Most wise investors adhere to the age-old adage that it’s time in the market that matters, not timing. This is never truer than in volatile times, such as we saw last year.
It hardly needs restating, but research reveals that over the past 20-year period, missing the best 10 days in the market annually reduces an investor’s return by more than 40%, whilst missing the best 20 days reduces their outcome by more than 70% (Market timers should never take a holiday or get sick).
What is even more dangerous is that seven of those 10 best days occurred within two weeks of the 10 worst! Think about how one’s mind is framing the world at these points in time.
Quality still beats Growth and Value
There is a way to avoid having to time. When coming out of +20% correction, ‘quality’ companies tend to excel beyond their value and growth cousins that rely on cyclical forces.
This is because quality companies possess characteristics that make them highly attractive throughout the entire cycle: they’re highly profitable and generate prodigious amounts of cashflow. Importantly they don’t rely on external capital for growth – this being even more crucial during bearish markets, QE tightening and rising interest rates.
To invest into the very best of these quality companies requires identifying which ones also enjoy the added ‘push’ of one or more enduring structural tailwinds (we call these, megatrends).
Why? Because some things don’t change.
Change is inevitable and, in some ways, also predictable and this is how investors can generate returns even in the midst of doom and uncertainty. Rarely are megatrends obvious until pointed out, yet the symptoms they produce almost always are. The dramatic rise of specialised silicon chips for gaming and cars are but one example.
Importantly not all megatrends are at the ‘investment worthy’ stage either and not all have strong quality companies within them to produce enduring returns. Megatrends however have always been a constant in our civilisation. Powerful, immutable, long-running, silent forces that are nearly impossible to reverse or stop. Ironically, the change wrought by megatrends is the very thing that won’t change. Or, to borrow from Heraclitus, the Greek philosopher, the only constant is change.
Let’s look at three examples:
- Technology won’t stop changing the world.
Few argue that technology in its hundreds of thousands of ways has, and will continue to, fundamentally change the way we live and work. From around 2017, technological advancement began accelerating far more than at any other time in history. This is producing an unstoppable wave of fast change impacting every business, from old-style utilities, energy and industrial companies to online payments, manufacturing, information management, communication, construction, and even retail.
It’s important to know that at best, recessions can only temporarily slow a megatrend – not stop it. Indeed many continue to run at full speed through a recession.
A prime example is the need for companies to continue to spend on enterprise digitisation and cyber security. Global consulting company Accenture is a major beneficiary, and this is reflected in its outstanding financial results.
- The need for alternative energy is on an immovable path
‘Energy Transition’ is establishing itself as one of the most important megatrends affecting the investment landscape, despite the carbon energy extractors hogging the present limelight. There are many hurdles to be overcome, failures will be part of its evolution, but it is here to stay. It will dominate energy generation across a raft of sources and methods. For example, hydrogen is one key component of the world’s quest to reach ‘net zero’ and avoid the worst of climate change. Hydrogen demand projections call for a 10-20x increase versus current volumes. One beneficiary in the box seat is air products.
Green hydrogen is produced with renewable power such as wind and solar, enabling the full life cycle of hydrogen production and consumption to be carbon free. This requires trillions of dollars of investment across many decades. The world needs hydrogen to power heavy industrial applications where electricity cannot.
- The population won’t stop ageing
The 60+ age cohort will more than double to 2.1 billion by 2050. The fastest-ageing group within it are those aged 70-75. As our population ages so does the incidence of chronic disease. Older people also often suffer from multiple chronic conditions at the same time. The second leading cause of death of those aged 70-75, behind heart disease, is cancer.
It should come as no surprise then, that worldwide drug sales are headed for 6.4% annual compound growth rates between 2021 and 2026, more than double predicted global GDP. Interest rates, inflation or recession won’t reduce demand. Ageing cannot be reversed either (we passed Peak Child way back in 2013), and nor will the increasing demand for combatting chronic disease cease.
Conclusion
While growth rates of quality firms might experience temporary slowdowns during difficult economic times, the cashflows they generate over their life cycle, and their long-term valuations remain unaltered. Timing this is both difficult and foolish.
Patient investors don’t need to either. All they need to do is hold ‘quality’ stocks that ride global megatrends. But why? Stock prices almost always follow a company’s earnings growth longer term. Any temporary weakness in stock prices of this small, select cohort of companies actually represents an opportunity to invest further, and that will never change.
Monik Kotecha is chief executive of Insync Funds Management.
