Many investors dream of making a fortune by jumping on the next bandwagon early. But spotting rising stars is the tricky part.
In the late 1980s Japan’s property and stock markets boomed. At one point it was alleged that Tokyo’s imperial palace was worth more than all the real estate in California combined.
As speculative investors piled into the Japanese stock exchange in 1990 the seven largest companies in the world were Japanese. A decade later the bubble had burst, and just two Japanese firms made the list of the world’s ten largest.
Bull markets and stock price bubbles have been part of financial markets since “tulip mania” in the 1630s, when bulbs became worth as much as a Dutch mansion. After one bubble bursts, a new one is usually not far behind.
The most recent pop came from the tech giants once known as the FAANG stocks, which include Facebook, Amazon, Apple, Netflix and Google. They soared for more than a decade until the start of 2022 when their share prices started to dive.
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Bear markets (when the market falls 20 per cent or more) are painful, but they exist for a reason — to shift market leadership from one group of stocks to the next, said Louis-Vincent Gave from the research firm Gavekal.
At the end of 2021, nine of the ten biggest companies in the world by market capitalisation were tech-focused. Of those, Facebook’s parent company Meta and the Chinese gaming company Tencent have already plummeted to 23rd and 29th place respectively. The electric carmaker Tesla’s share price is down 70 per cent this year, the computer graphics chipmaker Nvidia has fallen 52 per cent and Amazon is down 51 per cent.
Those who are waiting for these firms to rebound would do better to identify the next winning trend, said Gave. He argues that “sitting around waiting for the US Federal Reserve to cut interest rates before buying Nvidia or Alphabet [Google’s parent company] makes about as much sense as sitting in Tokyo in 1992 waiting for the Bank of Japan to cut rates before buying Industrial Bank of Japan”.
Simon Edelsten, the co-manager of the Mid Wynd International investment trust, still hopes that some of these stocks will make a comeback. He believes the prospects for Microsoft, Apple, Alphabet and Amazon look strong.
Edelsten said: “The sensible approach is to pick the global Goliaths still in the ascendancy and mix them with some fast-growing companies from the next tier or two down.”
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Identifying the leaders of the next bull market is no easy task, but here are a few possible areas to consider.
Healthcare and biotechnology
There’s a lot of innovation happening within this space, as highlighted by the speed of the discovery of a vaccine for Covid-19.
Edelsten likes Thermo Fisher Scientific, which provides the services and equipment that life science firms and researchers need.
People living longer is driving this investment theme — by 2050 there could be more than 250,000 people in the UK over the age of 100, according to analysis by the bank Morgan Stanley.
Companies to consider here include those providing regenerative medicines, which try to halt or reverse the ageing process, such as Germany’s Bayer and the US firm Unity Biotechnology.
Clean energy
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The move from fossil fuels towards cleaner energy sources will be “a multi-decade theme where capital will be reallocated on an unprecedented scale”, said Rob Morgan, an analyst at the wealth manager Charles Stanley. This has started in earnest with the US president Joe Biden’s Inflation Reduction Act. It provides subsidies for nuclear and solar power, which has “transformed the outlook for companies like the nuclear electricity generator Constellation,” said Cormac Weldon from the fund group Artemis.
Small modular nuclear reactors are a potential technology that could take off in the future, according to Morgan Stanley. Their size could make nuclear power cheaper and allow more flexibility in where it could be produced. Companies that could lead this area include the UK’s Rolls-Royce, America’s General Electric and Poland’s KGHM Polska.
Fossil fuels
The move towards green energy poses problems for oil and gas firms, yet industry patterns suggest that they could thrive for years yet.
Investment into oil and gas exploration has halved from $695 billion in 2012 to $351 billion in 2021. However, oil demand in that time has grown from about 90 million barrels a day to about 100 million a day.
In addition, electric vehicle sales in Norway grew from 0 per cent of total new car sales in 2010 to about 90 per cent by 2021, yet transport fuel demand fell about 0.3 per cent a year. “Electric vehicle impact on oil demand has been minimal at best,” the fund group GQG Partners said.
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At the same time, energy firms have become better run, are generating record cash flows and have been distributing most of those profits back to shareholders. “A combination of supportive commodity prices plus capital return makes energy equities one of our highest conviction areas,” GQG said.
The oil and gas companies Exxon Mobil, Enbridge and TotalEnergies are in the top ten holdings of the GQG Partners Global Equity fund.
Trying to predict the next trend should not be the only way you make investment decisions. But if you have a strong belief in a particular theme, it’s worth exploring the opportunities within it — you might just find the next bubble before it bursts.
