Innovation.
We take it as an act of faith that the lights turn on when we flip a switch, that water flows from a spigot, and that there is food on the dinner table. Think about it: electricity, water, and food are utilities, for all intents and purposes.
Those sectors are dramatically different in this millennium than they were twenty years ago, and will be different, still, in the next two decades.
We should try to take a new perspective about these and other “utilities” as we allocate money for capital gains expectations. Like so much of what we see today, it is important to prepare for, and be imaginative about, expensive and innovative changes to our infrastructure. Already, we are getting significant feedback from these industries about what they must do to keep pace with changing demand patterns globally, and for updating the delivery grids upon which we depend so much.
As with all innovation, the weaker companies will fail, while “better mousetrap” providers will succeed. Who these winners and losers might be, though, is still an open question.
It is not the role of investors, or governments, to decide which amongst them succeeds or fails, but, rather, the influence of demand, solutions, and free market innovation.
Where to go?
I stress these points because money seems to be at an impasse. On the one hand we are eager to ride the wave of euphoria and capital gains which began in March of last year. Conversely, the averages are up significantly from those lows of a year ago and seem to be stifled by resistance points, low momentum indices, and lack of imagination and suitable alternatives. As with most things, when it’s easy to make money, we don’t worry quite as much. Today, we need to know which path to take when we reach the fork in the road.
My work is leading me towards smaller cap and emerging markets as untapped sources of capital gains. Additionally, since earnings acceleration patterns are quite narrow, the universe of possible candidates is more loosely defined, in geography as well as capitalization.
What we know is that traditional metrics will be challenged, and possibly be replaced by creative top-down paradigms, some of which we don’t (or can’t) currently define.
Traditional front end leadership in Consumer Staples, for example, are long-in-the-tooth, and likely to be displaced by aggressive solutions from agriculture, water-use, electricity, medicine, energy and transportation. Any of these sectors might emerge as market leaders.
If it “looks like” you may have missed the last bull-leg extension, in reality, the search is just beginning.
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