Last year we discussed the decade to come and how populism, unilateralism and digital supremacy would be the main drivers shaping the next 10 years. This year, we added another major trend: the shift from concentration to distribution.
As we begin a new decade, one can’t help but note the extreme concentration of both power and capital. Currently, the five largest companies in the S&P 500 account for roughly 18% of the market value of the entire index. To put that into perspective, both Apple and Microsoft are now worth more than the entire S&P 500 energy sector. And, this type of environment is not exclusive to corporations, it also includes countries and currencies. When they become monopolistic, they squash innovation, gobble up the competition, and create significant barriers to entry. This overconcentration is fueling several structural changes – just look at the 16 active anti-trust investigations or the alternatives to the SWIFT system that are being created. These developments will continue to accelerate on the back of a great enabler: 5G!
When looking at specific opportunities, regardless of location, valuations matter. In the US, we are witnessing a substantial divergence between corporate profits and the performance of the S&P 500. Take Apple for example. Last year, revenue was down, gross profit was down, yet the stock went up 86%. Apple’s revenue, in real terms, is no higher today than it was 5 years ago. Furthermore, you’re paying 24x for every dollar of earnings. Keep in mind, however, that while the US market is trading at a 150% premium to its economy, Europe and Asia are trading at a discount.
With the rise of populism, unilateralism, digital monopolies, and the shift from concentration to distribution, balancing risk will be essential to investment success over the next 10 years. Balancing risk includes all facets of investing: asset allocation, public and private markets, hard assets, geographies and currencies.
This year, we will be expanding on the megatrends discussed at OUTLOOK in a series of articles that you won’t want to miss.
“Always so fascinating! It makes you think about how things interact, and what are the real underlying issues that cause investments to go up or down.”