In the world of investing, the passing of time is often measured by the different eras of market leadership that have shaped investors’ portfolios and the evolution of the economy to where it stands today.
Analogous to the way we have simplified and bucketed the prehistoric period into the stone age, the bronze age and the iron age, investors are known for naming much shorter periods of great transformation that have disrupted the status quo and generated the strongest or weakest financial returns.
Looking at stock market returns since 1896, the birth of electrification, alongside stable monetary and political systems, helped drive the bull market of the second industrial revolution to 1906, before the bear market of 1906-1921, a period of time linked to the First World War and the rise of the United States of America. For each financial epoch, there are a handful of defining features and standout trends.
From suburban consumerism in the post-war era to the growth of capitalism, the dotcom bubble, and the rise of China before the great financial crisis, the emergence of quantitative easing, and the dominance of the FAANGs; in short, there is always a story underpinning the movement of markets at any given point in time. We attach ourselves to narratives.
2020 has so far proven to be a year of disruption, grave uncertainty and change. The US stock market fell from a record high on Feb 21 into a bear market just 15 days later – a retreat that took 191 days during the global financial crisis. Then, as the stock market’s retreat became a rout on March 9 and the seven trading days following, two thirds or more of asset classes – including three different stock markets, government bonds, and a range of commodities and alternatives – posted daily losses. On two days they all went negative. Even with 20/20 hindsight, this period would have tested the resolve of many investors.
When a big rotation in the market occurs, ownership of incumbent market leaders remains a successful strategy up until the point it becomes problematic and you’re left holding stocks you no longer want to be exposed to moving forwards. Rather like those people who set up camp on the beach far enough inland to avoid the incoming tides, only to be rudely awakened by water rushing over their belongings.
I am not calling an end to the tech bull run, but its pace may begin to slow. It is beginning to face headwinds it has not previously faced.
For those questioning where the next wave of growth and returns for our retirement savings will come from, the accelerated transition to a digital economy raises opportunities across a range of sectors.
Technology can do great things, like track and trace the spread of a virus and allow entire businesses to function from employees’ homes, but in and of itself it is not a panacea for all industries and all ills. In fact, as today’s technology titans come under increasing scrutiny over data privacy and antitrust investigations, other sectors are poised to harness structural and secular changes that will define the investment landscape for the next decade.
In the same way the widespread implementation of electricity ushered in an industrial revolution on a scale never seen before, the healthcare sector, currently under the global spotlight, is ripe for a productivity revolution. We have been observing for some time an improvement in overall industry R&D productivity from leveraging the benefits of the technology revolution (such as significant gains in computing power, big data, AI, machine learning). This has driven continued breakthroughs in genomic medicine. The rapid pace of vaccine and therapeutic development for Covid-19 is proof of these advances.
Starting with the transition of archaic paper records to electronic systems and use of tele-medicine apps for GP video consultations, through to the employment of AI and machine learning to improve diagnostics, no other sector offers such a rich opportunity for innovation.
High levels of regulation will undoubtedly slow progress. In my view, the next cycle will likely cement healthcare as a growth industry that will see a steady increase in its earnings over time as efficiencies are made alongside ground-breaking innovation and returns in fields like genomics.
With the 2019 global population expected to reach 8.5bn by 2030, and overall life expectancy projected to increase, meeting health needs won’t be easy.
Healthcare has been an extremely defensive sector historically with a smaller number of strong growth stocks. Technology now offers the opportunity to change the fundamentals of more than a handful of first movers and market leaders.
Pharmaceutical companies, biotech firms, hospitals, specialist manufacturers and long-term care facilities stand to benefit from increased digitalisation. Investors stand to benefit from an efficiency premium. But meticulous research on stock selection is essential to avoid investing in healthcare companies, particularly large pharmaceuticals, that may see competitive advantages and revenues eroded away over time.
In the same way an underlying health issue requires highly specialised and expert analysis from both machines and doctors to diagnose and treat, investment decisions require both technology and human inputs. Some issues are too nuanced to exclusively use data science to predict future returns. Others are too broad to exclusively use fundamental analysis.
While the healthcare sector is an obvious beneficiary from technological disruption, the most pressing issues for the next market epoch – beyond an ageing and ailing population – are likely to be framed by societal and sustainability concerns such as inequality and climate change. As the pandemic has shown us, critical issues can be pushed from public discourse on to the policy agenda in record time, and we now find ourselves at a point where the nature of capitalism itself may be in the process of being redefined.
In light of this, the ability to adapt to new information in the face of seismic structural changes and actively engage in the defining features and evolving trends in societies will likely prove very valuable for investors over time.
Jeremy Taylor is chief executive of Lazard Asset Management