Much has been written about the new economy — of paradigm shifts and the start of a new era as we move into the digital age.
Much has also been written about what this means for investors keen to be ahead of the curve.
But even though we all use smartphones and conduct much of our business using the internet, the reality of this new age may still seem abstract to many investors.
That may be changing, however, with the emergence in recent years of internet giants which are actually delivering sales, earnings growth, and profits.
What is more, fundamental analysis shows that these companies — or more specifically, those with substantial intellectual capital — are driving the growth we have seen in economies. This creates a major challenge for investors.
To understand the changing nature of the economy, and what this could mean for investors, consider how economies have evolved over time.
A precursor to the Dow Jones Industrial Average (DJIA), which tracks US large-cap stocks, was first published in 1884 and contained 14 stocks, of which nine were railways and two were industrial companies.
The railways were a transforming innovation. They lowered transportation costs, employed vast numbers of people and opened up new markets — all of which drove economic growth.
However, the impact of railways on economic growth was subsequently eclipsed by automobiles. The first mass produced car was sold in 1901.
By 1920, Ford was selling over a million cars a year. Autos stocks made up almost a fifth of the DJIA in the 1920s.
Other trends followed: the mass consumer trend after the Second World War, energy in the 1970s, and IT and the internet from the 1990s on.
Each big shift brought with it deep structural change to the economy.
Today we are going through a similar period of structural change.
This time it is intangible assets (namely, intellectual capital) that is driving the modern economy, with new technology and knowhow transforming the way we live and interact and, again, fundamentally altering the structure of the economy.
Recent analysis demonstrates this.
For example, DWS undertakes fundamental value analysis on companies called Croci, which stands for cash return on capital invested.
The Croci methodology makes a number of adjustments to traditional accounting data in order to get to the heart of what the real value of a company is – as opposed to its value based on traditional accounting metrics, which generally do not take account of all intangible assets.
Analysis of the 300 companies in Croci’s coverage, with data history available back to 1989, shows:
- The annual pace of real economic earnings growth has slowed to just 0.7 per cent, down from 8 per cent in the previous eight years.
- Much of this slower growth is also the result of margin improvements rather than sales. Nominal 2018 revenue was in line with 2008 and below the levels of 2011, 2012 and 2013.