Over the past decade, the nature of global trade has changed radically. In this article, the fund managers at Capital Group say that “Digitisation is behind the latest shift in trade patterns, with far-reaching consequences for economies, companies, and individuals.
Many investors used to think of multinational companies as powerhouses in commodities or heavy industries, but a host of new global companies is rapidly emerging. If the 20th century was defined by a phenomenal rise in the transfer of goods and industrial commodities, the 21st century is being characterised by the rapid digitisation of services and the increasing automation of manufacturing. The knowledge economy, or digital trade, is gaining momentum, and this is giving rise to a new breed of global giants that are idea-driven — creative, nimble and networked companies, leveraging technology to their advantage.”
So why should equity investors like us care about this shift? Because it is impacting the identity of the highest performing stocks. In September 2003, out of the 20 largest stocks by market cap in the MSCI All Country World Index, only 4 were “idea-driven stocks”: Microsoft, IBM, Intel and Cisco.
Fast forward 20 years and 11 of the top 20 stocks (and 7 of the top 7) in the same index were “idea-driven”: Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, Meta, TSMC, Visa, Eli Lily and Mastercard.
The rise of idea-driven companies changes not just trade flows but how we as investors think about scale, growth and long-term compounding: “With the internet, there are no real borders, which creates paradigm shifts in the way companies are organised and how products are consumed. Product adoption can be swift and distribution costs limited — the smartphone or tablet is the delivery mechanism.”
To be specific, the number of winners i.e. the number of companies who can dominate their industry shrinks in this new world. Says Capital fund manager Rob Lovelace: “We are seeing huge in the global transfer of information and only a relatively small number of companies are really benefiting from that.”
Note: Some of the stocks mentioned in this article are part of Marcellus’ Global Compounders Portfolio. Several Marcellus staff members and their relatives are investors in this portfolio.
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