How real-world change is affecting the sharemarket

OPINION: This month it has become impossible to place a one-year deposit with the main banks and get an interest rate above 1 per cent.

That is astonishing, particularly given this is lower than the current inflation rate of 1.4 per cent. Twelve months ago, not many saw that coming. Yet looking back it should be no surprise – in recent years we’ve seen significant and often unexpected changes everywhere, including the world economy, digitalisation and geopolitics.

Aside from Covid-19 disruption and distress, recently the biggest changes we’ve seen are driven by technology. Artificial intelligence, the internet of things, robotics and quantum computing are changing our world.

Each of these new technologies will be at least as impactful as the steam engine, railroads, powered flight and the internet. These changes are also being reflected in returns from your investments.

The technology-heavy Nasdaq index in the US is up 25 per cent for the year while the Dow Jones Industrial Average Index is down 6 per cent. Technology stocks are delivering positive returns, more traditional industrials are down.

This is also reflected in the make-up of assets on company balance sheets. Plant and equipment are tangible assets which you can touch.

Meanwhile brand, intellectual property and reputation are intangible and ‘virtual’ assets. In 1975 less than 20 per cent of assets on the balance sheet of United States listed companies were intangible, now that number is over 80 per cent.

The world is becoming more ‘virtual’. Twenty years ago investors were stunned when the market value of Barnes & Noble, owner of bricks and mortar bookstores, was overtaken by a bookseller that didn’t own a single bookshop. Amazon, selling books over the internet, went on to become one of the world’s largest companies.

This year we have seen a repeat with digital entertainment company Netflix becoming more valuable than Disney. We shouldn’t underestimate the disruption coming for a range of industries and work practices.

Robotic fruit pickers and automated baristas are now a reality. Manual or less skilled jobs have often been seen as at risk of replacement, but so are highly paid and highly skilled jobs. For law and accounting firms, some high fee due diligence and audit work can already be outsourced to algorithms that are immensely faster and cheaper than their human counterparts.

There is also speculation that in the future a board of directors will include at least one artificial intelligence ‘entity’ which will process more information than any human director and make its own judgement calls on corporate strategy.

The world changes and as investors we need to anticipate and change with it. BP and Shell Oil are increasingly focused on renewable energy investment and are also mindful of their carbon footprint. That is amazing for big oil. The Ford Motor Company and Volkswagen know they need to pivot to electric vehicles to stay relevant.

This explains why Tesla has generated the highest investment returns of the major car companies this year, and why it has become the world’s most valuable stock exchange-listed car manufacturer.

And these changes explain why the share price of renewables companies like Solaredge and Vestas Wind Systems have significantly outperformed oil majors over the last year.

Technology is advancing quickly and is changing our world. We all know that. Yet if you add in a global recession, elevated equity values and an unbelievably low-interest rate environment, what is the result? A tough and challenging world where investors can’t be passive, unyielding and take their chances.

In fact, quite the opposite. Now more than ever, to deal with change investors need to be active, agile and thoroughly researched.

John Berry is chief executive at Pathfinder Asset Management, and KiwiSaver provider CareSaver. His views in this article are general only and are not recommendations for any particular person in relation to any share or financial product.


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GENERAL INFORMATION ONLY

This information is general information only and does not take account of your individual investment objectives or financial situation.
Pathfinder Asset Management encourages all investors to seek independent financial advice prior to making investment decisions.