Here are the 8 innovations that will revolutionize economies and markets
Eight big ideas for 2023 and beyond according to Ed Moberg, Portfolio Manager at Franklin Equity Group
Over the past decade, I have written down my views on the ideas we were most convinced of and thoughts on the coming quarters. To date, I've used notes like this to organize my thoughts on what the Franklin Innovation Team currently sees in the marketplace and record our expectations about how these ideas might evolve. In today's paper, I have collected eight ideas that offer an overview of our view on certain topics that we believe are important.
As history teaches, every pandemic has always been followed by a period of excellent economic growth.
Specifically, workers gain new power leading to a period of prosperity, and the latest data indicate that this is already happening. New shocks are often met with hyperbolic claims, such as that “nothing like this has ever happened before.” Actually what is meant to say is that “it is the first time we have seen it in our life.” As we underlined in our paper last year, war, hunger and pandemics have been the major causes of mortality in all of human history; we therefore have very abundant data on what happens after a pandemic. In England, for example, a country for which we have very accurate data, we have seen a very strong economy in the years following the outbreak of the bubonic plague or black death. At that time, in the mid-fourteenth century, the workers were predominantly serfs; instead, after the pandemic, an economy based on wages developed as a reaction to the lack of manpower. Between 1348 and 1351 nearly half of England's population died, and workers' wages increased by two-thirds. The so-called Spanish flu, which began in 1918, lasted for three years, a period which in many respects has been mirrored by COVID-19. In both cases, there have been four waves of infections and controversial prescriptions regarding the use of masks. The 1918 pandemic was followed by the Roaring Twenties: a period of very strong economic growth and robust labor markets.
Retracing that story, it is very likely that the COVID-19 pandemic will be followed by a period not of recession and contraction, but in which the workforce gains power, wages rise and change benefits the economy. We can already see it in the numbers. In the United States, women in half of couples currently earn as much or more than men. 4 Half of US households in the bottom half are in the strongest relative financial position in a generation, exceeding the middle 40% and top 1% for real labor income growth in the bottom half, while real incomes have fallen by half with the highest incomes. This is good news, and crucial for a thriving economy and democracy.
We see a market dominated by picking the best stocks in innovation
In the end, losers are doomed to fail. In 2020 and 2022, we saw very close correlations between the top-returning growth stocks. Many high-growth companies appeared to benefit from the most critical phases of COVID-19, however once they emerged from the pandemic, rationalization became necessary for these companies. Just as the euphoria aroused by earnings during the pandemic drove up all the stocks that had benefited from them, so indiscriminate were the corresponding massive sales, considering the relatively synchronized decline of very profitable high-growth companies, acquisition companies for special purpose (SPAC), private individuals and unprofitable technology companies for which the pandemic had been beneficial. In 2023 we expect a long-term recovery of structural bonds to start again. Interest rate hikes should lead to an acceleration of the bankruptcy of unprofitable technology companies and a tightening of competition. Instead, profitable companies that can grow throughout the cycle, and enjoy an increasingly favorable environment going forward, should be rewarded.
2023 will be the year of the Chief Operating Officer (COO), with a strengthening focus of secular-growth companies on disciplined spending and profitability, and many times on reducing or streamlining staffing post-pandemic.
The advances that COVID has brought about in e-commerce, payments, mRNA vaccines, office productivity and remote working will not be lost. Companies that have been more prone to spending as their businesses have accelerated will need to rationalize their spending as well with the current stabilization. The COO will be crucial in revealing the true earnings profiles of many growth companies. Imagine having to choose whether to invest in Company A, which had revenues of $250 billion and a goal of doubling that to $500 billion, or Company B, which already had revenues of $500 billion and needed an expansion of 280 basis points of operating margin to achieve positive free cash flow. In the absence of any other information, and assuming a similar market capitalization, we would suggest that Company B is a better opportunity, with a greater likelihood of achieving its objective.
Oil is dead. Long live oil.
