As 2022 begins, there is talk of a new investment era. While this has centred on the changing direction of monetary policy, there are three other shifts that we believe could change the market environment as we look ahead.
The spread of technology
When is a technology company not a technology company? Ask most people to list the five largest US information technology companies and they will come up with some combination of Apple, Amazon, Facebook, Google, and Microsoft. Perhaps with Tesla thrown in? However, many of these are not really 'information technology' companies.
Facebook and Google are ‘communications services’ businesses, as are Netflix and Twitter. Amazon and Tesla are in the ‘consumer discretionary’ sector. Technology is enabling their business, but they are not selling technology.
These sector definitions were developed in 1999, when the world was only just getting to grips with the potential of information technology. Today, the lines between the users of technology and those that create technology are increasingly blurred. Technology is involved in pretty much every business going, so labelling a business as a tech company is not necessarily helpful. Is it a sales software company or a semiconductor manufacturer? A virtual healthcare provider or a financial payments system? A smartphone maker or a social network?
Technology is creeping into more and more sectors, exerting its disruptive influence. As such, talking generally about technology will not cut it for much longer. The next decade might see the market sector disappear. Instead, it will be embedded at the heart of every other sector.
China: in or out?
Most investors are aware of the growing presence of China on the world economic stage. At the same time, it has built a thriving and innovative corporate sector, particularly in areas such as social media and green energy. Many investors will want a piece of this particular pie. However, the paths through which investors can invest in the world’s second largest economy may be narrowing.
It used to be that the easy way to invest in China was through developed market companies with a Chinese presence: luxury goods manufacturers; car-makers; or hardware providers based in the US, Germany or Japan, but with a high proportion of Chinese revenues.
However, as tensions rise between the US and China, trading in China as a US company, or in the US as a Chinese company, is going to become very much more difficult. Anyone stuck in the middle will have to choose where to target their business model – serving two masters is unlikely to work.
Chinese demand is shifting to domestic businesses, helped explicitly by government policy. Companies in the region are building their own luxury brands and technology companies. The best access to the exciting consumer story in China – with 1.4bn Chinese citizens growing in wealth and purchasing power – is likely to be via the onshore equity markets in Shanghai, Shenzhen and newly launched Beijing.
However, these markets are risky. There is plenty of private investor involvement and they have a casino-like quality as a result, subject to wild swings. At the same time, the government’s goal of “common prosperity” has seen it wipe out whole industries with a couple of regulatory initiatives. Geopolitical belligerence and human rights issues add a further moral dilemma. Shareholder rights are routinely ignored, particularly for foreign investors.
