Investing is being disrupted: Here’s how

Investing is essentially the art of making informed decisions with capital. Thanks to the rise of fintech - a catch-all term to describe new technologies and innovations in finance - making informed decisions with capital is more possible than ever before. Everyone from non-accredited investors right up to the most well-known institutional investors are investing in different ways as a result.

The disruption isn’t specific to one area of finance; game-changing innovations are seen everywhere from asset management to capital raising. A recent Accenture report categorized the new technologies into three groups: Artificial Intelligence (AI), the Internet of Things (IoT) and Blockchain, each of which, in turn, is leading to a vast swathe of new applications in the investment industry.

Artificial Intelligence: The end of ‘natural stupidity’

The defeat of world chess champion Garry to the IBM supercomputer ‘Deep Blue’ on May 11 1997 was a landmark moment. Not only was it the first time that a computer had beaten a chess grand master under official regulations, it was also a sign to the world that the most advanced artificial intelligence of the day had caught up on the best that human intelligence had to offer.

Deep Blue was 21 years ago. The most successful investor in the world in 1997 was Warren Buffett - just as today. So, unlike humans investors, artificial intelligence has moved up several levels. In investing, its rise is best exemplified by robo advisors, AI-enabled financial advisors which use sophisticated algorithms and up-to-the-minute data to provide clients with investment advice.

This makes investment options and advice scalable like never before, all whilst providing investors with a similar or better return on investment. The service is also significantly cheaper, with management fees coming in at under 50 bps, compared to traditional wealth managers, who can charge anything up to 5%. MyPrivateBanking estimates that robo advisors could manage up to 10% of all investable wealth by 2025.

IoT: Allowing investors to obtain data on everything

The greatest impact of the Internet of Things (IoT) is likely to be felt in the realm of insurance. In a 2016 PWC survey, 65% of CEOs in the insurance industry believed that the IoT was going to be strategically important to their organization in the coming 5 years. By providing truly personalized insurance plans - made possible by IoT technology - insurers can in turn make more informed decisions on premiums.

The total size of assets held by the US insurance industry make this hugely significant. At the end of 2016, the industry’s total assets were $6.1 trillion, including $727 billion of common stock. When insurers have better data on their risks, this money - essentially the accumulation of millions of US insurance policies - is also less risky, meaning markets will be less volatile.

Other applications for IoT can already be seen in commodities trading. Ongoing data provided at each stage of the value chain - from sophisticated crop or weather forecasting on the supply side to changing inventory levels on the demand side - allow traders to forecast where commodity prices are headed far more accurately than would have been possible in the past.

Blockchain: Far more significant than Bitcoin

Amidst all of the hype surrounding Bitcoin, Blockchain and its importance to the future of investing and the finance industry in general, has been under-reported. McKinsey says that blockchains have ‘the potential to dramatically reshape the capital markets industry, with significant impact on business models, reductions in risk and savings of cost and capital.’

In layman’s terms, Blockchain means that transactions mean that the mountain of paperwork, which over accumulated transactions, add millions of dollars to financial industry costs, can be replaced by blockchain - a digital system which is cheaper, more accessible and above all, safer than the current transaction processes used in the financial industry.

Little wonder then that so many of the world’s largest financial institutions are investing en masse in blockchain technology. The bigger the institution, the bigger the potential savings. Santander, the biggest bank in Europe, estimates that it could save $20 billion annually by adopting blockchain. When repeated across all banks, it’s clear that huge capital could be freed up for value creation elsewhere.

Summary: a new era of investing

In 2009, former Chairman of the Federal Reserve Paul Volcker quipped: “the ATM has been the only useful innovation in banking the past 20 years.” Ten years later, banking and the investment industry at large, is being disrupted by innovation. When Volcker made his famous remark, checks were still widely in use - now they’re being phased out. That’s just the beginning.

The fundamentals of investing will never change: the aim is to seek out investments that maximize NPV. However, the tools at investors’ disposal to achieve this continue to grow. The cost to invest continues to fall. Timely, accurate and relevant information is becoming more accessible to everyone. All of which points to an exciting new era of investing.

Investing in North Korea

When it comes to emerging markets, every year seems to bring a new frontier. A change of leadership, policy or even growth metric pushes hitherto unknown investment destinations into the spotlight. A couple of years ago, it was Myanmar. The military junta there declared Myanmar open for business, President Barack Obama visited and suddenly a place which previously was better known for George Orwell’s, “Burmese Days” became somewhere people were looking for investment opportunities on the ground.

