Hidden Gems In This Market Cycle's Leading Theme
Cam Hui | May 08, 2015 12:11AM ET
The Rich Get Richer ”, beautifully illustrates the point:
Notice that the profit margins of the various bins moved roughly commensurately up until the late 1980s and early 1990s. At that point, something happened. The profit margins of the top bin proceeded to explode, rising by over 1000 basis points. The profit margins of the next two highest bins stayed roughly flat. And the profit margins of the two lowest bins actually fell–even as their labor and interest costs were supposedly reduced. Overall, the dispersion of profit margins grew dramatically–which is the hallmark sign of a “Winner Take All” economy.
The analysis went on to show that much of the bifurcation in margins occurred in "new economy" sectors like Technology and Financials, but not in commodity-related price-taking sectors like Energy and Materials, or regulated sectors like Utilities.
In the past, I had openly wondered about the effects of Knowledge Based Capital (KBC) on the economy and the operating environment of US companies (see How I learned to stop worrying and love the missing CapEx). In my post, I postulated that the reason CapEx had not come back strongly during the current recovery was because of the dominant effect of KBC in the economy. The latest post from Philosophical Economics more or less confirms that hypothesis.
It seems that every market cycle has its own leadership theme. The last cycle featured the asset-rich commodity producers, before that, Technology-Media-Telecom (TMT) was the dominant them. This cycle may feature the KBC, or intellectual property, companies.
When we think about companies whose assets are mainly intellectual property, companies like Facebook (NASDAQ:FB) and Apple (NASDAQ:AAPL) normally come to mind. However, there is one hidden gem in the KBC investment theme that many may have missed - that's the biotechnology stocks (via iShares Nasdaq Biotechnology (NASDAQ:IBB)). As the chart below shows, the biotechs have been in a multi-year relative uptrend against the market.
I have no idea how long this market cycle will last, but should my KBC thesis be correct, then the biotech stocks may have a lot further to run than anyone expects.
Get The News You Want
Disclosure: Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.