Investors in equities are, by definition, optimists who think that the future will be an improvement on the past for many companies. Buyers and holders of a company’s shares believe that the business can develop new products and grow their sales, moves that will increase the value of its assets, profits and dividends.
Whilst it is possible to find good companies with management that can do well in most conditions in most sectors of the economy, you should be able to increase your chances of backing good investments if you select companies in areas that are likely to grow in consumer popularity. For example, maintaining investments in horse-travel-related businesses at the advent of the motor car would have seen an investor swimming against a very strong tide of consumer change. Investors really needed to back the motor car. So, what are today’s major growth areas?
Today’s twin revolutions
We see two large revolutions in the way we do things that will have similar dramatic impacts on the investment landscape in our own era.
The overriding wave of change we are living through comes from the digital revolution. The universal appeal and the ready availability of so much more computing power for businesses and individuals are transforming the way we shop, the way we are entertained, the way we bank and the way we access so many services.
The digital revolution was accelerated over the two years of Covid-19 lockdowns. These encouraged many who already liked digital equipment to use it more. It forced the reluctant (or the digitally challenged) to take to Zoom and online shops to buy what they needed and to stay in touch with family and friends. Now we are returning to more services and events that thrive on social contact we are living in a hybrid world, where the mobile phone or computer pad may be needed as part of the experience.
This produced a huge bull market in technology stocks, led by the US digital giants. After several years of dominant performance, they have had a difficult year so far. Markets have challenged their high valuations and pointed to slower growth or recession, noting these will hit these companies as well as traditional businesses.
Higher interest rates make most shares less valuable. Going forward it still seems likely online and computer-based ways of working, playing, shopping and running a home will expand further, offering plenty more investment opportunities to companies that surf the digital waves well. This movement is led from the bottom up. People willingly pay good money for more and better mobile phones and computer devices and adopt new digital methods of doing things. It does not require government subsidies or changes of the law to fuel this growth.
The second great revolution is the green revolution.
The energy transition and green revolution is another significant area of future growth. Whilst most people wish to lead greener lives and readily sign up to save energy or recycle waste, there is not the same spontaneous buy into the core products of the green revolution – yet. Heat pumps do not fly out of the warehouse, and electric-car sales are rapidly increasing from a small base, but still do not dominate the sales figures.
The revolution to date has been government-led, with big businesses signing up for the cause. The main thrust has been to invest in a big expansion of renewable electricity to replace coal and gas-powered generating stations. There are experimental technologies to capture and store carbon dioxide, convert renewable power into hydrogen for use in industrial and home boilers, increase the scale of battery storage to allow more electrification and find new ways of fuelling air travel. Investment is assisted by a range of tax breaks, subsidies and regulatory controls pushing the market in the direction of converting much more to work on electricity and ensuring more electricity comes from green sources.
A two-tier world
At Charles Stanley, we build these two great revolutions into our scenarios and portfolios. We also need to account for a theme that is less helpful to economic growth and stock-market success.
We are living through a movement of the world into competing blocs, with a China-led group of countries in a competitive challenge with a US-led bloc of countries. Each bloc wishes to cut its trade with the other, as countries become nervous about hostile attacks upon their technology and businesses and as governments want to build greater national resilience into their supply chains.
The race is currently on to block access to cutting-edge technology, especially where it could be applied for military purposes – and to increase control over food and energy within a friendly grouping of countries. Every time Russian President Vladimir Putin threatens Europe’s gas supply governments are given another reason to look to themselves and allied states for the essentials. These movements offer investment opportunities in the new national capacities that countries consider a strategic priority, but they also add to costs and subsidies reducing overall world efficiency.
Themes and trends are an important part of building realistic scenarios for the future. They can also inform some productive investment areas for portfolios, as investment managers try to improve the odds of choosing sectors and markets that will do well in an uncertain future.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.