1 Series 1.3: DIGITAL REVOLUTION: LIKE THE INDUSTRIAL REVOLUTION, CREATING INTER-GENERATIONAL WEALTH Over the past few weeks, as part of our Thought Leadership series, we introduced three investment elements that we believe are essential for smart investment strategies and portfolios. Last week, we covered why we believe the inevitable end to QE and rise of populist Trump-economics means inflation risk is coming back, (http://crossinvest.com.sg/crossinvest-crossinvest- thought-leadership-series/), and therefore why we believe investments in real assets should be an essential element of an investment portfolio; This week, we introduce the final two essential elements of Smart investment portfolios: 1. Digital revolution: Like the Industrial Revolution, creating inter-generational wealth and why investors should not miss out on this; 2. High conviction investing, a must as equity prices remain high despite weak economic outlook. “Favour substance over form. It doesn’t matter if an investment is public or private, fractional or full ownership, or in debt, preferred shares, or common equity”. Warren Buffett, 2009 “It’s obvious to me that we live in a transformational time, where emerging technologies are creating new business models and destroying old ones” Nick Grace, Capital Group, 2016 The first two industrial revolutions inflicted considerable pain and destabilisation erasing whole industries. The power boom in the late 18 th century and then Edison’s electric light and Benz’s horseless vehicles in the 1800s, led to significant job losses. These though ultimately benefited everyone. CrossInvest Asia UNCONVENTIONAL THINKING: three essential elements of smart portfolios in the new world economy DIGITAL REVOLUTION & HIGH EQUITY PRICES, AND WHY HIGH ALLOCATION TO CONVICTION EQUITIES AND NON-LISTED ASSETS MAKE SENSE
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Series 1.3: DIGITAL REVOLUTION: LIKE THE INDUSTRIAL REVOLUTION, CREATING INTER-GENERATIONAL WEALTH
Over the past few weeks, as part of our Thought Leadership series, we introduced three investment elements that we believe are essential for smart investment strategies and portfolios. Last week, we covered why we believe the inevitable end to QE and rise of populist Trump-economics means inflation risk is coming back, (http://crossinvest.com.sg/crossinvest-crossinvest-thought-leadership-series/), and therefore why we believe investments in real assets should be an essential element of an investment portfolio; This week, we introduce the final two essential elements of Smart investment portfolios:
1. Digital revolution: Like the Industrial
Revolution, creating inter-generational wealth
and why investors should not miss out on this;
2. High conviction investing, a must as
equity prices remain high despite weak
economic outlook.
“Favour substance over form. It doesn’t matter if an investment is public or private, fractional or full ownership, or in debt, preferred shares, or common equity”.
Warren Buffett, 2009
“It’s obvious to me that we live in a transformational time, where emerging technologies are creating new business models and
destroying old ones” Nick Grace, Capital Group, 2016
The first two industrial revolutions inflicted considerable pain and destabilisation erasing
whole industries. The power boom in the late 18th century and then Edison’s electric light
and Benz’s horseless vehicles in the 1800s, led to significant job losses. These though
The current revolution, the digital revolution, however could be far more divisive due to
the “unpresidented” (author’s note: could not help myself) pace at which the change is
evolving.
This is, and will, create significant risks not only for investors but many livelihoods.
This is, and will, create many livelihoods as well as provide opportunities for many astute
investors.
The digital revolution is likely to create more economic change than ever before as its impact on every aspect of society, not just the working economy, is far more omnipresent. Between 1988 and 2003, computers became 43,000,000 times more effective through smaller processors and algorithms. Problems once deemed impossible, are now held in the palm of our hands. Recently, one of
Google’s AI innovations, AlphaGo, beat South Korea's Lee Se-dol, in a complex Chinese
game called Go – a feat that had not been expected to be achieved for a very long time.
The pace of change is undeniable – but the key is to understand the remarkable pace of
change, and more importantly understanding the likely impacts of this accelerated change,
and then having a strategic plan of action. For the investment world for example, it is
important to understand how companies can be very quickly disrupted, their share prices
decimated and shareholder value eroded – this is already too fast for many investors to
have time to react. The figure below shows the companies that have over the recent years
joined the S&P500 index and the ones that have exited.
FIGURE 1: PACE OF CHANGE IN THE COMPOSITION OF THE S&P500 ACCELERATES EVERY YEAR
The pace at which these companies have entered the index means there has already been a
significant growth in value while they remained unlisted. Back in the first technology
investment boom in 1998/99, companies were listing at an average age of four years. Today
the average is 11 years. Of the technology IPOs completed since 2002, 91% of the shareholder
wealth created was pre-IPO, despite the better than market returns made by these
companies post-IPO. Those that waited for the IPO simply missed out, as shown in the Figure
- The key is to understand the remarkable pace of change, and more importantly
understanding the likely impacts of this accelerated change and having a strategic plan
of action;
- Significant wealth is still being created although 90 percent of the wealth is being
created before a company is listed;
- There are significant opportunities as a result of this digital revolution – an allocation to
unlisted assets is a critical element of any investors’ portfolio;
- but this needs proper investment guidance and advice.
Below, we cover the third most essential element of smart portfolios - criticality of high
conviction investing.
SERIES 1.4 HIGH CONVICTION IS A MUST AS EQUITIES PRICES REMAIN HIGH DESPITE WEAK ECONOMIC OUTLOOK World economies have fallen into a trap with some concerning parallels to Japan’s lost
decades. This gloomy opening sentence does not mean however that investors’ are best
placed to lock their money away in cash (in fact that is probably the riskiest plan of all) -
it actually means that investors have more opportunities to create wealth from what will
invariably emerge as a massive shift in economic prosperity across the world.
The global central banks’ response to the GFC was to flood the world with cheap credit in
the form of low interest rates, Quantitative Easing (QE) and easier lending standards. This
was supposed to restart economic growth, but instead has created a toxic mix of excess
industrial capacity, unsustainably high financial asset prices and record levels of debt,
replicating the Japanese economy from the 1990s.
While excess capacity is keeping inflation low, it is also keeping employment down as
demand for new investment is now even lower than in 2009 while demand for goods hasn’t
recovered to pre-GFC levels.
FIGURE 1: EXCESS CAPACITY IN THE US AND CHINA IS CREATING DEFLATIONARY PRESSURE
Certain statements contained within the information in this Crossinvest Thought Leadership white paper, may be statements of future expectations and other forward-looking statements. These statements involve subjective judgement and analysis and may be based on third party sources and are subject to significant known and unknown uncertainties, risks and contingencies outside the control of Crossinvest (Asia) Pte Ltd, which may cause actual results to vary materially from those expressed or implied by these forward looking statements. Forward-looking statements contained in the information regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. Opinions expressed are present opinions only and are subject to change without further notice. No representation or warranty is given as to the accuracy or completeness of the information contained herein. There is no obligation to update, modify or amend the information or to otherwise notify the recipient if information, opinion, projection, forward-looking statement, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. Crossinvest (Asia) Pte Ltd shall not have any liability, contingent or otherwise, to any user of the information or to third parties, or any responsibility whatsoever, for the correctness, quality, accuracy, timeliness, pricing, reliability, performance or completeness of the information.