Morgan Stanley
  • Research
  • Jul 26, 2019

Investing in the Second Machine Age

The pace of technological change in the Second Machine Age is breathtaking. For investors, this is one of the most important themes of the next decade. What can we expect in the coming years?

An explosion of digital technology

The concept of the Second Machine Age is an explosion of new digital technology that will drive a step change in global productivity, at least equivalent to the Industrial Revolution. This is not a vague concept that may happen one day in a hypothetical world: it is very much here and now.

Real dollars are being committed, with tangible benefits in global efficiency and productivity – and there is much more to come. While that is clearly good news, it remains a broad investment theme and could be tricky to navigate.    

‘Future’ technologies are beginning to go mainstream

The past year has seen breakthroughs in the application of reinforcement learning in artificial intelligence (AI). Google's DeepMind beat world champion players in the computer game Quake III (a game that requires team cooperation) with almost no instruction. The AI used reinforced learning, allowing it to fail often, memorise mistakes and find patterns that lead to success.

Philips and Microsoft have developed a holographic screen of data for surgeons performing minimally invasive surgery. The concept brings live imaging and vital data currently displayed on large 2D screens into a 3D holographic augmented reality environment. This allows the surgeon to track and direct the surgery more accurately.    

What can we expect in the future?

Morgan Stanley Research highlighted six of the most relevant technology categories for the next decade: AI software, autonomous vehicles, internet of things (IoT) hardware, industrial software, robotics and semiconductors.

While we are still in the early stages of the adoption phase for these technologies, the pace of change is accelerating. It is estimated these technologies will see a 17% compound annual growth rate in total addressable market, growing from US$738bn in 2018 to US$2.2trn by 2025.

Within the next decade, it is likely that the majority of industrial facilities will deploy some form of AI. Manufacturing is set to become highly customised, with a 'lot size of one' being the norm: consumers will specify exactly what they want on virtually any product – cars, shoes, sports equipment, dental implants, and body parts.

In 2040, robots could be 8-21% of the manufacturing workforce versus 1% today. By that stage, the main ethical dilemma may shift from the threat of robotic substitution to how humans are physically connected to machines.    

How can we identify companies at the forefront of this transition?

Morgan Stanley Research found certain factors came up repeatedly across different sectors, and were able to narrow them down to four traits for success in the Second Machine Age: ability to use data, domain knowledge, access to capital, and vision and culture.

Data collection may be straightforward, but data interpretation is not. The ability to meaningfully process big data, combined with the second trait – deep understanding of the technologies and the markets they serve would be a clear advantage. Developing this knowledge and pushing it further into new technologies requires investment – such as R&D, M&A and talent acquisition – therefore access to capital is critical.

Vision and culture somewhat speaks for itself: the leaps in technology and rapidity of progress are not minor. Industrial robots that took 40 years to become capable of working alongside humans, for example, have become anthropomorphic in just five. Companies with the vision and culture in place to embrace and lead these shifts are the most likely to succeed.

How to invest for the Second Machine Age

Morgan Stanley encourages investors to 'cast the net wide' and consider these three factors when constructing a portfolio for the Second Machine Age:    

  • Growth – which technology categories have the greatest potential? Figures show there has historically been a wide variation in growth rates due to base and cyclical effects.
  • Quality – which companies have the most outstanding ratings? Consider the four criteria – ability to use data, domain knowledge, access to capital, and vision and culture.
  • Technological niches – finding the picks and shovels. Although niche companies should not necessarily be the mainstay of a portfolio, there are companies that could emerge over time as providing the 'picks and shovels in the gold rush'.


For more on how to properly position your portfolio for the Second Machine Age, or a copy of our report, speak to your Morgan Stanley financial adviser or representative. Plus, more Ideas from Morgan Stanley's thought leaders.