To this list of emerging nations, we can add North Korea. China’s Ministry of Commerce in Beijing publishes guidelines on business in almost every global destination: among them, countries like Afghanistan and North Korea. According to the guide, the Chinese Development Bank has a “working team” operating out of North Korean capital Pyongyang, which will advise Chinese business on how to obtain credit[1]. The guidebook goes on to talk about two Special Economic Zones (SEZ) just inside the border with China.

Apparently, the Chinese Ministry of Commerce aren’t the only ones getting in on the action, either. Famed investor Jim Rogers told Forbes Magazine a little under a year ago that he was also looking to dip his toes into North Korea. In an interview, Rogers told the magazine, “what you’ll have is a country of 70 odd million people with cheap, educated, disciplined labor in the North, vast natural resources  . .with a big capital pool and management capability in the South. It will be a powerhouse.”[2]

Pyongyang: Investment haven.

The resources that Rogers referred to include huge mines with vast quantities of anthracite (coal), iron ore and rare earth minerals, most of which have been swallowed up by Chinese resource mining companies. With precious few investment opportunities left in this sector (the North Koreans weren’t going to let it lie unused, even if they do preach communism), opportunities lie in some of the Chinese  companies that have access to the resources and stand to capitalize on them.

However, it’s not just these large, industrial scale businesses which are providing returns. In essence, every sector in the economy has the potential to benefit from the catch-up effect (“convergence”). In North Korea, this is more real an economic phenomenon than anywhere else. The catch-up effect is the hypothesis that incomes in underdeveloped economies will tend to grow faster than those in their more developed counterparts.  In layman’s terms, this is another way of saying that these economies have more “low-hanging fruit.”

The “low-hanging fruit” argument seems to make more sense for North Korea than most other emerging economies on the surface, at least. It shares borders with two countries: China and South Korea and has ample coastline to develop trade. In 2011, its GDP per capita was estimated at around $1,800 – or a little over 5% of the equivalent metric in South Korea[3]. Cleary, sharing a border doesn’t guarantee growth (look at the US and Mexico) but it’s not a bad place to start.

According to Chinese academics in Yanbian, between 40 and 50% of North Korean families operate directly in the underground markets of North Korea, with most of the country’s economic activity taking place within the semi-legal sphere. A broadening consensus is that this is the stream of economic activity which will turn into a flood[4]. This will only increase now that there is a high-speed train line coming from North Korea or that mobile communications networks are in place.

In fact, on that very point – mobile communications – an opportunity for indirectly investing in North Korea presents itself in the form of Orascom (see here), an Egyptian mobile telecoms provider which caters to the 1 million North Korean mobile phone users.[5] As we know, if there’s one thing that promises to grow quickly once mobile telecommunications has arrived, is trade (illegal and legal). The government can interfere with the network, but realistically, one gets the feeling that North Korea is ready to make a move forward.

Obviously, western investors should be weary. “Contracts don’t hold much weight,” says a senior fellow from the Council on Foreign Relations. Likewise, never underestimate cultural barriers, particularly when dealing in an area which has been cut off from the rest of the world for so long. Likewise, in the mid-term at least, you can forget a stable currency or a predictable legal environment. But these are typical characteristics of such markets and it would be naïve to expect anything else.

“This place is like China in the 1980s,” one Chinese serial investor told Forbes in 2014. It’s a nice sound bite but there may be something more to it; investment opportunities are arising in North Korea far faster than one might think. Establishing reliable contacts on the ground (no easy thing), investing indirectly through Chinese consumer and mining firms and finding niches (as with any market) currently present the best opportunities. North Korea represents an opportunity for investors one way or the other – of that, there is little doubt.

---

[1] http://www.bloomberg.com/news/articles/2014-10-22/want-to-invest-in-north-korea-china-hands-out-new-how-to-guide

[2] http://www.forbes.com/sites/gordonchang/2014/03/23/jim-rogers-wants-to-put-all-his-money-into-this-country-is-it-the-next-china/

[3] http://www.marketwatch.com/story/how-to-invest-in-north-korea-2013-04-05

[4] http://thediplomat.com/2014/02/the-perils-of-investing-in-north-korea/

[5] http://www.wsj.com/articles/SB10001424052702304458604577487572176127932