Innovation that’s ripe for investment
With the U.S. leading the way in an uneven global economic recovery, a new report from Wells Fargo Investment Institute finds opportunity in technological innovations by following the investment mantra of buying quality and staying diversified.
Throughout the post-recession recovery, the U.S. has shown faster growth and job market improvement than the rest of the developed world. Even with economic challenges, investment opportunities — especially those involving new technologies — remain, if you know where to look.
These opportunities form the foundation of “The Divided Recovery: How the Innovative and Efficient Adapt (PDF),” the first quarterly thematic research report in 2017 by Wells Fargo Investment Institute. The report identifies developing trends in globalization, technology, and innovation that may create opportunities for investors.
One of the key trends highlighted is the growth of the “Internet of Things” — a term representing all of the new technologies and applications shaping people’s daily lives. This includes the development of self-driving cars and other applications and devices that impact everything from how you checkout at the supermarket, the way your home monitors its energy use, how doctors deliver health care, to even the logistics of getting goods from factory to consumer.
Tracie McMillion, head of global asset allocation strategy for the Institute, explains that technology’s disruptive force has launched new businesses and wholly altered others. Developed markets have evolved into global service economies, she said, with trade ties that now reach the most remote areas of the world.
Luis Alvarado, an investment strategy analyst with the Institute, said the quickening pace of technology developments has spurred a technology revolution businesses shouldn’t ignore.
“While technology’s roots are wrapped around various industries, more and more companies in diverse industries are reshaping themselves as technology companies first,” Alvarado said. “In order to be competitive, businesses must increase spending on technology to stay current and attract top talent.”
The future of the ‘Internet of Things’
McMillion suggests the “Internet of Things,” the ecosystem of technologies that interact with each other to provide better insights, is a prime area for investment. According to a McKinsey Global Institute analysis, adoption of the “Internet of Things” could contribute up to $11.1 trillion to the economy by 2025.
“There are a number of business areas poised for further innovation, including cloud computing, robotics, data analytics, biotechnology, and financial technology (FinTech),” McMillion said. “From an investment perspective, we see growth opportunities in two key sectors – information technology and health care – and believe they are best positioned to incorporate innovation into their products and services.”
The Institute continues to be shaped by technology as it works with the Digital Advisory Team to bring digital solutions and products to Wells Fargo.
Identifying High-Quality Assets
Amid the uncertainty created as new policymakers take office around the globe, the Institute continues to choose high-quality assets – financially sound investments that have the potential to weather various market conditions. High-quality assets, particularly in the equity and fixed-income markets, can help mitigate volatility risks and diversify portfolios.
How can investors find high-quality investments in such volatile investing times? McMillion advises them to look for companies with:
- Diversification across industry groups and with sales spanning broad geographies
- Large market capitalization with steady access to capital
- Strong market share in their industry with branding and pricing power
- Financial soundness with ample liquidity, low debt, and dependable cash flows
- Distinct competitive advantages
- Dependable management teams
- Consistent earnings with the ability to grow and pay an attractive dividend
Supporting the wisdom of this checklist, a study by the Leuthold Group found that between 1986 and 2014, high-quality stocks achieved a 13.1 percent annualized return compared to 10 percent for low-quality stocks. The same study also showed high-quality equities outperformed low-quality ones during economic downturns.
With the potential for further geopolitical tensions, an economic downturn, or other unanticipated risks, McMillion suggests investors should “Hold high-quality assets within a well-diversified portfolio as we proceed through the latter stages of the recovery.”
Read the report, “The Divided Recovery: How the Innovative and Efficient Adapt (PDF),” and visit the Institute for more investment education and insights.
All investing involves risks, including the possible loss of principal. Equity securities are subject to market risk, which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities.
Technology and internet-related stocks, especially of smaller, less-seasoned companies, tend to be more volatile than the overall market.
Wells Fargo Investment Institute, Inc. (WFII) is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company and provides investment advice to Wells Fargo Bank, N.A., Wells Fargo Advisors and other Wells Fargo affiliates. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.
The information in this report was prepared by WFII. Opinions represent WFII’s opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. WFII does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.