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Per the SuperTrend 3, Silicon Valley was a huge magnet for talent over the last decade. Those involved in tech-startups often made a fortune, despite working for companies that never turned a profit or created value for the public. What’s worse, the investment that did take place mainly went into productivity-dragging distractions – digital games, social media, and other consumer internet technology. Sure, some of these are modern conveniences, but they are hardly industrial breakthroughs. Compare that to earlier episodes of capitalism, which generated advances in electricity, key infrastructure, and other innovations that lifted productivity across industries.
All this, of course, has come with a longer-running cost. For example, in the resource extraction business, we now have a shortage of engineers. New projects take far longer to complete. New technology to make extraction faster and more cost-efficient has also been scant. No surprise, then, that the world is facing enormous deficits in key commodities. A wide range of other research-intensive fields have suffered as well, as endless rounds of low-rate-funded venture capital pushed the best and brightest into game development and ad optimization (and, sadly, into building algos for cryptocurrencies).
Also, consider that the 2010s were the decade of massive company buybacks. That makes sense. Why would companies, even those flush with cash, engage in real business investment when growth is sluggish and uncertain, and capital near-free? Over the short-term, corporate executives can hit quarterly earnings targets far more easily with financial engineering than long-term investment initiatives. As it was, a capital spending cycle, with the resulting rising wages and higher growth, never took hold. Instead, the recovery from the 2008 financial crisis was the most anemic since World War II.
Looking ahead, a revival in demand is taking hold simply because the world has underspent in the real economy for years, whether it is on energy, infrastructure, or defense. This revival will not just happen in the West. For example, India, a country with a share of investment-to-GDP of just 30%, has enormous potential to kickstart a multi-year infrastructure cycle. Investors should expect this figure to move closer to China, where during their rapid industrialization phase from 2002-2011, investment reached 45% of GDP.
Finally, heightened consumer demand is finally convincing executives that capital is worth outlaying – a sign that individual businesses are buying into their own prospects (even as they remain gloomy on the world economy and higher rates). In fact, shortages have quietly kickstarted a robust recovery in capital investment. This was the key missing ingredient in the post-2008 recovery and is crucial for lifting capacity, productivity and, ultimately, higher growth. Eventually, this will lead to stronger earnings and sustainably higher interest rates, even if growth is bumpy and central bankers can’t stick a soft landing in 2023 (don’t hold your breath for that).
The real economy is back. Suddenly, fantasy is out and fundamentals are in. Investors are no longer obsessed with finding Treasure Island. Growth at any cost is no longer being rewarded. Instead, they are becoming intrigued by such quaint things as steady earnings growth, robust balance sheets, and most crucially, cash in hand.
The market will continue to reward industries and sectors that can deliver this now rather than a promise out to 2030. In other words, the world is getting back to reality. Investors should not lose sight of this when setting asset mix.
Tyler Mordy, CFA, is CEO and CIO of Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. The Forstrong Global Investment team contributed to this article. This article first appeared in Forstrong’s “2023 Super Trends Report: Metamorphosis” publication available on Forstrong’s Global Thinking blog. Used with permission. You can reach Tyler by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at tmordy@forstrong.com. Follow Tyler on Twitter at @TylerMordy and @ForstrongGlobal.
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Content © 2023 by Forstrong Global. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited. Used with permission.
The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Performance statistics are calculated from documented actual investment strategies as set by Forstrong’s Investment Committee and applied to its portfolios mandates, and are intended to provide an approximation of composite results for separately managed accounts. Actual performance of individual separate accounts may vary with average gross “composite” performance statistics presented here due to client-specific portfolio differences with respect to size, inflow/outflow history, and inception dates, as well as intra-day market volatilities versus daily closing prices. Performance numbers are net of total ETF expense ratios and custody fees, but before withholding taxes, transaction costs and other investment management and advisor fees. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
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