by Disruption is either the gospel or the monster of the new millennium, depending which side of the trade you’re on. Every technology company worth its salt is aiming to disrupt something, and enough of them are succeeding that many conventional businesses face an existential threat. Why get a hotel room when you can rent a house or apartment on Airbnb? Why wait for a taxi when an Uber will come at the touch of a button? Why employ humans when there are faster, more precise robots? But disruption isn’t solely the provenance of technology. In a recent report entitled, “The Age of Disruption,” Credit Suisse has identified three powerful forces of disruption today, including technology, competition from China, and government regulation. Smart investors need to keep an eye on how all three forces might affect the holdings in their portfolio. China has overinvested over the last decade, creating excess capacity some of which is now being exported into foreign markets. Chinese producers are also moving up the value chain, vying to compete on quality, as well as price, with Western multinationals – and the country’s government is actively subsidizing their ascent. The rising quality and sinking prices of Chinese goods pose a threat to renewable energy firms, automakers, steelmakers, and chemical companies.
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Ashley Kindergan considers the following as important: Airbnb, China, Credit Suisse, disruption, globalization, Investing: Features, Regulation, Uber
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Disruption is either the gospel or the monster of the new millennium, depending which side of the trade you’re on. Every technology company worth its salt is aiming to disrupt something, and enough of them are succeeding that many conventional businesses face an existential threat. Why get a hotel room when you can rent a house or apartment on Airbnb? Why wait for a taxi when an Uber will come at the touch of a button? Why employ humans when there are faster, more precise robots?
But disruption isn’t solely the provenance of technology. In a recent report entitled, “The Age of Disruption,” Credit Suisse has identified three powerful forces of disruption today, including technology, competition from China, and government regulation. Smart investors need to keep an eye on how all three forces might affect the holdings in their portfolio.
China has overinvested over the last decade, creating excess capacity some of which is now being exported into foreign markets. Chinese producers are also moving up the value chain, vying to compete on quality, as well as price, with Western multinationals – and the country’s government is actively subsidizing their ascent. The rising quality and sinking prices of Chinese goods pose a threat to renewable energy firms, automakers, steelmakers, and chemical companies.
Government regulation also poses a disruptive threat to firms in a variety of industries. On March 15, for example, the United Kingdom passed a tax on sugary drinks – a step Belgium, France, Hungary and Mexico had already taken. Increased regulation has squeezed margins at financial institutions since the financial crisis, and discussions about increasing the minimum wage have gained traction in both Japan and the U.S.
Credit Suisse ranks energy firms and automakers as those most at risk from the above three disruptive forces. Besides the obvious challenge of falling prices, oil and gas companies also have to contend with a growing regulatory focus on climate change. A global climate change agreement signed in Paris last year will shift the energy mix toward renewables in the future. Automakers face both higher fuel-efficiency standards and the disruptive threat of driverless cars. Developed-world automakers also have to keep an eye on those Chinese competitors that are quickly catching up to them in terms of production quality.
A caveat: While disruption poses a real threat to multiple industries going forward, history shows that disruptor stocks often experience dramatic pullbacks after an initial period of excitement. Railroad stocks skyrocketed in the 1800s as freight increasingly moved from canal vessels to the rails, but stocks fell substantially in the 1840s and never reached their previous heights. Similarly, the dot-com bubble inflated Cisco’s market capitalization relative to Wal-Mart from just 1 percent in 1990 to 230 percent in 2000. In 2016, Cisco’s market cap is just 64 percent of Wal-Mart’s. In 23 of the 32 years between 1980 and 2012, companies that underwent initial public offerings underperformed the market in the first three years of public trading. Finally, disruptors can also be disrupted. Nokia and BlackBerry posed problems for traditional telephone companies as customers decided to cut the cord, but have struggled to stay relevant in a world of smartphones.
Just as disruption isn’t a surefire guarantee of success, being disrupted isn’t necessarily a recipe for failure. Sometimes, investors become overly pessimistic about industries under pressure from shiny, new technologies. A century after railroads upended canal shipping, they came under pressure from airlines in the 1950s and 1960s. Since the industry endured some high-profile bankruptcies in the 1970s, however, railroad stocks have outperformed both the overall market and airline stocks.
In fact, there is some evidence that the older the firm, the more defensive the investment. A Credit Suisse analysis of 3,700 companies listed in Japan, the U.K., and U.S. shows that while companies that are less than 10 years old generate more cash than those that are over 50 years old, the older firms’ returns are less volatile and less correlated to the business cycle. The same is true for revenue growth – older firms had lower, but more stable, revenue growth over time.
In an age of disruption, Credit Suisse thinks that investors should scrutinize current and potential investments for vulnerability to the above forces of change. Broadly speaking, the bank suggests that investors consider a list of 60 high-quality global companies in a range of industries, including household goods, food, beverage, and tobacco, software and services, retail, and capital goods, that have solid growth momentum and are relatively immune from the three major disruptive trends.