Global stock markets witnessed a modest loss in Q1, the first quarterly decline since the final three months of 2015.
The tech sector, despite being conventionally considered risky and expected to perform badly in a down market, was the top performer last quarter and posted a positive return. On the flipside, the consumer staples sector was among the worst performers – despite being renowned as ‘safe’ and ‘defensive’, and a good place to invest if you are worried about the market.
We like finding ideas in tech, but we are wary of consumer staples. The tech sector elicits two anchor views from most investors: high risk and potentially fast growth. We think it is common for investors to frame sectors containing fast-growing stocks as risky. The concern is that if one company is growing fast, another must be losing somewhere. The history of tech is littered with such examples: Nokia wins and Motorola loses, then Apple wins and Nokia loses – and so on.
While success in tech feels transitory and risky, consumer staples have different anchor emotions: comfort and familiarity. Staples seem to have endured forever and success does not appear ephemeral.
Many safe havens available in tech sector
The tech sector is diverse, containing businesses as different as Apple, Google, Nvidia, Facebook, Applied Materials, Microsoft, IBM, Salesforce and Cisco. The sector is diverse because of the very different ways companies make money. In our framework of cognitive bias, we are drawn to heterogeneous sectors. We think it is easy for investors to reach general views about a sector and then inappropriately apply these views to businesses that are pretty idiosyncratic. This makes for error from bias.
There are plenty of safe, defensive and robust businesses in tech, in our view. If you are worried about the world, there are many places you can hide in tech – in stocks with loyal customers, pricing power, strong positions with suppliers and seemingly bulletproof balance sheets.
Crucially, from a management behaviour perspective, there are plenty of businesses where there are opportunities to grow – which keeps CEO egos safely inflating. While it is still true there are a number of tech businesses losing to current winners, the sector has matured, so losers are now just as likely to be found outside the sector as within.
Technology altering consumption patterns
As for consumer staples, while the sector may look safe, many companies do not have crucial properties to insulate them from impatient management behaviour. Some of the reasons why staples have looked safe are being eroded; some are starting to lose to tech. Staples rely on the habituation of customers. These companies have successfully used the commercial application of psychology – advertising – to bombard customers, using traditional media of print and TV, with messages designed to convince them to be lazy and disregarding of price.
However, technology has systematically attacked a number of the previously successful strategies. Technology now makes it much easier to search out reliable alternatives and to compare prices. Technology has weakened the power and influence of traditional media in shaping customers preferences. Technology has weakened the habitual patterns of consumption.
Conventional retailing, media and branded staples are all part of an ecosystem that captures and manipulates customers. Technology is attacking conventional retailing and media – which in our view weakens businesses built on its foundations. Consumer staples companies look lazy and lacking opportunities to grow. This can often lead to risky, destructive management behaviour, in our experience
Therefore, we do not believe the sector performance witnessed in first quarter of the year was an aberration. For long-term safety, investors are better off hunting in tech than in consumer staples.Jeremy Lang is partner and co-founder of Ardevora Asset Management.
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