On disruptive technology…
Disruptive technology is pervasive, often (but not always) led by the internet. Consider the impact of Amazon on retailers, where the cost of running physical stores has made it almost impossible to compete directly on price with internet-only alternatives. Consider the impact of Google’s advertising model on traditional advertising strategies. Consider the impact of alternative energies on traditional fossil fuels. The list goes on, and is diverse, but from an investment perspective, the results are similar: the disruptors are hit-or-miss gambles (some will be successful and will be good investments at almost any price, others will not and are worth nothing at all), and the vast majority of companies that face one form of disruption or another appear riskier than ever before.
On oil…
Does the falling oil price present opportunities? A couple of interesting points arose in our discussion. It is possible that a supply side reaction will be faster this time than in the past. The reason being that the marginal cost of a barrel of oil (i.e. the cost of pumping the next barrel, disregarding the costs of developing the well thus far) is much higher in shale oil than it is in traditional oil wells (where the marginal cost is almost zero). It is the marginal cost that dictates supply side reactions rather than total costs, so this may provide a floor to the oil prices sooner rather than later. The Panel also noted that integrated majors have outperformed the market as a whole even in falling oil price environments (look at Shell and Exxon between 1980 and 2000). Finally, the Panel commented that countries that are large importers of oil and other consumer goods might be worth investigating as they benefit most from the recent oil price correction and low inflation (or even deflation). India is one such example.
On the US…
Whilst the level of discrepancy between performance (and valuations) in the US and the rest of the world in 2014 has been unusual, it is not impossible to understand. There are several factors at play. For one, the world is coming to terms with the fact that interest rates may stay lower for longer. Eighteen months ago, economists expected rates to start rising towards the end of 2014. That is clearly not happening, and investors are starting to look beyond 2015 for rate rises. In that environment, equities yielding just 2% become interesting, and expanding valuation multiples can be excused in an environment in which alternatives are less attractive (think bonds, cash and gold). Added to this, margins remain high in the US, and cashflows are uninterupted. As such, abundant levels of cash (derived either from operations, or from creditors happy to lend at appealing rates), are being deployed to buy back shares at an unprecedented rate ($130bn per quarter in 2014, which dwarfs all other investments into the market). Whilst this environment lasts, the US can continue to defy gravity.
Peter Hollis, Russell Napier, Angus Tulloch and the Kennox investment team.