More government
The notion of more government explores the ways that governments are becoming more influential in economic and financial-market activity—a trend that is likely to be highly significant in identifying areas of investment opportunity and risk in the coming years. The increasing intervention of governments—for example, in the dramatic widening of budget deficits and in supporting commercial banks—lends significant unpredictability to the destiny of economies and financial markets. The increasing role of governments can be seen most obviously in the financial sector but also in a number of other areas, such as the environment and healthcare provision.
In the oil sector, heightened government involvement may lead investors to favour companies with strong reserves over those that lack reserves (or do not control them). Investors may also choose to avoid companies that could become involved in conflicts with governments, given that politics are becoming a more important factor in resource allocation. One might also be cautious about exposure to companies in direct competition with “national champions.”
In the pharmaceutical sector, regulation is vital to ensure the safety of new drugs. Over the last two decades, there has been a significant increase in the scope of this regulation. In many countries, this has led to an increase in the number of patients required to be involved in clinical trials and a marked boost in the costs of running such trials. Dr. Claiborne Johnston, director of the University of California, San Francisco Neurovascular Disease and Stroke Center, estimates that over the last 20 years, the average cost of developing a drug has risen at a rate 7.4% higher than inflation. For pharmaceutical companies, this escalation in costs is highly significant and explains partly why the average number of yearly drug approvals has fallen sharply over the last decade. The pharmaceutical sector has many favourable investment attributes, but with the lower rate of overall drug approvals, investors should focus on identifying companies that can be innovative in light of the more onerous regulation.
Networked world
Although networks have already transformed our lives in many ways, the trend remains at a relatively early stage. Rapid increases in bandwidth continue to expand networks’ range of uses and their interactivity, which, in turn, drives productivity gains. The explosive growth of the mobile internet, combined with innovations in sensor technology, will generate profound and transformational changes in many industries.
For example, information technology has the scope to transform areas such as healthcare, security, entertainment, payment systems, communications, transportation, factory automation and agriculture. Investment opportunities associated with these changes include a broad range of network operators, equipment manufacturers and software companies.
Using global themes allows investors to identify both growth opportunities and areas of risk in an uncertain world. Harnessing these investment themes doesn’t remove the need to evaluate the fundamental attributes of investment candidates or the need to scrutinize the appropriate valuation at which securities should be bought or sold. But, by using themes, investors may overcome the unhelpful short-range noise that can impede the fulfillment of their investment objectives. BC
Jeff Munroe is chief investment officer at Newton Investment Management, a London-based global investment management subsidiary of The Bank of New York Mellon Corp.
jeff_munroe@newton.co.uk
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© Copyright 2010 Rogers Publishing Ltd. This article first appeared in the July/August 2010 edition of BENEFITS CANADA magazine.