markets on the rise

Market size projections in USD bn

Source: Frost & Sullivan, Statista, Bloomberg Intelligence, UBS, as of February 2020

Why now?

2020 has been a watershed year for global climate policy. The EU and Japan pledged to go carbon neutral by 2050 and China promised to do the same by 2060. Although these are long-term targets, we expect governments to start acting in 2021 to stimulate job growth and economic activity, aiding the recovery from the pandemic.

Why could greentech be “The Next Big Thing”?

The green transformation of some of the world’s biggest industries could be just beginning. To hit carbon neutral targets, government regulations, investment, and subsidies will be geared toward incentivizing four main goals:

1. replacing fossil-fueled power generation and building heating and cooling (37% of CO2 emissions) with renewable energy;

2. swapping fossil-fueled transport (22% of CO2 emissions) for (battery) electric vehicles;

3. switching from industrial applications using gas (19% of CO2 emissions) to ones powered by green hydrogen; and

4. using digital solutions to improve efficiency.

Greenhouse gas emissions concentrated mostly in four sectors

Share of EU-28 greenhouse gas emissions, by sector (in %)

Source: Eurostat, European Environmental Agency, UBS

What will this mean in terms of investment opportunities?

Renewable energy

Today, only around 8% of global electrical power is generated using solar and wind. According to the IEA, to meet sustainable development goals, that figure would need to rise to around 30% by 2030, and 40%–45% by 2040. Considering that electricity consumption will also increase due to economic growth and increased electric vehicle penetration, this would require 10% CAGR in annual wind and 16% CAGR in annual solar capacity. That shift would favor developers and manufacturers across the renewable value chain.

Batteries

Currently, just 4% of the newly sold global light-vehicles are electrified (plug-in hybrids and battery-powered). We think that figure will rise to nearly 40% by 2030, at the same time as the number of cars and light trucks is expected to climb only back to 2019 levels. Accordingly, we expect growth in pure battery electric vehicle sales to reach a 30% CAGR, rising from USD 60bn today to USD 800-1,000bn annually by 2030. This development should benefit select automobile companies and their suppliers; battery, semiconductor, and chemical manufacturers; and those supplying auxiliary technology like charging points, of which more than one million will be required in Europe alone.

Hydrogen

Industrial applications using natural gas cannot be readily electrified due to the significant energy density required. Hydrogen could provide a solution, but producing it requires a lot of electricity, and 95% of global hydrogen is produced today using fossil fuels. The EU's hydrogen strategy aspires to add 500 GW of electrolysers by 2050. This would imply more than 1,000 GW of additional wind and solar capacity—almost four times more than today's EU capacity—and more than EUR 1tr of additional investment in renewable capacity in Europe alone.

Greentech creates short- and long-term investment opportunities

Source: UBS

Significant growth in renewables capacity required in IEA Sustainable Growth Scenario

Projected electricity capacity (GW) by source, CAAGR in %

Source

Source

2019 electricity capacity

2019 electricity capacity

2030 electricity capacity

2030 electricity capacity

2040 electricity capacity

2040 electricity capacity

2019-2030 CAAGR

2019-2030 CAAGR

2019-2040 CAAGR

2019-2040 CAAGR

Source

Total capacity

2019 electricity capacity

7,484

2030 electricity capacity

11,650

2040 electricity capacity

16,550

2019-2030 CAAGR

4.1

2019-2040 CAAGR

3.9

Source

Coal

2019 electricity capacity

2,124

2030 electricity capacity

1,603

2040 electricity capacity

1,053

2019-2030 CAAGR

–2.5

2019-2040 CAAGR

–3.3

Source

Oil

2019 electricity capacity

440

2030 electricity capacity

276

2040 electricity capacity

229

2019-2030 CAAGR

–4.1

2019-2040 CAAGR

–3.1

Source

Natural gas

2019 electricity capacity

1,788

2030 electricity capacity

2,022

2040 electricity capacity

2,121

2019-2030 CAAGR

1.1

2019-2040 CAAGR

0.8

Source

Nuclear

2019 electricity capacity

415

2030 electricity capacity

488

2040 electricity capacity

599

2019-2030 CAAGR

1.5

2019-2040 CAAGR

1.8

Source

Hydro

2019 electricity capacity

1,306

2030 electricity capacity

1,606

2040 electricity capacity

2,029

2019-2030 CAAGR

2.4

2019-2040 CAAGR

2.1

Source

Renewables ex-hydro

2019 electricity capacity

1,401

2030 electricity capacity

5,431

2040 electricity capacity

9,735

2019-2030 CAAGR

13.1

2019-2040 CAAGR

9.7

Healthcare (66%), green recovery (56%), 5G (62%),were cited as the thematic investment strategies surveyed investors would most seriously consider implementing over the next six months.

Source: 3Q20 UBS Investor Sentiment survey

What does the future look like?

Our flagship report series "Future of…" provides a deep dive into some of the major issues that we think will drive society, the economy, and financial markets in the Decade of Transformation.

“Future of waste” 

From food and energy waste to the proliferation of plastic packaging, waste reduction is a key issue for consumers, companies, and the environment. Our report shows how investors can capture long-term returns by investing in waste reduction, which also aligns with some of the opportunities identified in our greentech theme.

“Future of the tech economy”

The fourth industrial revolution, where technology meets economic forces, is just beginning. Yet it has already reshaped entire industries. Meanwhile, the COVID-19 pandemic has accelerated key trends including e-commerce and digital data penetration, with ramifications for enabling technologies such as 5G and disruptive technologies like fintech.

“Future of humans”

The application of technology will transform the future of healthcare and education, particularly in the context of an aging and growing global population.

“Future of Earth”

This, coming in 2021, report will focus on the investments that need to be made to balance planetary sustainability, economic development, corporate profitability, and human needs, while addressing the impact of limited resources and the changing natural environment on our economies, livelihoods, and communities.