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The risks and opportunities in 21st century investing
What a start to the third decade of the 21st century. As 2019 closed, the eastern states of Australia experienced some of the worst and most devastating bushfires on record. Then, just when life was returning to normal, the world was engulfed by the global pandemic COVID-19. With hindsight, none of us could ever have envisaged our lives would change so much in such a short space of time.
The risks and opportunities in 21st century investing
What a start to the third decade of the 21st century. As 2019 closed, the eastern states of Australia experienced some of the worst and most devastating bushfires on record. Then, just when life was returning to normal, the world was engulfed by the global pandemic COVID-19. With hindsight, none of us could ever have envisaged our lives would change so much in such a short space of time.
The same could be said of what is and continues to happen in sharemarkets. We are all living in a great period of change that is coming at us from every direction. From an investment perspective, that poses both tremendous opportunities and risks.
The change in the way businesses operate has been in train since the 1960’s with the evolution of computers and basic robotics. The rate of change accelerated with the large-scale rollout of the internet and the subsequent technological advancements in the last 10 years. In 1999, I recall a senior businessman who proclaimed the internet would amount to nothing. Yet as the pandemic has proven, the rate of change in the online and e-commerce space is not only growing but accelerating to the detriment of old business models.
According to PGIM asset management “In 1990 the Big Three Detroit automakers had revenues of US$250 billion, and 1.2million employees. Today, the three top tech companies have more than twice the revenues and fewer than one-third the number of workers.” PGIM refers to these companies as weightless, and intangible asset companies now represent 85 per cent of the US S&P 500.
The Australian sharemarket has a far higher concentration of financials and resource shares, but as the technological, healthcare, online digital marketplace expands, the make-up of the ASX 200 will also evolve. For investors it is no longer prudent to just expect what worked in the past will be reliable in the future. Arguably, the pandemic has accelerated many of the tech trends and time will only tell what the long-term structural changes to the economy are, in terms of the workplace, transportation and international travel.
As shareholders we want to own those stocks that are in tune with the challenges (21st century risks) and can not only manage them but turn the potential negative impacts into a positive.
The major risks and opportunities can be classified broadly into five categories:
- Disruption can be technological, the old world versus the new world business models as well as regulatory risks as we saw with the fallout from the Royal Banking Commission or the Banks back stopping Australians in the lockdown phase of the pandemic.
- Climate change risks are increasingly being acknowledged as real and potentially significant across all aspects of businesses, notably in the energy, transport, building, insurance and banking sectors.
- Populism is on the rise and poses regulatory risks to investors, think antitrust legislation against the US tech behemoths.
- Ethics and governance is on the rise. Funds flowing into ESG (Environmental, Social, Governance) continued during the March 2020 corona crash, showing not only resilience but an ongoing growth trend.
- Interest rates – lower for longer. The full force of Central Banks’ monetary policy to boost economies and liquidity will mean lower to negative interest will continue to underpin growth stocks (weightless companies) and investors will seek out growth for sharemarket returns,
All five points pose both risks and opportunities to investors. Zoom, Netflix, Nvidia and Shopify in the US, to name but a few, have all been big winners from the pandemic Traditional business models are being challenged by ecommerce, streaming, gaming and at home, work. Cloud computing and ancillary services are on a tear and the millennials are supporting shares in the USA like Tesla and Beyond Meat with the transition to the electrification of the transport sector and meat less products (another winner from the closure of abattoirs during the pandemic). Telehealth and online medical services have also grown, out of necessity. This trend is only expected to accelerate.
Whilst the opportunities may seem greater in the larger US sharemarket (NASDAQ), Australia has a growing suite of listed companies that offer investors exposure to these sectors as well as long term secular growth markets in healthcare. The list includes data centres and cloud software providers like Next DC (NXT), Technology One (TNE), Xero (XRO) to data analytics Appen (APX), and the burgeoning payment platforms of AfterPay (APT), ZIP Money (ZIP) and EML Payments (EML) and our healthcare leaders CSL, (CSL), Resmed (RMD) and Cochlear (COH).
In these times of great change, all investors need to keep an open mind and remain alert to investing with the risks and opportunities in mind. Equally a healthy dose of restraint is sometimes needed as new opportunities in growth markets quickly become speculative bubbles.
Danielle Ecuyer is an author and investor.
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