Disrupted Economy
According to Bank of America Merrill Lynch, the cumulative outflow from equity funds over the past five weeks was $44 billion. The “equity exodus,” saw the largest redemption over a 5-week period since August 2011. The economy is growing very slowly and this is causing alarm with many investors. I believe that investors might be confusing a slow growing economy with how our economy is being disrupted with new technologies. For compliance purposes, I would like to note that I am not making a buy or sell recommendation on any of these companies discussed in this article.
It is clear to investors that value is outperforming growth this year. The margin is close to 8%. I believe that the reason for the divergence has to do with a changing U.S. economy, and investors chasing dividends. Conservative investments have been the big winner over the past 12 months. Investors have been seeking higher dividends and focusing on the companies that are able to maintain their competitive advantages and keep higher barriers to entry. They are selling the companies that are being disrupted by technology.
The public companies which are disrupting the economy includes Facebook and Amazon. Both are trading near all-time highs. Amazon has single-handedly destroyed most retailers in the mall space. The retailers that you grew up shopping at such as Sears, Nordstrom, Macy’s, JCPenney, and Gap have lost a significant amount in value in the past few years. Facebook has had a similar effect on many of the large media conglomerates. On the private equity side, the two big winners are Airbnb, which is disrupting the lodging sector, and Uber, which is disrupting the transportation sector. Even the wealth management business is being disrupted with automated investment advice.
All of these disruptors have one thing in common, they are replacing middle-class jobs with machines. Wealth is now being concentrated into a smaller number of people at an alarming rate. Airbnb and Uber are a few examples of companies accelerating the changing business models of entire industries. This year investors have been buying boring businesses that are more insulated from these disruptors. These sectors include Utilities and Consumer Staples, which have outperformed the broader market. At some point, valuations will become too extreme for the disruptors and too cheap for the more capital intensive businesses. The defensive sectors that have the highest barriers to entry, such as Utilities, REIT’s, and consumer stocks, are beginning to look very pricey. There will come a time when investors begin to lose interest in the disruptors. The reversal of this trend could have major implications on your portfolio over the next year. A few years ago, I believed that Emerging Markets and commodities were going to become extremely volatile. The current trend that is worth watching is how these disruptors are impacting the economy and changing the valuations across sectors that were once thought of as defensive.
If you would like to speak with me about building a diversified portfolio through customized portfolio management that aligns your risk tolerance with your financial goals, feel free to send an email to mitch@cgfadvisor.com.
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