The current growth cycle is maturing. The outlook from here appears to be even more uncertain and volatile than we’ve experienced in recent years, with the likelihood that returns will also be more moderate.
We recently invited a group of Australia’s most prominent thought leaders to provide their views on emerging trends and how these are likely to affect markets.
Our panel included Scott Haslem, Chief Investment Officer from Crestone Wealth Management, Anil Sabharwal, Head of Engineering Australia and Global Product Vice President from Google, Hamish Douglass, Chief Executive Officer, Chief Investment Officer and Lead Portfolio Manager from Magellan Financial Group, and Paul Bassat, Co-Founder and Partner from Square Peg Capital. The panel was moderated by Helen Dalley, Anchor and Journalist from Sky News Business and Sky News Australia.
The need to look globally
Haslem explained that “most forecasters continue to expect global growth to remain strong at around 4% into 2019”, albeit no longer accelerating. Key leading indicators, such as the global purchasing managers index, suggest that this should be the central case for now, despite all the geo-political risks that dog that outlook. However, there is growing evidence that the cycle is becoming less synchronised, with the US showing increasing signs of growth leadership, with that recently impacting our view on markets. While most other economies have stabilised at an above-trend pace mid-year, a combination of a stronger US dollar and higher oil price has started to undermine other parts of the globe, such as emerging markets.
For Australia, growth is expected to stay robust. But headwinds from weaker housing and credit were likely to constrain growth to trend, in contrast to the current above-trend pace of growth in the US and Europe.
Even though we are in a maturing growth cycle, this should still deliver positive returns for equity markets. History has shown that in the 12 months after the peak in global growth, equities have, on average, risen by 5.5%. According to Haslem,
“Australia’s equity market is hamstrung by its over exposure to large sectors with low earnings outlooks (such as financial and real estate) and a lack of exposure to faster-growing secular trends (such as healthcare, technology and consumer spending).”
Investing in leading companies
The panel acknowledged that businesses that have been investing for the long term and thinking strategically about their respective markets are vastly outperforming those focused on short-term ‘sugar hits’ like dividends and meeting quarterly guidance.
In picking leading companies, Douglass explained that he is looking for multinational businesses that are true global players. He sees technology platform businesses, which are playing in many different markets, as being truly unique, with many of them still at an early stage in the monetisation of revenue.
“While in the context of history Alphabet and Apple are very large companies, we would argue that in huge parts of their businesses, they’re very early on in the monetisation of revenue.”
Douglass explained that he is also looking for traditional businesses, which are unlikely to be disrupted in the next 10 years. Acknowledging that the competitive advantage of some traditional big brands is likely to be disrupted, he admitted that this is a more challenging task. “We ask ourselves can we invest in businesses for the next decade that we think are very unlikely to be disrupted. Once you start thinking like that, it starts to get really hard.”
Bassat described how he aims to identify winners in the venture capital space. He acknowledged that to invest in this space, investors need a high tolerance for risk—but quite often, the leading companies end up being very big winners. In identifying the key ingredients of such companies, he says “it goes to theme, it goes to timing, and it particularly goes to team—the groups of people that can build really significant businesses off the back of disruptive opportunities.”
An Insight into innovation
Sabharwal provided his insight into the inner workings of one of the great companies of the world. Central to the Google mind-set is its focus on innovation and its drive to solve user problems through the application of artificial intelligence (AI) and machine learning.
“Each conversation within Google now includes how machine learning and AI can be used to solve problems and make use of technology that wasn’t available five years ago.”
Another key aspect of Google’s culture is the importance of respecting and encouraging failure. “We don’t expect that everything you’ll work on is going to succeed, so we encourage that. We reward failure and move onto the next thing.” Sabharwal acknowledged that a key challenge for large organisations, like Google, is how they compete with smaller, more agile companies. He explained that, in order to stay ahead of the curve, it’s important for large organisations to continuously challenge their current business model and understand their unique ability to add value—whether that’s through scale, brand, or an ability to apply amazing advancements in machine learning and artificial intelligence.
In talking about innovation, Bassat noted that “when we talk about technology, we often confuse software innovation with technology. Software innovation is a form of technology innovation, and a large proportion of the disruption that occurs in the world today is driven by software-enabled business models”. On AI he noted that it is a simple concept. “Computers can process information incredibly quickly and keep getting faster. When we talk about AI, we’re not talking about computers processing things, we’re talking about computers making decisions.
Do you see value in the market now?
The panel discussed whether they feel some of these leading companies are currently expensive.
Douglass offered his view that they aren’t as expensive as they look, with Facebook’s share price only just back at levels it was at a few months ago. In discussing Google’s share price increase in past years, he feels that it is still fundamentally undervalued on a long-term view. “The Google cloud platform is very early on in monetisation. Waymo is their driverless technology, which is another area that’s exciting—and they’re so far ahead of anyone else.” The panel acknowledged the potential of Chinese technology companies but that they need to expand beyond the Chinese market.
Haslem commented that as we invest in some of these companies we need to be cognisant of potential regulatory over-reach. With the rise of extremist political parties around the world, what we see as over-reach may very well become the new norm.
Key themes to emerge from the event
- Australia’s equity market is seen as hamstrung by its over exposure to large sectors with low earnings outlooks and a lack of exposure to faster-growing secular trends, such as healthcare, technology and consumer spending.
- Investing in leading companies is about identifying those that are able to solve real user problems and that are unlikely to be disrupted in the medium to long term.
- Businesses that have been investing for the long term and thinking strategically about their respective markets are vastly outperforming those focused on short-term ‘sugar hits’ like dividends and meeting quarterly guidance.
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