by Jason Norris, CFA Executive Vice President of Research

For technology junkies, the Re/code conference in Southern California is one of the highlights of the year. It is a broad mix of public and private companies speaking on innovation today and what the future holds -- from automobiles and wireless to media and culture.

One of the most popular segments of the conference is Mary Meeker’s annual presentation of internet trends. Meeker is a partner at venture firm Kleiner Perkins; however, her thrust into the spotlight came about 20 years ago when she was an internet analyst for Morgan Stanley. The key point to her 190+ page slide deck was that the internet is still in its very early stages and mobile is becoming more of a dominant aspect of the web. While the consumer and businesses have been pushing the internet, there are several other areas of the economy where opportunities are still great. Government, education and healthcare are just a few examples of sectors that have not yet fully leveraged the internet.

As users, traffic, and transactions increase online – security becomes more of a focus. What has been a common news event of late, there are breaches at various institutions that can put both individuals and those entities at risk. The IRS unfortunately is the most recent institution to be significantly impacted. As more people connect to mobile devices, security and encryption are even more essentials. The chart below highlights time spent with digital media on different devices.

Accessing digital media continues to grow at a double-digit rates and the growth is primary coming from mobile. This growth in connectivity globally continues to benefit companies such as Apple, Samsung and Avago.

Increased transactions as well as a growth in private information shared digitally, specifically wirelessly, does increase the need for better security, as well as the opportunity for companies to analyze consumer behavior and offer personalized deals. These trends have resulted in chief information officers (CIOs) to forecast security and analytics spending to continue to increase as a percentage of information technology (IT) spending. Morgan Stanley released a survey earlier this week highlighting a 210 bps increase in the growth of network security spending in 2015 (12.8 percent up from 10.7 percent). To put in perspective, overall IT spending usually grows in the low-to-mid-single digits. Some beneficiaries of this trend would be Cisco, Checkpoint and Palo Alto Networks.

Watch What You Do

As consumer utilize more wireless devices and with the most recent launch of the Apple Watch, some legal issues become a bit fuzzy. In several states, it is against the law to use your wireless handset while driving. What if you are using your watch? This was the case in Quebec earlier this month where a watch owner was fined $120 for operating his watch while driving. As devices become more integrated, especially in cars, safety regulators are going to have a tough time keeping up.

Our Takeaways for the Week

Mobile is becoming the dominant means of interent access
Cybersecurity will be a theme for years to come

Disclosures

Furgeson Wellman by Brad Houle, CFA Executive Vice President

Haggis is a cuisine of Scotland characterized by Wikipedia as a savory pudding containing sheep's pluck (heart, liver and lungs) minced with onion, oatmeal, suet, spices and salt mixed with stock. It is traditionally encased in the animal's stomach and simmered for approximately three hours.

The often lampooned delicacy was featured in the 1993 film, “So I Married an Axe Murder,” staring Mike Meyers. In the comedy, Mike Meyers’ character of Scottish decent when as asked about his fondness for haggis responded, “I think it's repellent in every way. In fact, I think most Scottish cuisine is based on a dare.”

On September 18, a referendum for Scottish independence from the United Kingdom will be put to a vote. Recently, polls suggest that it will be a close outcome. This situation is creating uncertainty and we have seen the pound sterling weaken as a result. At stake is revenue from the oil-rich North Sea which has been greater than 2 percent of the UK's revenues down from over 6 percent of revenue in the 1980s. The North Sea fields are off the coast of Scotland and there is some question about which country would control the revenue after a split. There have been many comparisons of an independent Scotland and Norway based on the countries similar populations and potential energy wealth. While the North Sea fields are in a period of declining production, the revenue would be material to an independent Scotland.

If a vote for independence passes, the UK's fragile recovery from the financial crisis will be called into question. The UK economy has slowly been crawling out of the economic downturn of the Great Recession in a similar fashion to the U.S. A split-off of Scotland would potentially stall the recovery.

The pending referendum has also created uncertainty relative to business investments in that there is a question about the political landscape should a split occur. In a similar situation, Quebec had a referendum for independence in 1995 that failed. However, the uncertainty that it could occur again was at least partly responsible for an economic malaise in the province and reduced business investment.

In Spain, the region of Catalonia has a referendum in November of 2014 for possible secession. The impact of this would be negative for Spain as its economy is in far worse shape than the U.S. and the UK.

While not a catastrophe in the making, an independent Scotland or Catalonia destabilizes what is a tenuous recovery in Europe. Most of Continental Europe is suffering from anemic growth, continued high unemployment, massive indebtedness and the specter of deflation. Above all, the financial markets hate uncertainty and these types of changes are potentially disruptive to the European recovery.

Other Takeaways for the Week

Apple introduced the iPhone 6, Apple Watch and Apple Pay this week, which were generally well received. The Apple Pay secure transaction using an iPhone rather than a physical credit card has the potential to revolutionize how items are paid for at retailers.
The late Joan Rivers often used humor regarding her financial life as part of her act. One memorable quote that bears mentioning is, “People say that money is not the key to happiness, but I always figured if you have enough money, you can have a key made.”

Disclosures

Wired and Connected

Independence for Scotland and a UK haggis famine