Change, Structural vs Cyclical: Which matters most?

Cyclical change separates markets into growth companies and value companies. Structural change separates the market into winners and losers. Losers don’t mean revert…they go bankrupt. It’s important to recognize the difference…

I get asked all the time about my “outlook” for the market. My answer has been the same for nearly 20 years: “I don’t have one.” I don’t … for good reason. I’ve not yet met the person who can consistently predict what the market is going to do, but even more importantly: I don’t buy the market. In my view, the question itself is the real problem. I believe it shows a critical flaw in a person’s thinking — the only reason to ask that question is to attempt to time the market … a perfect example of what I call “cyclical thinking.” I don’t like cyclical thinking.  I believe it is one of the main enemies of the successful long-term investor.

 Successful investors, in my view, have to be expert at recognizing the difference between cyclical and structural trends. At the core of my investing philosophy is this: I look for structural trends. Simply put: “How is the world changing?” A perfect example that I’ve been investing in for my entire career is the rise of ecommerce. That’s represented a steady change in the way business is done — it’s not a cycle that leads to four years of ecommerce being favoured and then a mean-reversion to four years of brick and mortar retail outperforming. That’s the difference: Cyclical change separates markets into growth companies and value companies. Structural change separates the market into winners and losers. Losers don’t mean revert — they go bankrupt. Like I said, it’s important to recognize the difference.

So, here’s my outlook, but not for the market … for the structural growth trends that I believe are changing the world. 

• Move to the cloud. I believe the shift toward cloud-based tools and services will continue stronger than before. Prior to COVID-19, it was considered a “nice to have.” It is now considered essential. As one CEO recently told me, “If I don’t get to the cloud like yesterday, I don’t have a business tomorrow.” I see this as a once-in-a-generation type shift that is changing the way every company on the planet does business. Not many things do that.
• Rise of ecommerce. Ecommerce is accelerating. It has become the only option in a COVID-19 world, and post-COVID behaviour will likely still favour not going to the store as much. Every crisis in the past 20 years has sped up the market share gains of ecommerce. I don’t expect this to be any different.
• The electronification of money. This trend actually started in 1950 with the first credit card, and it has grown globally unbroken at a rapid rate for over 60 years. I expect it to accelerate during this COVID-19 environment and continue afterwards. Why? Ever look at money under a microscope? Don’t. 
• Diagnostics and research. It’s been on the rise for two decades and will again accelerate as a result of this environment, in my view. 

I expect all of these trends to continue for at least the next decade — that kind of compounding makes short-term concerns meaningless to my investment process. 

To read the full PDF, which includes the views of other portfolio managers from across Invesco, please see our latest edition of Market Pulse.