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18 September 2017

Over the past week Australian shares were up 0.5% while small company shares were flat. Shares in developed countries were up 1.2% with the US market up 1.6%. Shares in emerging markets were also up 1%. The Australian dollar fell 0.7% to 0.80 US dollars. The Australian Government 10 year bond yield and the US 10 year bond yield rose to 2.74% and 2.2% respectively. The oil price was up 5.1% to $49.89 per barrel.

Last week we explored the investment opportunities created by the Internet of Things (IoT), primarily the potential for companies to improve their efficiency and customer service. However, there are also risks associated with the IoT, and it’s important that these are considered, particularly from an investment perspective. This is the topic of this week’s update.

The primary risks relate to security, data governance and associated issues around privacy, government policy, and finally, implementation risk (or how well companies incorporate the IoT into their businesses). Not only will the IoT produce winners but it will also result in some companies losing out (those which are slow to adjust).

There are many case studies of security, data governance and privacy issues related to IoT. While consumers may fear the headline risk of hacking (you may recall cases in the news where celebrities have been hacked), there’s the additional risk that companies actually on-sell information they have about us. A recent example is of Roomba, a robotic vacuum cleaner. For efficiency reasons some models create maps of their owner’s homes. However, iRobot, Roomba’s manufacturer, is considering sharing mappings of people’s private homes and layouts with commercial partners.

In many cases government policy around data ownership and data privacy lags the activities of leading companies. Who owns personal data – the company or the customer? What permissions are required to use and on-sell? What protections exist? Is data an asset and how should it be valued? What happens to the data when a consumer exits a relationship with a service provider? What happens if a service provider with significant personal data fails? There are many questions with unclear answers and in some cases varying rules across different countries.

An interesting test case is smartphones – do consumers own the phone or are they purchasing a license to use the associated software? One interesting reflection is the length and detail of terms and conditions sections which many of us tend to accept.

The risk of policy mistakes by government is large. Failure to establish clear policy may slow investment in IoT but heavy-handed policy may slow the realisation of the full potential of the IoT.

While there will clearly be winners there will also be losers in the corporate world. There are many companies who manufacture goods or provide services that will be overtaken by existing companies, who can innovate more successfully or new companies with a clean sheet of paper who aren’t burdened by legacy business.

Again, just like last week’s article, all of this highlights the importance of having a collection of fund managers who can successfully navigate between those that will win and those that will lose from the IoT.

Signing off

David Bell | Chief Investment Officer

Past performance isn't necessarily an indicator of future performance.

All data sourced from Bloomberg.