Never in the history of humanity have we experienced so many changes in a short period of time. Since the beginning of this decade we have already experienced a pandemic, the runaway inflation growtha whirlpool bath, energy crisis and a war. These events have totally revolutionized the future trends of the stock investment markets. The strategists of Goldman Sachs They have gotten wet on the subject and have stated that we are in a change in the winning sectors for this decade, with more winners but with fewer benefits. Let's see what are positioned as the stock investment trends for this decade...
What has driven profitability over the past decade?
The returns of the last ten years were among the best in history. With a time of economic growth after the debacle of the 2008 crisis, investment in stocks in the technology sector (the FAANG in particular) led the returns of the last decade. This combination of actions was successful thanks to six key factors:
Lower inflation.
After the great debacle of the 2008 crisis, came a time of economic prosperity. Productivity growth, globalization and technological advances greatly expanded the availability of supply, leading to a decline in inflation and therefore prices in general.
Development of inflation during the 2010s. Source: Inflation Data.
Lower interest rates.➗
After a large drop in interest rates to alleviate the great global financial crisis and the decline in inflation, they kept interest rates very low for a long time, which again encouraged investment in US stocks.
US interest rates for the last 20 years. Source: Federal Reserve System.
Less regulation.⚖️
After clearly knowing what the catalysts of the previous crisis were, the supply reforms and the fall in interest rates created a favorable environment for the growth of companies and consequently for investment in stocks in the vast majority of sectors.
Lower political risks.️
At a global level, geopolitical risks during the past decade were minimal. After the conflicts in Iraq and Afghanistan along with the dissolution of the Soviet Union, conflicts between countries decreased. This situation helped create a favorable climate for economic growth in different regions of the world, especially emerging economies.
Global trends in armed conflicts from 1946 to 2019. Source: Systemic Peace.
Globalization.
At a time when cooperation was crucial for global economic recovery, world trade grew strongly. This helped encourage equity investment and reduce costs for companies as they were able to move their facilities to countries with cheaper labor.
Digitalization.
The entry into this decade has also brought about the greatest technological revolution for human beings. Smartphone devices and people became more connected, thanks to chips and computing power, which is why investing in FAANG stocks benefited over the past decade.
Different sectors that have driven digitalization during the past decade. Source: Digital Transformation Reports.
What factors will drive equity investment returns in the next decade?
With the arrival of the 2020s we already saw that large-caliber events were coming. In just two years we have experienced some abrupt changes in our daily lives, totally revolutionizing the factors to follow for this decade:
Growth of inflation.
Price increases have largely been supply-driven, initially due to supply chain issues caused by the pandemic. And much of these problems are disappearing, but some price pressures are likely to persist over time. Europe is facing a huge rise in higher energy costs and is slowly spreading inflation to the rest of the world and therefore stock investment prices.
Inflation has skyrocketed during the beginning of this decade. Source: NXTmine.
Higher interest rates.️
The measures to alleviate the effects of the pandemic took effect in the short term. Today the side effects have appeared after living with rates at decade lows and abysmal quantitative expansions (QE). The central banks of the world's large economies have already begun to raise them, and may have to do so more, to try to reduce inflation.
Forecast development of interest rates until 2024. Source: Bloomberg.
Greater geopolitical risks.⚔️
Although we know that after the storm comes calm, in this case the factors have been reversed. After the calm of the last decade, geopolitical conflicts have emerged again in different regions of the world. These have already grown significantly following the Iran-US conflict at the start of the decade, Russia's invasion of Ukraine and with rising tensions between China and Taiwan.
Global Peace Index of the year 2021. Source: Impakter.
More regulation.
With the increasing loss of growth in different major regions of the world, governments have begun to impose new unforeseen taxes that fall directly on investment in stocks in major sectors. In this way, we can understand that to try to alleviate the effects of the current recession, large companies will suffer increases in their taxes and, consequently, their profits.
Growth projections by region. Source: IMF.
Redistribution of production.️
Supply chain issues caused by the pandemic and geopolitical tensions have given way to a trend toward offshoring. Companies are manufacturing again close to their supply points, closer to where demand is. This is already happening in the semiconductor industry, where rising tensions between China and Taiwan have prompted a return home for many companies.
What does this mean for stock investing?
The new environment should change many things, especially the way of investing. This is all good news for people who enjoy doing a little research when choosing where to invest and who rely on fundamental analysis. One of the characteristics of investment in the last decade was the choice of a winning factor (such as growth) or a sector (such as technology). It seemed to matter a lot more than the individual companies that were chosen. Investing in technology and growth stocks generated superior results regardless of their profitability, while investing in value stocks generated inferior results regardless of the quality or competitive position of their company.
Overall return on investing in value stocks versus growth. Source: Goldman Sachs Global Investment Research.
Without the support of low interest rates, stock selection will be more important to generate market-beating returns. The individual profitability of the companies in which we decide to invest will be the most important thing, not the profitability of their sector in general. Therefore, we may need to start focusing on analyzing companies with strong competitive advantages and solid profit generation.
How do we take advantage of this situation?
We may need to start really diversifying our portfolios. The winners of the past decade were those who relied primarily on US and technology stocks to generate profits. In this new era, a greater variety of sectors is likely to yield better results for us, and technology FAANG stocks could easily be replaced by FAANG 2.0 that we showed you a few weeks ago. We well know that the energy sector will be one of the great beneficiaries for the next decade...