December 01, 2016
The World is Changing...Are you Ready?
The World is Changing...Are you Ready?
Professor Robert Gordon, in his book "The Rise and Fall of American Growth" (January 2016), suggests that the economy will continue to grow more slowly than in the past. This is because we have already reaped the benefit from major transformational innovations like the printing press, the steam engine, electricity, computers, the internet, etc. He sees no technology on the horizon that can have as much impact as the discoveries that were made between 1870 and 1970. Hence productivity growth will continue to be slower than it was historically, and so will economic growth since GDP is equal to population times productivity (output per person).
I think Professor Gordon may be wrong. We are currently experiencing substantial and accelerating change caused by the implementation of new technologies. Consider examples like Uber, media streaming on the internet, mobile payments with smart phones, etc. These new technologies have the potential to put whole industrial sectors out of business. We are talking about transformational technology – technology that is changing the way we live. Do you remember pay phones or bank tellers? Do you use a travel agent or priceline.com instead?
There are a number of different technological trends emerging, including gene sequencing, nanotechnology, supercomputers, big data analytics, artificial intelligence, robotics, drones, virtual reality, 3-D printing, the cloud, wireless communications, and the Internet of Things. Perhaps Professor Gordon is correct in that none of these technological developments in isolation is on the scale of the printing press or electricity, but synergistic effects from combining them can be of similar magnitude. The driverless car is one example of a combination of new technologies. The Human Genome project evolved from the science of genetics, but it depended on development of supercomputers and big data analytics. What took $3 billion and 13 years of research to complete in 2000, now can be done in just one day for $1,000 thanks to advances in computer technology. Gene sequencing promises to cure or prevent many diseases while extending human lifespans.
I believe it is no longer enough to simply look for companies with good track records of profitability and growth. Now we have to consider whether a company's business model will remain viable in the world of the future that is evolving. I can remember when Kodak was a blue chip stock before photography went digital. And where is the CD player now that we have the world of Apple? We must try to identify businesses that can survive and thrive in the face of change, while taking care to avoid potential buggy-whip companies. I call this kind of investment approach searching for businesses with a future (BWAF).
In addition to technology, there are changing trends in geopolitics. Today, the world is connected like never before. Events that take place on the other side of the planet can affect your investments. There are emerging economies with strong demographics and new governments that may accelerate growth, like India, Mexico, Brazil and Argentina. Meanwhile, Japan and Europe are slowing down due to aging populations. Europe also is experiencing turmoil from the refugee crisis, a challenged banking system, and unstable governments such as Italy. Growth has slowed in China, the world's second largest economy, with negative implications for commodities. And it certainly appears that Donald Trump will be an agent of change in America. One of the most important secular trends of the last few decades – globalization – may be about to reverse.
The world is changing so rapidly right before our eyes that it must seem daunting for an individual investor to navigate through it. Yet you have to invest – your capital needs to generate a return if you want to fund future financial goals. Fortunately, you do not have to go it alone. We are here to help, with all of the resources available to CIBC, including investment research, the Economics team, and CIBC World Markets Global Macro Strategy group.
Considering all the fundamental change that is underway, it may be time to revisit your financial plan and make adjustments to your portfolio strategy.
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