Currently only 20 million of the 1.4 billion vehicles on the road in the world are electric vehicles (EV). The other 1.3+ billion have traditional engines, powered by fossil fuels. By 2030, the US Energy Information Administration (EIA) projects there will be 130 million EVs on the road, still less than 9% of the total projected vehicles, despite a very brisk increase in EV production. The global fleet of vehicles with fossil fuel-powered engines will not peak until 2038, according to EIA projections. This energy transition will take some time to achieve. The Organization of the Petroleum Exporting Countries (OPEC) controls 40% of global oil production, with exports accounting for 60% of total international oil trade as the West has cut back on investment. Even if we had factories with enough capacity to ramp up EV production, which we don't, it is to be expected that we would also need to invest heavily in materials such as copper, lithium or cobalt to sustain production. Moreover, almost 70% of the cobalt comes from Congo, a country with problems related to child labor that raise ethical questions from an environmental, social and corporate governance (ESG) point of view. China's reopening after the pandemic has only just begun; a combination of the expected increase in Chinese demand and current needs in the rest of the world lead us to believe that demand for oil will continue to be strong. High raw material prices can make extraordinary innovation necessary.
The Inflation Reduction Act (IRA) passed in 2022 in the United States is a likely element of accelerating the energy transformation.
The reaction of other countries will also be needed. The IRA has little to do with reducing inflation. It is important for two reasons. First, it's a law: which means it can't be overturned simply by an executive order from a new administration. Second, it will likely generate a similar reaction in Europe, substantially doubling its impact in US dollar terms. The law focuses heavily on energy transformation and is very generous to solar, hydrogen and wind energy. We are convinced that this will lead to an increase in innovation in the area of renewable energies. Some of the early technologies are very exciting, such as fracking geothermal wells, fusion and small nuclear reactors. At one level, it will all lead to an acceleration of interest over the next decade.
Payments
Pressing a key is not enough. Payments are the fourth branch of profitability for websites on the internet. Historically, there have been three main sources of income for websites on the Internet: advertising, subscriptions and e-commerce. Payments have become an independent source of revenue, and as such will continue to grow. Payment processing revenue pools are large enough for companies to offer consumers a great feature, such as website development, inventory management, or reservation management, in return for processing payments through the system of the supplier. This gives the vendor the impression that the feature is free and the goals of the customer (in this case, the vendor) align with those of the vendor. This creates a framework for a new set of investment opportunities.
mRNA drugs look beyond COVID-19.
Pharmaceutical companies are increasingly realizing that one of the best ways to increase their return on investment (ROI) in the industry won't be by pricing drugs, but by efficiently discovering and manufacturing them. New mRNA drugs developed based on lessons learned during the pandemic are now aimed at fighting cancer, Ebola, influenza and respiratory syncytial virus (RSV). For example, the combination of an mRNA vaccine and immunotherapy has demonstrated an improved recurrence-free survival rate for high-risk melanoma (skin cancer), reducing the risk of recurrence or death by 44% in phased trials. 2b. More than 1,200 mRNA trials have started since 2016, and drug development efforts have more than doubled from pre-COVID levels. As this trend accelerates, we expect to see an expansion of mRNA that will go far beyond COVID.
New drug launches in 2023 and 2024 could be among the largest in history.
In the face of a global obesity epidemic (38% of the population over five years of age is overweight or obese), 15 pharmaceutical companies are offering a solution to curb it. This solution, a semaglutide injection, is already showing results. Estimated sales of the drug in the United States could reach $4 billion this year, and the market is expected to exceed $150 billion over the next decade. Other pharmaceutical companies are also seeing positive results from weight loss drugs, with trials demonstrating patient weight losses of more than 20%. 17 Cancer therapies could reach similar dimensions. As a point of reference, worldwide oncology drug revenues in 2021 totaled $178 billion. At the same time, governments around the world have good reason to offer more support for weight loss, considering the estimated $2 trillion impact of obesity on the global economy.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/otto-innovazioni-rivoluzione-economia-mercati/ on Sun, 27 Aug 2023 06:19:09 +0000.