Economy  

The rise of the intangible economy

  • Describe the changing nature of the modern economy.
  • Identify why companies with intangible assets are delivering higher earnings growth.
  • List the right investment strategy for the knowledge driven economy.
CPD
Approx.30min

- Aggregate 2018 real economic earnings were in line with 2011, and only a fifth higher than in 2007.

Conclusion? That global equities have, in aggregate, essentially gone ex-growth.

The grouping includes some of the largest companies and has a combined market capitalisation of $16.9tn.

Broadening the universe to Croci’s full coverage of 900 companies (70 per cent by weight of the MSCI ACWI index, which tracks global stocks) changes the picture little, with earnings growth rising to only 1.4 per cent.

This stagnation presents a genuine challenge for investors.

The result is that, overall, equity valuations are high, and the earnings growth that could justify these valuations seem structurally impaired.

Asset-light companies have delivered higher earnings growth

A closer look at growth by sector reveals an interesting picture.

The weakness is not uniform — some sectors (IT and healthcare, for example) have managed to deliver strong earnings growth, while others have lagged.

What is more, the sectors that have generated growth fall into the ‘asset-light’ category, requiring lower tangible capital investments than the average company to generate revenues and earnings.

By comparison, the sectors that have delivered negative growth since 2007 are all ‘asset-rich’, requiring large physical capital investments.

These results, again, point towards a fundamental change, with earnings growth now dependent more on knowhow and brand names rather than tangible capital.

And when you think about it, this makes sense.

The big earnings generators today do not need vast machinery, or capital intensive industrial plants to generate profits. 

Share price moves follow

Figure 1 shows how, at an aggregate level, only companies with intellectual capital have been able to grow their earnings since 2007.

Figure 1: Earnings growth has come from companies with intellectual capital

Source: DWS, Croci. Data as available on March 1 2019.

What is more, the higher earnings growth is not down to a few large companies driving the performance of one group, or because of exposure to specific sectors, as Figures 2 and 3 show (the rise of the intangible economy is not, therefore, just a few big internet companies phenomenon – it is wider than that).

Figure 2: Median earnings growth - global coverage

 No. of companiesMedian growth (annualised 2007-18)
Companies with brands803.40%
Companies with R&D2863%
Companies without IC421-0.60%
Total7871.40%

Source: DWS and Croci. The table shows median annualised inflation-adjusted economic earnings growth of companies with and without brands and R&D. This table excludes certain companies with negative earnings whose growth could not be calculated. Data as available on January 31 2019.

Figure 3: Median earnings growth by sectors

Median 2007-18 annualised growth

Companies with intangible assetsCompanies that don't have intangible assets
Communication services13.50%-4.90%
Consumer discretionary2.80%2.90%
Consumer staples2.70%-1%
Healthcare4.50%3.80%
Industrials1.90%1.50%
IT4.40%4.10%
Materials3.80%-3.40%

Source: DWS and Croci. The table shows median annualised inflation-adjusted economic earnings growth of companies with and without brands and R&D. This table excludes energy, financials and utilities companies. Data as available on January 31 2019.

As you would expect, higher earnings growth has ultimately been rewarded by the market, pushing up the share prices of those companies with intellectual capital.

CPD
Approx.30min

Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. A precursor to the Dow Jones Industrial Average was published in 1884 and contained how many stocks?

  2. Analysis of 300 companies with data going back to 1989 shows the annual pace of real economic earnings growth has slowed to just 0.7 per cent from what in the previous eight years?

  3. "The sectors that have delivered negative growth since 2007 are all ‘asset-rich’, requiring large physical capital investments." True or false?

  4. Companies with intangible assets in which sector had median earnings growth of 13.5 per cent in 2007-18?

  5. What does the author say is "a useful reminder of the risks that lurk"?

  6. According to the author, four-fifths of what type of companies have intellectual capital?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • Describe the changing nature of the modern economy.
  • Identify why companies with intangible assets are delivering higher earnings growth.
  • List the right investment strategy for the knowledge driven economy.

I completed this CPD in

To bank your CPD please complete the form below.

Were the stated learning objectives met?

Why weren't they met?

What did you learn from undertaking this CPD exercise?

Why did you undertake this piece of learning?

Banked!

Congratulations, you have successfully completed and banked this piece of CPD

Already Banked!

You have already banked for this article.

To bank your CPD you must or

Register

One or more questions have been incorrectly answered,
 please review your answers and try again.

Please complete all the above text fields to bank your CPD.

More Investments CPDSee my completed CPDSee all CPD