Impact of technological revolution

Market participants seeking to benefit from the enormous technological revolution now in progress should be prepared for volatility.

We have seen how information technology can increase productivity and improve the quality of life. The phenomenon is so widespread in the United States that the economy has been experiencing unprecedented strong growth that has now lasted for seven years. It is now being recognised as a "Technological Revolution" and it is of a dimension matching, if not exceeding, that of the Industrial Revolution in Europe of the late eighteenth and nineteenth centuries.

The extent to which this phenomenon is catching on in other economies has, however, been rather less marked. Some have attributed this disparity to the lack of flexibility in the labour market and to the limited mobility of labour in some economies: this is particularly relevant in the case of Europe, where unemployment remains high and a matter of serious political concern. Innovation that displaces labour does not gain votes and it is understandable that there will be some resistance to the Technological Revolution.

However, with open markets, in goods and services, and in finance, the disparity is not expected to last long. The efficient and sometimes brutal forces of the market, encouraged by the ever-intensifying alertness of consumers and producers to what information technology can offer in terms, respectively, of enhancing the quality of life and increasing profits, will ensure that the "new economy" will quickly attain a global dimension. Those with the responsibility to determine policies of individual economies will have no viable alternative but to allow their economies to ride along with, and to deal with the consequences of, the Technological Revolution.

The performance of financial markets, particularly that of equity markets, reflects the potential of this Technological Revolution. Participants take a view, at the macro level, on the extent to which information technology could continue to enhance productivity and sustain economic growth, and, at the micro level, how individual listed companies would profit from it. The stocks of the effective providers of information technology as well as the efficient users are understandably in great demand, pushing historical price/earning ratios, to astronomical heights. But in terms of prospective price/earning ratios, the collective action of the market participants, made on the basis of all relevant information available to them, is suggesting that the stocks are, to them at least, reasonably priced.

Nevertheless, we have to be alert to the fact that much of the information available to market participants is in the form of subjective opinion or conjecture about something that no one has ever experienced before. There is therefore a higher risk of at least some of these simply being altogether wrong. There is also, correspondingly, a higher risk of intense volatility, as opinions shift and greater knowledge is acquired of the potential and implications of this Technological Revolution.

We also have to be alert to the fact that no phenomenon worth the description of a revolution is a smooth one. Rapid changes that come as part of the revolution bring at least disruptions and possibly casualties. Safety nets will no doubt be required in a society that has been used to more "peaceful" times. But too extensive a safety net will hinder revolutionary progress, and too flimsy a net will risk hardship that is considered by the people to be excessive.

Interesting times. And, given that the use of the internet, e-commerce, and e-banking in Hong Kong is still very much in its childhood, the Technological Revolution in Hong Kong has only just begun.

Joseph Yam
30 March 2000

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