Next Avenue to Growth

Being an investor and trader, I cannot avoid thinking about what the next big thing in the markets will be. People bet on further growth of tech, the Internet of Things, super-fast internet, AI and robots, blockchain, additive printing etc., and some look towards new education platforms, aerospace stocks and infrastructure needed to enable renewable energy.

In short, people are betting on technology. While betting on technology is not inherently wrong, the empirical evidence shows that the consensus made by the masses often offers bad advice. If you have investing experience you probably already have gained a scar or two from following the crowd. While I may be proven to be wrong, I believe that those sectors will not perform according to investors' expectations in the coming decades.

At WhiteWater, we have developed a simple yet powerful technique when thinking about where future trends will unfold. Frankly, I borrowed it (as often happens) from the online course called "Managing the Company of the Future" by Julian Birkinshaw, London Business School (by the way, fascinating lectures, I absolutely recommend looking into these).

Let us start with what caught my eye when I began watching the course videos. A simple graph below illustrates cycles or eras of economic development, explaining how management as a discipline has evolved (or rather not) from the industrial era to the knowledge era and poses a question on how it should evolve to fit into the post-knowledge era.

Based on Julian Birkinshaw's Managing the Company of the Future, 2014, London Business School.

Birkinshaw concludes that at each stage, the management model is characterized by the scarcity of different resources. For example, during the industrial era, a manager's role was to plan and control. During the knowledge era, it was to serve as a conduit for the flow of information. He guesses that during the post knowledge era a scarcity of human attention may become a new constraint.

Leaving the role of management aside, let us apply the same framework to the stock market. Below we have 200 years of history in one chart.

Source: Global Financial Data

The same pattern reveals itself. First, there were banks and trading companies (e.g. Dutch East India Company and East India Company). Capital accumulated through international trade funded infrastructure development: railroads and ships.

The ability to ship large volumes of materials and goods across vast distances gave birth to the consumer market, followed by the rise of computers and tech in the knowledge era.

You can see that each tidal wave in the stock market takes several decades to form. Big trends start small. But let us go back to a consensus that the future is tech. Consider that in the late 19th century it would be very difficult to convince anyone that railroad investments were not the future of the stock market.

When you look at tech using the railroad example, you can draw a parallel where the teсh industry acts as the enabler of something bigger and even more exciting.

Consider the following. Car manufacturers producing self-driven electric cars will make commuting unmanned, safe and less costly. Financial institutions adopting blockchain technologies will eliminate the need for human attention to control financial transactions. Smart cities accommodate more people with the use of less energy while generating less waste.

The point I making here is that technologies will free up capital and human attention which will be directed somewhere else. And this somewhere else is the New Wave.

Another way of approaching it – treating the economy as a living organism (after all it is made of human interaction). You will notice some similarity with the Abraham Maslow hierarchy of needs (Pictured below).

Same as humans move to achieve Recognition and Personal Strength having satisfied more basic needs the market looks to be moving to the next era as it is building on capital, infrastructure, knowledge, information, and technology made available in the previous eras. Most likely during this era, people will want to experience a longer, healthier, and more productive life. A life where a person does not have to choose between having kids and pursuing self-realization, but instead, he/she has enough time to pursue both.

After considering all the evidence we could, we conclude that the healthcare sector is best positioned to become the New Wave. Further evidence is:

  • Healthcare markets have been around for decades; however, quality healthcare is still expensive and unaffordable on a large scale. There are far more people who can afford a smartphone than those who can pay for a visit to a dentist.

  • A growing and ageing population certainly creates more demand, while the availability of capital, abundance of knowledge, and technologies lower the R&D cost to make it easier for new entrants.

  • The availability of big data also plays a significant role in this process. Installing sensors in machinery, building smart cities, and redesigning public infrastructure takes massive effort. Meanwhile, people are more than eager to pay out of their pockets for devices that generate a plethora of health-related data. The supply of data in health and wellbeing is abundant.

A word of caution here. By no means do we assume that the healthcare market will jump in a year or two. It is never this simple in the financial world. As was the case in the IT sector, as stocks first peaked during the dot-com bubble, pharma stocks have peaked during the COVID crisis. Now it may be time for a correction on the backend of our recovery from COVID shock and some disappointment from vaccine effectiveness and monetization.

We should begin to look for the emergence of new business models inside healthcare markets during the next 2-5 years. We may see tech giants like Microsoft or Google begin to enter diagnostics and therapeutics, new entrants that will be aimed at making healthcare solutions affordable, faster and scalable. If you notice that happening - chances are you are at the crest of the wave.

Source of image: Microsoft website

This article is circulated for informational and educational purposes only. It does not constitute investment advice, there is no consideration given to the specific needs, objectives or tolerances of any of the recipients. Whitewater investment positions may differ from the conclusions discussed above.

The article utilizes data and information from public sources. While we consider information from external sources to be reliable, we do not assume responsibility for its accuracy.

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