One would hardly imagine that the term creative destruction would be anything but an antonym. But this term coined by Economist Joseph Schumpeter has caused some massive changes on the bourses historically.

In context, the recent Coronavirus pandemic may be one such harbinger of change on the bourses and those who invest in them. Certain new trends will affect investor’s priorities thanks to the pandemic.

“Economies and markets move in cycles,” said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services about the changes that the pandemic is going to herald.

The periods of expansions on the bourses are characterised by what the economist Joseph Schumpeter called innovations.

Technological innovations play an important role in economic expansions and stock market booms, and there are some hard facts to substantiate this claim.

The stock market rally in the US during the last five years was driven primarily by the FAANMGs (Facebook, Apple, Amazon, Netflix, Microsoft, and Google) During the last five years, the FAANGMs appreciated by 400 per cent while the rest of the S&P 500 crawled up by only 40 per cent.

Economist Joseph Schumpeter described the dynamic pattern in which established firms are unseated through a process he called creative destruction. Schumpeter believed that disequilibrium was the driving force of capitalism; Coal Age technologies gave way to Oil Age technologies that are now giving way to Information Age technologies, according to a Morningstar report.

So why is this important? Simply because companies that fail to innovate will fall by the wayside. And investors are astute to such changes.

“Consumers and investors are rewarding innovation against the old ways of doing business,” said Prateek Jain, Co-founder, Winvesta, an investment platform.

As an example before Tesla (an electric car), many car companies discarded the idea of EV as too challenging. Now they are in a race to convert their entire fleets to electric.

“Today's investors are paying closer attention to the future than ever before,” notes Jain.

And companies that fail to innovate or get their technological order risk facing investor wrath.

GE is a great example of a blue-chip company that was the flag bearer of innovation once but failed to maintain pace in the last two decades. GE stock rose almost 900 per cent in the 90s but has declined 80 per cent since then. Similarly, Ford Motors was a favorite of investors in the 80s and 90s but lost 90 per cent of its value in the past twenty years.

A similar story is repeated in India, where old economy stocks like ONGC and Coal India are languishing, conversely, stocks in the telecom, IT, and pharma space are doing well.

And do remember the WFH (work from home) phenomenon has brought out new trends. Both how we will work and how we will invest.

The pandemic has accelerated the development and adoption of technology in several sectors. For example, remote working tools made a giant leap last year. Software that enables collaboration, like Slack, Zoom, and Asana, reaped the benefits. “We also saw banks and other financial services prioritize the development of their digital offerings,” said Jain.

So what are the changes that are likely to come on the bourses, both from the corporate as well as the investment perspective?

Some sectors have gained from the pandemic; some sectors have been least affected by the pandemic and some sectors have been devastated by the pandemic. Pharmaceuticals gained from rising sales and profits. This segment, particularly CRAMS (Contract Research And Manufacturing Services) will continue to do well since the world will be concerned about future pandemics and the need to counter them. “Since WFH is likely to be the new normal in some industries, telecom will do well due to an explosion in data consumption,” said Vijayakumar.

Companies will do well to take note of the pandemic on their strategies.

Kristina Hooper, Chief Global Market Strategist at Invesco, expressed her belief that the pandemic has put the process of creative destruction into overdrive, accelerating trends that were expected to evolve over many years, into a few months.

Hooper felt that the kind of economic destruction caused by the pandemic is so massive that it will inevitably result in enormous progress and innovation.

And who will be left standing after the fallout?

Hooper said the pandemic and the consequent recession will be a catalyst for a greener economy generally, and a greater focus on ECG (Environment, Social, Governance) – compliant companies.

“Companies with a focus on ECG will do well, going forward,” emphasized Viyajakumar. Whether pandemic or post-pandemic phase, investors should focus on clean, high-quality companies with growth potential, he said.

“Nothing can stop companies that have strong fundamentals,” said Jain.

“Financial planning is important and your portfolio should be based on your investment objectives,” said Jain. Investing without objectives is like playing soccer without a goal. Build a diversified portfolio with an appropriate risk profile and set aside some cash or liquid investments for emergency needs.

“Young people ask that their assets have a decent risk-return profile, but they also ask that they be responsible because that’s their future that these investments are influencing,” said Lord Nicholas Stern of the London School of Economics, and Chief Economist at the World Bank between 2000 and 2003.

Changed investment trends

“The pandemic gave investors time to think and plan their financial future,” said Jain. The market correction at the beginning of the pandemic also exposed the lack of diversification in portfolios. Another trend was many investors shifting parts of their portfolio overseas to access opportunities not available domestically.

Other investing priorities were the financialisation of assets, essentially moving from physical assets like real estate and gold to equities and fixed deposits. During times of uncertainty, or market opportunity, investors prefer to have liquidity for asset reallocation.

Investors also started preferring growth stocks and innovative companies vis-à-vis traditional business models while analysing an opportunity.

“The WFH (work from home) phenomenon also gave more time to employees, many started trading from home,” said Vjayakumar. The Bull market facilitated this retail participation. Low-cost trading platforms have created this ‘Robin Hood phenomenon’. Many of the new retail traders are likely to disappear from the market after the next bear market, Vijayakumar cautioned.

ETFs and ECG

Most ETFs too apparently favour ECG-compliant companies.

ETFs are Exchange Traded Funds or an asset that tracks a particular set of equities like an index. ETFs can track either a particular industry or an index.

“We are already seeing a massive shift towards that (ETFs investing in ECG complaint companies) in the west,” said Jain. Today's investors are more aware and conscious of the impact their choices make. Companies with strong ESG components are being rewarded by consumers, employees, and investors alike, reflecting in their stronger financial performance. ESGV ETF for example tracks over 1400 companies in the US that are screened for certain ESG criteria.

“Most of the ETFs favour this segment,” said Vijayakumar, Chief Investment Strategist at Geojit Financial Services. Whether pandemic or post-pandemic phase, investors should focus on clean, high-quality companies with growth potential.

“I feel that corporate governance (how companies are managed ethically), is as important as technology in how companies are perceived by investors,” said Sanjeev Hota, Head of Research, Sharekhan by BNP Paribas about other issues besides the pandemic that affects investor attitudes to companies.

Hota noted that markets have negatively perceived companies like Suzlon, Idea Cellular, R Power, Unitech GVK, South Indian Bank, JP Associates, etc. The perception stemmed from a high level of pledged shares (by the promoters of the companies), a high debt level, opacity in company operations were significant negatives.

The converse holds true

Companies that are ECGs (Environment, Corporate, Governance) are gaining more transactions. “This is a global trend, with the MSCI weightage for such companies has increased,” said an analyst. Titan, Hindustan Lever, Godrej Industries. Marico. Ultra Tech, Page Industries, Havells India, P, And G are examples that Hota cites as ECG compliant companies in India. Such companies have a strong business model and strong governance in place.

The author is a Financial Writer

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