This article was first published in the National Post on May 13, 2023. It is being republished with permission.
by Tom Bradley
I always push back when I hear a colleague or client say we’re going through a period of heightened uncertainty. I get grumpy because there’s always uncertainty in investing, regardless of how the landscape is portrayed. The only thing that changes is the urgency around a small number of issues.
That’s not to say we don’t live in interesting and dynamic times. Indeed, it’s a fascinating time to be analyzing businesses, the economy and the market. I have compiled a list of important trends that are going through profound change or just starting a transition. It’s long. The ground is shifting underneath us.
A number of cyclical factors are in flux. We’ve had higher interest rates for about a year and their impact is rippling through the economy. Consumers and companies are renewing loans at higher rates, and, in some cases, having trouble getting financing at any rate.
The poster child for this impact is residential and commercial real estate, which seems to be adjusting to higher rates in slow motion. Transaction volumes have plummeted as sellers are stuck on 2021 prices while buyers calculate what they can afford using 2023 mortgage rates. Meanwhile, the definition of hybrid work seems to change weekly.
Unprofitable tech companies, the darlings of 2020 and 2021, are experiencing a sea change. Their market penetration was enabled by technology and fuelled by unsustainable pricing. Unfortunately for them, growth-oriented investors who willingly funded the resulting losses have changed their tune and are now demanding profits.
Price increases at companies such as Netflix and Uber are just the beginning of the disruptors’ difficult pivot to “profitable growth” from “growth at all costs.”
At the other end of the spectrum, the tech giants are gushing profits, but showing signs of maturity. Revenue growth has slowed at the likes of Apple, Alphabet and Facebook owner Meta, and they’re now doing what other mature, blue-chip companies do: cut costs, buy back shares and maybe even increase dividends.
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The makeup of the energy complex is shifting as renewables work into the mix. For progress to continue, advancements in grid management are needed.
Related to energy, there are an increasing number of electric vehicles (EVs) on the road. In this regard, we have a front row seat to watch the incumbent car companies pursue a variety of strategies in hopes of a successful transition. So far, they’re losing badly to Tesla and the Chinese EV makers.
Are you tired yet? Well, there are other tectonic shifts just getting started. There’s artificial intelligence, of course. We’re all scrambling to assess how big an impact AI will have.
And the West’s changing relationship with a more confident and pugnacious China could be a game changer. Its increasingly isolationist tone (a new Cold War?) is putting a chill on corporate strategies. Will Apple be a US$2.7-trillion company if it stops getting along with the Chinese government?
So far, investors are in denial about the risks, and companies are finding it hard to diversify their supply chains away from China.
Still to come
There are more shifts on the horizon. Loan losses, a much-watched metric by bank shareholders and bondholders, seem destined to go through a cyclical spike. According to management, “Everything is fine,” but it’s hard to see how there won’t be an increase in defaults given that we have higher interest rates and are coming off the greatest debt cycle ever.
Speaking of debt, governments are nearing the point where they’ll need to buckle down and show some restraint. As it is, our children and grandchildren will be burdened with rising interest payments and ballooning health-care costs as spendthrift baby boomers roll into their 80s. The current math doesn’t compute.
I’ve run out of room and haven’t even mentioned U.S. regional banks, cryptocurrencies or lithium. There’s a lot going on right now, some positive, some negative, and all of it nuanced and unpredictable.
Is this turbulence unprecedented? Probably not. Indeed, the expression, “May you live in interesting times,” dates back to 1898 when Joseph Chamberlain, a British statesman, reputedly said, “I think that you will all agree that we are living in most interesting times. I never remember myself a time in which our history was so full, in which day by day brought us new objects of interest, and, let me say also, new objects for anxiety.”