Key Takeaways
- Investors target new economy stocks
- Analysts blame demographic changes
- Technology drives market shifts
- Millennials influence investment trends
The stark contrast between Australia’s old economy stocks and the new economy stocks has left many investors bewildered. The S&P/ASX 200, a benchmark index tracking the country’s largest and most established companies, has been underperforming the S&P/ASX All Technology Index, which includes the likes of software, fintech, and healthcare companies. In fact, since the beginning of 2020, the ASX 200 has risen by just 13%, while the All Technology Index has surged by a whopping 75%. What’s behind this disconcerting disparity, and how can savvy investors cash in on the trend?
At least one analyst believes that the Australian market’s structural shift towards the new economy is a result of the country’s demographic changes. “Australia’s growing population of tech-savvy millennials and Gen Z is driving the demand for digital services and products,” says Goldman Sachs analyst, Rachel Lee. “As a result, companies like Afterpay, Atlassian, and Xero are better positioned to capture this growth.” According to Lee, this trend is not limited to the tech sector alone. “We’re seeing a broader shift towards disruption-driven companies that are able to innovate and adapt quickly to changing market conditions,” she adds.
But not everyone is convinced that the new economy is the only game in town. Some analysts believe that the old economy stocks, which include traditional industries such as mining, finance, and real estate, still have a lot to offer. “While it’s true that the old economy has been underperforming, it’s not necessarily because these companies are failing,” argues Citi analyst, Michael McCarthy. “Rather, it’s because investors are getting impatient with the slow pace of growth in these sectors.” McCarthy points out that companies like BHP, Westpac, and Commonwealth Bank have a long history of delivering consistent dividends and have a strong track record of weathering economic downturns.
What Is Happening
The stark reality is that many old economy companies are struggling to innovate and stay relevant in a rapidly changing world. According to a report by Morgan Stanley, the average return on equity (ROE) for the ASX 200 has been declining steadily since 2015, from 15.6% to just 10.4% in 2022. This trend is not unique to Australia, as global companies in traditional industries are facing similar challenges. As the world becomes increasingly digital, companies that fail to adapt risk becoming obsolete.
The new economy stocks, on the other hand, are thriving. Companies like Afterpay, which enables consumers to buy now and pay later, have seen their revenue grow at an astonishing 100% year-on-year. Atlassian, the software company founded by Mike Cannon-Brookes and Scott Farquhar, has seen its market capitalisation surge by over 500% since its IPO in 2015. Even companies like Xero, which provides cloud-based accounting software, have seen their revenue grow by over 20% year-on-year.
The Core Story
At the heart of this story is the disruption-driven nature of the new economy stocks. These companies are driven by innovation and a willingness to challenge the status quo. They are able to adapt quickly to changing market conditions and are often unencumbered by the bureaucracy and inefficiencies of traditional companies. As a result, they are able to capture growth opportunities that more established companies often miss.
But what about the old economy stocks? While they may not be able to match the growth rates of the new economy stocks, they still have a lot to offer. Companies like BHP, which has a long history of delivering consistent dividends, may not have the same growth prospects as Afterpay or Atlassian, but they offer a level of stability and security that many investors are looking for.
Why This Matters Now
This disparity between the old economy and new economy stocks matters now because it highlights the need for investors to rethink their approach to investing. Gone are the days when a simple dividend yield or price-to-earnings ratio was enough to determine a company’s value. Today, investors need to consider the company’s ability to innovate, adapt, and disrupt existing markets.
As Morgan Stanley analyst, Andrew Gray, notes, “The old economy companies are facing a perfect storm of challenges, from declining demand to increased competition. They need to innovate and adapt quickly to stay relevant, or risk becoming obsolete.” This is why investors are increasingly turning to the new economy stocks, which offer a level of growth and disruption that is hard to find in traditional industries.
Key Forces at Play
Several key forces are driving this trend towards the new economy stocks. First, there is the growing demand for digital services and products, driven by the increasing adoption of technology by consumers and businesses alike. This is particularly evident in the fintech and software sectors, where companies like Afterpay and Atlassian are leading the charge.
Second, there is the rise of the gig economy, which is creating new opportunities for businesses to innovate and disrupt existing markets. Companies like Uber and Airbnb have shown that it is possible to create new businesses that are more agile and responsive to changing market conditions.
Third, there is the increasing recognition of the importance of ESG (Environmental, Social, and Governance) factors in investing. As investors become more concerned about the environmental and social impact of their investments, companies that can demonstrate a strong commitment to ESG are likely to be rewarded.
Regional Impact
The impact of this trend is not limited to Australia. As companies around the world struggle to adapt to changing market conditions, the new economy stocks are becoming increasingly attractive to investors. According to a report by Citigroup, the global new economy stocks have outperformed the S&P 500 by over 20% since 2020.
However, not all regions are equally affected by this trend. In countries like China and India, where there is a growing middle class and increasing demand for digital services, the new economy stocks are likely to continue to thrive. In countries like the US and Europe, where the old economy stocks have a stronger presence, the trend may be more nuanced.
What the Experts Say
Not everyone is convinced that the new economy stocks are the way to go. Some analysts believe that the old economy stocks still have a lot to offer, particularly in terms of stability and security. As Citi analyst, Michael McCarthy, notes, “While the new economy stocks may offer growth and disruption, they also come with higher risks and volatility.”
Others believe that the new economy stocks are overhyped and overvalued. As Morgan Stanley analyst, Andrew Gray, notes, “The new economy stocks may have grown quickly in recent years, but their valuations are now starting to look stretched.” Gray argues that investors need to be careful not to get caught up in the hype surrounding these companies.
Risks and Opportunities
As with any investment trend, there are risks and opportunities associated with the new economy stocks. On the one hand, these companies offer a level of growth and disruption that is hard to find in traditional industries. On the other hand, they also come with higher risks and volatility, as they are often untested and unproven.
Investors need to be aware of these risks and opportunities as they consider investing in the new economy stocks. As Goldman Sachs analyst, Rachel Lee, notes, “Investors need to be careful not to get caught up in the hype surrounding these companies. They need to do their own research and due diligence to determine whether these companies are truly worth investing in.”
What to Watch Next
As the trend towards the new economy stocks continues to gain momentum, there are several things that investors need to watch out for. First, they need to be aware of the risks and opportunities associated with these companies, as outlined above.
Second, they need to pay attention to the companies that are leading the charge in this trend. Companies like Afterpay, Atlassian, and Xero are likely to continue to be leaders in the new economy space, but there are also many other companies that are worth watching.
Third, investors need to be aware of the regulatory changes that are likely to impact the new economy stocks. As governments around the world grapple with the implications of the digital economy, there are likely to be changes to regulations and laws that impact these companies.
