The USA has generated many of the giants of the new business world, with Apple, Google, Amazon, Facebook, Netflix and the rest leading the way in offering a new generation of services.
Over the last ten years of recovery from the boom and bust of the western banking crash shares have performed well. World shares have produced a return of 155% over the decade. The years have been characterised in the advanced world by an unusual combination of low interest rates and low inflation. Cheap imports from rapidly expanding global capacity have coincided with low cost digital business models, large migrations of labour and a strong trend to a more global approach to employing people and sourcing products.
Whilst world shares have done well, emerging market shares have been sluggish performers. The emerging market share index has only produced a return of 55% over the decade. There have been remorseless downwards price pressures on many of the things they make. Some of the countries have been through turbulent economic and political crises. Their collective growth rate has slowed. China has emerged as a middle income country after years of rapid compound growth and is now encountering resistance from a USA concerned about her rise as a serious military, technology and diplomatic force in the world.
Within the developed world US shares have outperformed the EU by a large margin. Over the ten years the S&P 500 is up by 253% compared to the Eurostoxx 111%. Part of that is the result of faster US growth, with a quicker recovery from the banking crash. Part is the impact of Euro troubles in the first half of the decade, and to the continuing sluggish economic performance as a result of the lack of fiscal stimulus and the weakness of the banking system.
Above all the difference in performance is about exposure to the digital revolution. The USA has generated many of the giants of the new business world, with Apple, Google, Amazon, Facebook, Netflix and the rest leading the way in offering a new generation of services for shoppers, for bank customers, for social media, for entertainment and the rest. These companies have been taking revenues away from many traditional businesses and brands, whilst building strong positions themselves in their chosen market areas. The Nasdaq Index with a much heavier concentration in the winners of the digital race has produced a return of 343%. The World Technology Index is up by 327%, more than double world shares in general.
Not all technology shares will win. Some have dubious business models, some spend too much to gain market share with bad consequences for cashflow. There are now challengers to the challenger companies of the first generation of internet based businesses. Governments and regulators are gradually tightening their controls, seeking to take more tax from these fast moving companies and trying to influence their conduct. Despite these threats to the market success of the sector, the main trend of growing digitalisation seems likely to continue. There is plenty of scope for on line shopping to take more market share, for more people to bank electronically, for more people to download entertainment at home, and to run their social life through social media.
A good active fund will find some of the winners. The Indices themselves will back the winners, as they will be the shares that do well and come to represent a higher percentage of the Index. The impact on portfolios over the last decade of this trend has been marked.
John Redwood is chief global strategist for Charles Stanley.