Analysis | Forget What You’ve Learned About Investing in the Last 20 Years


The Association of Investment Companies recently polled UK fund managers, asking them what sectors they expect to perform best over the next year and over the next five years. The top two answers over both time frames were energy (28% over 12 months) and information technology (21%). All the other sectors lagged far behind (11% said healthcare).

This pretty much sums up the divide in today’s market. There are those who think everything will soon be back to some approximation of the normal of the last 20-30 odd years — inflation and rates will fall, the various supply crunches will sort themselves out, governments will relax and the market will revert to valuing growth above all. These are the people whose first question to every equity strategist is “when do we start buying tech again?”

Then there are those who find this terrifyingly naïve, who believe that this year does not represent a blip, nor anything close to an ordinary business cycle. For them, the volatility in the stock markets is telling us the story of a huge structural change — one that is taking us back to a different kind of normal, one that might mean you need to forget everything you have learned about investing over the last 20 years.

Think about the world of the last few decades. It has been a time of falling and low inflation, of plentiful (and pliant) labor, cheap energy, easy access to capital, globalization and a gradual shift in the world’s wealth from tangible things (energy infrastructure, machines, factories, inventory and the like) to the intangible (patents, data, brand value, etc.). In 1975, notes Saxo Bank’s Steen Jakobsen in my recent podcast, intangible assets made up around 17% of the world’s wealth; the rest was real stuff. By 2020, that number surged to 90%. The intervening period had been a perfect time to invest in technology companies. 

Now look to today. All of these trends are changing. Globalization is firmly in reverse — countries are backing away from the cheap, easy supply chains that once characterized trade with China and are looking to move manufacturing home. Apple Inc. Chief Executive Officer Tim Cook tweeted earlier this week about the opening of a new chip plant in Arizona, making clear that he is “proud to become the site’s largest customer.”

It isn’t just manufacturing either, it’s mining too. Look to North Carolina and you will see that it is home to the first rise in US production capacity of lithium (needed for batteries for electric cars) in more than a decade. The UK has just approved its first new coal mine in 30 years — just as British Steel has said it will stop importing Russian coal. Green grandstanding is suddenly less important than actually having the energy we need, which is no longer cheap thanks to the end of Russian exports and our own failure to invest in fossil fuel production.

Labor is no longer remotely pliant. In the UK, a perfect wage-price cycle is getting underway — real wages are falling and everyone now understands that in a way they did not when inflation was 2%. So the strikes have begun. Rail, health care, postal service and university workers are all on the go. In the US, consumer price expectations came in at 5.9%, up from 5.4% in September, and the labor market is, as Economic Perspectives’ Peter Warburton puts it, “tight as a drum.” Expect wage growth all around. 

When the tide goes out, you can see who has been swimming naked, or so Warren Buffett likes to say. He meant it to refer to the corporate world. But it works just as well for countries: A nasty mix of general geopolitical tension, pandemic policy and war has meant that the tide of globalization — of cheap Chinese manufacturing and cheap Russian energy — has gone out for us. And we have been found to be less dressed than we should be.

Our physical world is too small to deal with the demand created by the energy shortage and the supply crunch. We haven’t got enough willing workers, manufacturing capacity or energy assets. So now we have to build them. The next few decades won’t be about apps, brands and eyeballs. They will be (in fact, already are) about building energy assets, improving electricity grids and building new manufacturing capacity across the western world. Think capital expenditure boom and  industrial super-cycle.

In this environment, knowing how to invest in companies dealing in intangibles in a low-inflation environment is useless. You need to know how to invest in tangibles (the “builders of supply” as consultancy TS Lombard call them) in a middling-inflation environment — and you need to know how to do that at reasonable valuations, given that the end of the low-interest-rate world is also the end of the world in which price doesn’t matter.

Last year, 75% of those surveyed by the AIC said they expected global stock markets to rise in 2022 (this may be why, on AJ Bell numbers, only 13% of UK active funds this year outperformed their passive equivalents). This year, only 56% expect the same for 2023 — a clear lack of consensus! Either way, it seems likely that the market leaders will be energy, resources and industrials. 

Consider me on the side that says this is not a blip — the same side as Morris Chang, founder of Taiwan Semiconductor Manufacturing Company. As he said: “Globalization is almost dead and free trade is almost dead. A lot of people still wish they would come back, but I don’t think they will be back.” Forget everything you have learned about investing in the last 20 years. 

More From Bloomberg Opinion:

• Big Bank Job Cuts May Just Be Getting Started: Paul J. Davies

• Shareholder Democracy Doesn’t Work. Here’s How It Can: Luigi Zingales and Oliver Hart

• Sunak’s Post-Brexit Britain Is Becoming a Worst-Case Scenario: Clive Crook

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Merryn Somerset Webb is a senior columnist for Bloomberg Opinion covering personal finance and investment. Previously, she was editor-in-chief of MoneyWeek and a contributing editor at the Financial Times.

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