EconomyJul 10 2019

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.
  • 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.
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The rise of the intangible economy

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.

Such companies have seen their aggregate market values double since 2007.

By comparison, the market value of companies with little intellectual capital is unchanged since 2007, as shown in Figure 4.

Figure 4: Share price performance has followed earnings growth

Source: DWS, Croci. Aggregate data of companies with comparable data going back to 2007. Data as available on March 1 2019. 

Investment strategy for the knowledge driven economy

DWS’s Croci team estimates that a third of the large-cap companies in the non-financial part of the market do not have any intangible capital.

This is also the case for financials, which means that two-fifths of the companies that investors tracking the market as a whole are exposed to either have no, or negative, real earnings growth.

As was the case in the early 1900s, this could have profound implications for many of today’s largest companies.

Previous structural changes, ultimately, have been for good.

The average person has seen a substantial improvement in quality of life and wellbeing in the past 120 years.

Intellectual capital may also bring lasting benefits, and if investors accept that the economy is once again restructuring then they may want to consider allocating towards intellectual capital.

This is not an easy task.

Intellectual capital assets do not generally appear on companies’ balance sheets.

One option is to chase the highest profile, hottest companies. But, in contrast to the early 20th Century, the pace of change today is fast.

The dotcom bubble is a useful reminder of the risks that lurk.

Many investors correctly judged the internet to become a major driver of future commerce.

But many of the companies that were set-up to take advantage of that future did not survive the crash that followed.

Investors therefore need to be careful of companies that are not able to use their intellectual capital to enhance their profitability.

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