Tom Bradley is co-founder of Steadyhand Investment Management, a member of the Investment Hall of Fame and a champion of timeless investment principles.
This summer, I took advantage of a slow news cycle and plenty of dock time to think about bigger things. It’s a remarkable time for new and changing trends that will affect economies and markets.
I’m not one to base investment strategies on macroeconomic forecasts, so my musings weren’t tactical but rather an effort to be macro-aware. There was no expectation of precision, and little hope of getting the timing right. With that as context, here are some changes that will be important whenever they kick in.
A stretched consumer: With some trends, there’s a lag between cause and effect. For consumers, the effect of heavy debt levels and higher interest rates is playing out like a slow-moving train wreck. Spending is just starting to taper off. Retailers such as Home Depot Inc. and Canadian Tire Corporation Ltd. are reporting slower or even negative sales growth, grocers are seeing shoppers trading down to cheaper brands, and banks have increased their loan-loss reserves.
The situation in Canada has the potential to be worse than that in the United States. More families are house-poor in Canada, and the mortgage renewal cycle will stretch budgets even further (most U.S. homeowners are locked in at lower rates for longer periods).
Even more stretched governments: Government debt is an example of a stress that’s been building for years, but the timing of its impact is impossible to call. Governments keep spending beyond their means, even in good times, and the debt load for future generations keeps building.
There are always predictions that governments are about to hit a debt wall, but that hasn’t happened yet. The sustainable level of debt-to-GDP keeps getting adjusted upward. When the wall is reached, however, governments’ credit ratings will drop and their cost of borrowing increase, services and infrastructure spending will be cut, and user fees and taxes will rise.
Growth challenges: One of the most remarkable trends of my career is how long the mega-tech companies have continued to grow. Apple Inc., Microsoft Corp., Alphabet Inc. and Amazon.com Inc. move from strength to strength, developing new monopolies as they go.
They’ll remain a dominant part of our lives, but the question is whether they can continue to grow fast enough to justify their premium valuations. Can their core profit drivers do it, or will they be forced to diversify into less profitable areas?
There’s an ad for that: The revenue model for many tech companies relies on advertising. Meta Platforms Inc. and Alphabet have grown to dominate the ad market, and it’s now a big part of Amazon’s growth story.
There are a few angles to explore here. First, is advertising – which has historically been tied to the economy – a limited resource, or can new delivery methods keep expanding ad budgets? The two advertising giants have grown effortlessly by taking market share from traditional media, but there’s little left in the field to harvest.
Second, will new players with unique advantages, namely Amazon and Walmart Inc., slow down the duopoly?
And third, will advertising hit a saturation point where people stop noticing, or even rebel against logos on Springsteen’s guitars and billboards on neighbours’ lawns?
Two worlds: China has had a huge impact on investment portfolios. I’m not referring to Chinese stocks, but rather corporations lowering costs by manufacturing in China and expanding revenues by tapping into a huge and growing consumer market.
But instead of becoming a participating global citizen, China seems intent on going it alone. An antagonistic approach to trade, world affairs and human rights makes it increasingly likely that we’re heading toward two worlds – one centred around the U.S. and Europe, and the other around China.
Two worlds or not, are we reaching the point where China is more of a risk than an opportunity? Where having China exposure may mean a lower valuation, not a higher one? Where Apple and Starbucks Corp. are penalized for their China-dependence instead of rewarded?
Underestimating renewables: I’ll finish on an optimistic note. I can’t help but think experts are underestimating the growth of new power sources. Why? Because adoption of technology in general has accelerated, there’s a strong push behind sustainability, and renewable returns are attractive. The fact that businesses in Alberta and Texas are leading the charge into wind and solar tells me that the economics are undeniable.
So, do my dock thoughts suggest you sell the Magnificent Seven and your consumer discretionary stocks? Not necessarily, but you don’t want to overlook potentially powerful trends and other technologies related to health care, environment, and anything that lowers costs for large organizations, including governments.