“Miranda: O brave new world……!”
— William Shakespeare, The Tempest (Act 5, Scene 1)
Over the past few years, easy monetary policy worldwide hasn’t been enough to fully revive global economic growth. It has, however, helped to catalyze a strong equity rally, concentrated in a fairly small number of stocks — many of them technology and e-commerce businesses — that have been able to consistently “outgrow” the sluggish global economy. This rally has been aided by the advent of growth-focused ETFs, index funds, and smart beta products, along with (more recently) the US day-trading phenomenon that has accelerated amid COVID-19.
But we think the world is starting to change. Driven by unprecedented levels of monetary and fiscal stimulus in response to COVID-19, the economic growth outlook is improving. Commodity and interest-rate markets are grappling with the return of long-dormant inflation. At least one major central bank, the People’s Bank of China, has signaled its discomfort with accommodative monetary policy and has begun to withdraw liquidity. Global yield curves are steepening. We believe these changes have profound implications for how asset owners should invest going forward.
Let’s look at two case studies in Asia — Chinese technology firms and Indian domestic companies — to highlight how new global dynamics are shaping the investment opportunity set.
China’s technology sector
In the Chinese tech space, the narrative for most of the past decade was “winner take all.” Today, it’s less about “the big getting bigger” and more about how companies can adapt to and capitalize on the fast-moving world we live in. Rapid technological innovations (in internet speeds, storage, and processing power) have given rise to new use cases that are quickly evolving into promising business models. This is “democratizing” the playing field, so to speak. Here are two examples to illustrate:
- Not long ago, Chinese e-commerce was a one-player industry. This has changed dramatically in just the past five years with the onset of two e-commerce platforms — one focused on swift delivery and one on group-buying — that are challenging the incumbent behemoth. By identifying and exploiting niche business areas, these platforms have been able to create new markets in which they are thriving, even as the aforementioned incumbent still leads in its own segments.
- The ongoing “video-ization” of online content is a completely new monetization opportunity, not only in the consumer entertainment space, but also in commerce, education, health care, and many other areas. New startup businesses appear to be winning this fierce battle for market share at the expense of the large legacy platforms that once dominated the field.
India’s equity market
In India, the economy has struggled over the past few years following the corporate credit bust, the demonetization policy, the disruption caused by the nationwide goods and services tax, troubles in the real estate and non-bank financial sectors, and (more recently) the COVID-19 pandemic. During this trying period, it paid to stick to well-established market leaders across sectors, whose strong balance sheets allowed them to gain a significant share of incremental business while smaller, weaker competitors floundered.
In recent months, however, India has experienced a broader equity market rally, fueled by anticipation of a new credit cycle, supportive government policies, and a potential renewal of private-sector capital investment. In a notable reversal of fortunes, India’s small-/mid-cap stock index has handily outperformed its large-cap counterpart year to date through mid-April 2021. We expect this “catch-up” of previously out-of-favor market sectors to persist and are more bullish on bottom-up equity opportunities in India than we have been in some time — including non-bank financials, graphite electrode makers, infrastructure and road-building companies, and auto ancillaries manufacturers.
The Asian technology sector and the Indian equity market are just two examples of what we see as a broader, nascent trend toward an expansion of the global investment opportunity set. So how should investors navigate this “brave new world” and pursue the growing opportunity set?
Index funds and other investment approaches focused on yesterday’s winners may not be up to the task if the economic picture continues to brighten in the period ahead. We believe investing in select actively managed, bottom-up strategies with a differentiated investment process and a proven track record of weathering market cycles is the way to go.