Investing Basis The Innovation Theme

Innovation is an important part of our everyday life as it improves productivity and makes things easier. The same applies to companies and their performance as well. Just look at our Indian Railways—we have evolved from the steam engine in the 1950s to the impressive Vande Bharat of today. Thus, innovation is the key to survival. Companies that innovate outperform others in terms of growth and it is important to identify and invest in them.

Innovation, as an investment theme, is exceptionally broad and covers radical innovation (replacing an existing product with a brand new one), disruptive innovation (new affordable products/services catering to a large customer base) and incremental innovation (upgrades to existing products/services) and is across all market caps.

Innovation can be as simple as making a small change or as complex as completely overhauling an entire system. But whatever form it takes, it is an essential driver of economic growth, and businesses that can innovate consistently tend to be more successful than those that don't. This is because they fare better in terms of organic growth and provide better opportunities for wealth creation.

Innovation pockets
Contrary to the widespread myth, innovation is not restricted to only technology and can be found across sectors. For instance, banking models have been innovated ever since the private sector was allowed in the 1990s. Internet banking and seamless trading, any branch banking, and large-scale retail banking are all innovations brought about by the entry of private competition. Public sector banks paid the price of being slow to adopt technology, as a result of which many customers switched to private banks for their banking needs.

When it comes to telecom, 5G is accepted as the bedrock for innovation and will have a sizeable impact across sectors. True disruptive innovation causes rapid cost declines and demand growth, cuts across sectors and geographies, and spawns further innovation, stimulating growth over extended time horizons. Similarly, Artificial Intelligence (AI), energy transition, robotics, DNA sequencing and Blockchain technology will all play a major role in the innovation theme in the times ahead. This can be gauged from the fact that AI learning systems are expected to transform not only retail, media and telecom but also those previously thought impervious to disruption, notably healthcare and financial services.

Globally, companies like WhatsApp, Salesforce, Airbnb, Uber and Spotify are examples which disrupted the very competitive messaging market, customer relationship management (CRM), hotel, taxi and music industries respectively. Identifying future innovators can help generate relatively higher returns, as investments in innovative companies usually reward disproportionately over the long term.

Why consider the innovation theme now?
There are multiple undercurrents favouring the innovation theme at the moment. The importance of supply-chain diversification was realised during the pandemic leading to good scope for innovation. Furthermore, the uncertainties around the Russia-Ukraine war and the US-China tension have forced countries to look for better options to reduce dependencies. Compounding these challenges is persistent inflation which is causing countries to promote their domestic manufactured products, all of which bring innovation as a theme under the spotlight.

Given the nature of the innovation theme, most companies operating in this space tend to be growth-oriented. And growth-oriented companies tend to do well in a normalising interest rate environment. With central banks across the world approaching the fag end of the interest rate cycle, it is very likely that growth stocks may outperform in the medium term.

In India too, innovation is gathering steam as India looks to move from energy transition to de-carbonization, indigenization of defence manufacturing etc. All of these will push companies to innovate, thereby creating opportunities for investment and wealth creation.

How to invest?
For a lay investor, keeping track of the companies working on innovative products or processes is not easy. Hence, for those investors who wish to participate in the innovation-based journey, the easier alternative is to invest in mutual fund offerings based on this theme. One of the offerings in the space is the ICICI Prudential Mutual Fund. This fund invests in innovation-based companies both in India and overseas, making it an attractive investment proposition.

About Author:
Sugandh Goenka, Business Head,Staywealthy Invetment Services