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Three ways the investment world has changed

The investment world looks very different today compared to what it’s looked like in the recent past and requires investors to challenge pre-conceived notions, according to Schroders’ Robin Parkbrook, Fund Manager and Co-Head of Asian Equity Alternative Investments.

Speaking at the annual Schroders Investment Symposium, which for the first time was hosted virtually and will continue via a series of webinars until 19 May, Parbrook highlighted three ways in which the investment world has changed over time and how investors can best prepare and adapt to the shifts

being seen.

1. Structural deflation is likely to persist – unless we get a major government policy reset

“There are plenty of signs that inflationary pressure is rising,” he said. “The question is whether these inflationary pressures are structural or a temporary blip.”

For most of this year Parbrook sees inflationary pressures rising as global economies open up.

Longer-term though there are “four Ds” that are structurally deflationary forces: demographics, disruption, disparity in income and debt.

“Two or three years out I don’t think inflation is going to be a structural phenomenon,” he said. “I think the four Ds will re-assert themselves, especially disruption and debt.”

He caveated this by pointing out that if there was a major change in government policy (a move to Modern Monetary Theory or MMT, and a concerted effort to inflate away debt) inflation could become a structural issue.

Modern Monetary Theory is also referred to as “helicopter money” because it involves governments creating money to directly fund public spending or tax cuts, rather than them simply printing money to buy financial assets.

“This would be very significant and require capital controls. It may happen but is unlikely in next 2-3 years,” he said.

2. “BEVI” bubbles will burst

There’s been a large increase in retail investor participation in stock markets across the world, including in Asia. Historically, this has been a good indicator of a market bubble.

Retail money is flowing heavily into popular themes such as biotech, electric vehicle and internet stocks (“BEVI”).

“I’m getting increasingly worried by the tone of the broker notes, especially on the electric vehicle (EV) side,” said Parbrook.

“An EV is essentially a generic good with standard technology that’s relatively easy to use. There are hundreds of EV start-ups, and hundreds of existing original engine manufacturing companies,” he added.

“In fact EVs remind me of LCD TVs in the 1990s. We believe EVs are in a classic bubble and it will burst – rather badly. It’s not a great place for investors.”

3. Old-style value investing is dead (new-style is not)

So if Parbrook is cautious on the growth areas of the market because it’s bubbly, should investors be looking at the more value-oriented areas of the market?

“This is a key debate we’re having at the moment,” he said. “Relying predominantly on classic value measures like price-to-book and trailing price-to-earnings ratios no longer works.”

The key difference between today’s market and the market in which legendary value investors like Benjamin Graham developed the investment philosophy, is that intangible assets have become more important.

Intangible assets are things like research & development, brand building, building a sales network – things that can’t easily be quantified in the same way as the classic value measures can.

“Those companies that are investing heavily into intangibles will be the likely winners”, he said. “You can’t differentiate between stocks simply on traditional value measures like book value because you’re not accounting for the value that lies in the company’s intangible assets.

“This is the fun and the challenge for us as investors at the moment”, Parbrook added.”We have to work out which companies are investing well in intangibles and are really building businesses, because we can’t see these investments and potential growth just by looking at the reports and accounts”.

This led him on to the topic of new and old economy stocks. He pointed out the big difference in intangible/R&D investing between the two based on the chart below.

Source: FactSet, Macquarie Research, September 2020. New economy stocks defined as those in the following sectors: commercial services, consumer services, hardware & semiconductors, healthcare, software & media. Old economy stocks defined as those in the follow sectors: automobile, capital goods, durable & apparel, energy, financial, fast moving consumer goods, materials, real estate, retailing, telecom