Following an unprecedented four successive years of S&P 500 returns in excess of 20%, performance ye...
Following an unprecedented four successive years of S&P 500 returns in excess of 20%, performance year to date has investors wondering if the high returns of the past decade are a thing of the past.
The major concern, or risk, seems to be: will the Federal Reserve raise interest rates to the point of a serious market correction, or perhaps a recession? Investors cannot ignore such risks, but it is important to remember that there have always been macro concerns to cloud the investment horizon. We remain bullish, because structural changes will continue to deliver higher growth and lower inflation than expected.
Seventy years ago the Austrian economist Joseph Schumpeter described capitalism as "creative destruction". The new destroys the old because it is better, faster, cheaper. Technology has accelerated this natural process of change. In less than 10 years the internet, PC, and cell phone have reached levels of penetration that the car, electricity and TV took over 50 years to achieve.
Therefore, the transition led by today's technologies is the fastest ever witnessed. Transitions are always painful, because it is never obvious who the eventual winners will be. Think of the early days of the automobile industry. There were several hundred fledgling companies, but it was very difficult to identify which would eventually be market leaders. As it is often easier to identify the losers, smart investors 100 years ago were all selling horses. This is exactly what markets did last year. They bought all new economy stocks and sold the rest. But this has clearly changed in the last few months. Investors have become more selective, questioning both the business models of new economy stocks, and their ability to attract further capital.
We expect current levels of volatility to continue, as investors come to terms with the fact that all companies and sectors are affected by changes brought about by the new technologies. So how do investors profit from these structural changes? Focus on only the leading firms, who are capital efficient, global, and disruptive.
Globalisation has delivered another leg of growth for many US companies, as the winner is allowed to take all on a global scale. But remember that globalisation is a double-edged sword. Many US companies are not the top player in their field, so will struggle on the global stage.
Finally, disrupter companies are taking market share from the incumbents. Most new business models are initially viewed with scepticism. Fifteen years ago Michael Dell was just someone with a different vision for the PC industry. Today, Charles Schwab is changing the rules of our business.
Christopher Lees is senior vice president US equities at Baring Asset Management
18 new entrants featured
Recommended cash offer
Latest news and analysis
Second London acquisition in three years
Partner Insight: Continuing the Architas education series for clients.