Forget About Inflation — Innovation Is the Bigger Trend
It’s not an easy time to be an investor.
Every morning I wake up to new headlines about inflation, recession risks, and shortages. The media is really all-in on fear at the moment.
Of course, you can’t totally blame them. There are plenty of risks that do need to be taken seriously, inflation being one of them. But there may be a point where fear pushes things too far…
Cathie Wood, famous for leading the tech-centric ARK fund, certainly believes this. She reportedly told a packed Sydney crowd at the Morgan Stanley Australia summit that the ‘tide is turning’.
She believes that the market’s obsession with inflation may be overblown. In fact, more than that, Wood sees deflation on the horizon.
That is certainly a bold claim to make right now, but it is worth considering.
After all, this inflation we’re battling isn’t really ‘normal’ inflation.
It’s a symptom of supply and demand issues more than it’s about currency devaluation. The entire reason you’re now paying more at the checkout is often because of backdated issues from the pandemic.
Logistics backlogs, worker shortages, and poor crop harvests are just a few of the real issues at play here. All of these issues are putting price pressure on common goods, and rising interest rates are going to do nothing to alleviate that.
No, as Wood told the crowd yesterday, innovation is our best bet…
Ripe for disruption
First of all, let’s explore the idea of deflation a little more closely.
Because right now — in Australia at least — it seems like a hard pill to swallow. Stateside, though, it’s a completely different story.
Big retailers like Walmart and Target are heavily overstocked right now. Wood even suggests that inventories could be up to 70% higher than they were this time last year. But despite this oversupply, we’re not seeing a dramatic shift in buying.
Target has even somewhat confirmed this narrative with its recent update to investors.
Management told the market that it expects their profit margin to dip to around 2% as it rushes to dump excess goods. It’s a pretty severe drop from the 5.3% margin it reported in the first quarter.
So despite what the headlines may be saying, deflation really could be around the corner for the US. And if that transpires, don’t be shocked if Australia is next to see this shift.
In the grander scheme of things, inflation and deflation are just part of a much bigger change.
Despite the market’s obsession with short-term events, this is really about long-term consequences. As Wood will tell you, we’re in the midst of perhaps the most disruptive era ever in human history.
The AFR summarises the situation pretty bluntly:
‘There’s the looming problems of labour shortages, which support Wood’s case for the proliferation of industrial robots across the economy.
‘There’s food security, which supports her case for technology that can increase crop yields.
‘There’s disease and health problems, which supports Wood’s case for backing companies that are aggressively investing in technologies such as gene editing.
‘There’s climate change, which supports her case for electric vehicles, particularly autonomous vehicles.
‘Say what you like about Wood, but frankly it’s hard to fault her logic. These are big problems that have only got bigger in the last few years. They will most likely be solved by disruptive technology companies whose share prices have been beaten down in the last nine months or so.’
The time to invest is now
Now, while I don’t see eye to eye with all of Wood’s opinions, I do think her overarching view is correct. It’s hard to argue against the fact that we need more innovation, after all.
The key point, though, is that this innovation, from an investment point of view, usually stems from tech stocks. Some of that will come from the established names we all know, but I suspect much more will come from new start-ups and businesses.
It may take some time — likely years, in fact — but expect tech to dominate once again.
As Wood herself predicts:
‘Disruptive innovation in the public equity markets today is valued at about $US7 trillion globally, which is maybe 8 per cent of total global market cap. We believe that $US7 trillion will go to $US210 trillion by 2030.’
In order to reach that forecast, tech stocks would need to achieve an annual growth rate of 46%!
Needless to say, that sounds pretty astounding for the kind of larger companies Wood typically deals with. But for some of the smaller up-and-coming firms, this sort of return is much easier to fathom. In fact, depending on the sector, it may even be a tad conservative.
The point is that tech stocks, no matter what you think of them, are not going away.
Necessity is the mother of invention, and right now the world needs new solutions to some very big challenges. Luckily, for everyday investors like yourself, that could also net you some incredible returns.
Because if you look for the right companies in the right sectors, the sheer value to be found in tech stocks right now is incomparable.
Editor, Money Morning
Ryan is also co-editor of Exponential Stock Investor, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.
PS: The ASX will be closed on Monday, 13 June, due to the Queen’s Birthday public holiday in all Australian states and territories bar Queensland and Western Australia. As such, you won’t hear from your Money Morning editors on Monday.
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If you’re in the parts of Australia celebrating the Queen’s Birthday, we hope you enjoy your long weekend!