Most investment in equities is a lottery, but it is usually possible with some degree of certainty at least to identify the growth industries of the future, if not its companies.
Most investment in equities is a lottery, but it is usually possible with some degree of certainty at least to identify the growth industries of the future, if not its companies. Two sectors in particular have always struck me as racing certainties - health care and financial services. Both of them stand to reap huge benefits from changing demographics and levels of economic prosperity, particularly in the developing economies of the Far East and India.
Rising prosperity is fast creating a vast new middle class from the subsistence populations of the past. That in turn creates demand for health care and financial services. The ageing process compounds the effect by making populations and governments realise that present pay as you go healthcare and pension arrangements are quite incapable of meeting the challenge of an ageing population. Not only are they likely to prove unaffordable, but in most cases they also fall far short of rising expectations for living standards.
Spending priorities among human beings as they grow more wealthy follow a well worn pattern. First comes food. Once you've fed yourself, then comes a decent roof over your head. After that come the consumer durables and the little luxuries. Then comes education for one's children, leisure and travel. Once these aspirations are met, then people start to worry about their health and what happens if it fails.
So they buy insurance and they start to save. Huge new pools of assets stand to be created over the years ahead in the fast growing economies of the developing world, all of which will require management and stewardship. Following on from this is what promises to be the greatest intergenerational transfer of wealth the world has ever seen, all of which again is manna from heaven for the financial services industry.
In a speech this week to the Lloyd's of London annual dinner, Chuck Prince, chief executive of Citigroup, the world's largest bank, put it succinctly. "We are looking", he said, "at a future of growth that has the potential to exceed our largest expectations." Can it really be that simple? Are Citigroup, HSBC, and even Lloyd's of London, about to enter a new golden age of unparalleled growth and prosperity? Regrettably, this is where the prediction game becomes a great deal less easy. As Mr Prince points out, governments don't always make the right choices, and markets don't always cooperate. Financial services, moreover, are prone to repeated periods of crisis and sometimes spectacular loss of value.
No human activity is linear, perfectly orderly and predictable and there are almost bound to be ups and downs along the way. What's more, any growth industry invariably attracts a high degree of competition, as well as an army of chancers and ne'er-do-wells. The idea that sovereign nations of the Far East will roll over and let the likes of Citigroup, HSBC and Royal Bank of Scotland come in and dominate their financial services industries is naive.
None the less, Mr Prince has high hopes for the future. The growth of competition, paradoxically, creates pressure for consolidation so as to cut costs and deliver better value service to the customer. The next decade, in Mr Prince's view, will see the development of a handful of truly global, full service, financial services firms with the capital, distribution and broad product base to meet all their clients' needs. We've heard this from the financial services industry before, and usually it presages some ghastly crisis which forces a severe period of contraction and a dismantling of the vast financial supermarkets built in headier times. Yet over the longer haul he has to be right. The opportunity for growth in financial services has never been greater.
Nor, after a period of profound breakdown in public trust in the financial services industry, have its responsibilities. The financial services industry still has a mountain to climb in restoring the necessary degree of confidence. Yet it is not impossible, as Lloyd's of London has demonstrated. Ten years ago, the market looked like a busted flush, laid low by some disastrous underwriting decisions and still riddled with allegations of corruption and fraud. The turnaround in perceptions and performance since then could scarcely be more striking. Marsh & McLennan serves as a sharp reminder of how quickly a reputation can be destroyed.
And so ends IBM's 20-year relationship with the desktop computer, appropriately enough via the disposal of its loss-making PC business to the Chinese, who these days manufacture the vast bulk of PC hardware including that sold under the IBM brand. IBM was late into the desktop market, having been beaten to the punch by Apple Macintosh, and although it was a pioneer of the alternative personal computer, sold initially only to business, it managed completely to misread the market. IBM's decision to contract out the operating system software to the then still nascent Microsoft rates as one of the biggest wrong turns of modern business history.
The original IBM PC fast spawned a whole host of copycat versions, from Hewlett Packard in the US and Sony in Japan to Amstrad in the UK and eventually the mighty Dell, which wholly commoditised production so that customers could buy their PCs direct from the factory. These days, plenty of people simply acquire the components and assemble the PCs themselves.
As the growth of Microsoft into the world's biggest company amply demonstrated, the value of the IT revolution lay not in the kit, which is today one of the most viciously competitive industries in the world with huge overcapacity and tumbling prices, but in the software, which IBM gave away at the start to Bill Gates. Microsoft wasn't the only company to grow fat at IBM's expense. There was also Intel, the chip maker, and more recently a whole host of internet companies from Google to Yahoo! and eBay piggybacking off IBM's original PC.
IBM became a textbook study in the vicissitudes of the modern corporation. In the 1960s and 1970s it came to dominate its industry in mainframe computers for business. No one else could get close, so much so that eventually IBM attracted the attentions of the antitrust authorities. There followed years of debilitating litigation. Although IBM survived intact, it paid a terrible price for its arrogance. Obsessed with seeing off the authorities, management took its eye off the ball, failed to see the IT revolution coming and fast lost the plot.
While senior executives were closeted with their lawyers, the world moved on. By the time they realised what was going on outside, it was already too late. There was always a real danger that Microsoft would make the same mistake but, perhaps taking a lesson from IBM, it seems to have managed its brush with the competition authorities in the US and Europe much more effectively.
Just as the decline of IBM is the stuff of textbook study, so too was the eventual turnaround achieved under Lou Gerstner, eloquently chronicled in his book, Who says elephants can't dance. Mr Gerstner made IBM dance again, but only by recognising that the old vertically integrated model, in which IBM hoped to dominate all aspects of the computer industry, no longer worked. The disposal of the PC business takes IBM full circle back to its roots as a business solutions company.
The buyer, China's Lenovo, seems equally symbolic. At a stroke Lenovo becomes the third-largest PC company in the world after Dell and Hewlett-Packard. For China it is a coming of age. Hard to believe, but it was little more than 20 years ago that the first PC rolled off the production line as the ultimate at that time in state of the art, cutting-edge technology. The manufacturing baton was long ago handed from the US to the Far East. Now the intellectual property rights are being passed on too. The life cycle of new industries just seems to get shorter and shorter.Reuse content