Medium term market outlook September 2015

Last few weeks have left the market cold. As many analysts have commented much of it was expected. In this post, I analyze the current secular trends and likely impact on markets.

China

Chinese stock market was a bubble, and when it burst, it has wiped out the savings of a lot of common people. For a country that was trying to shift to a consumption based model, the consumers are likely to suspend their consumption for a little while. I suspect the stock market impact on consumer behavior to last 6 to 8 months.

The impact of China slowdown will be felt by commodity producers feeding China as well as consumer discretionary companies targeting Chinese markets for a little while. I expect that the commodity and supplier slowdown to be more secular, as a recovered China will still be focusing more on internal consumption than an export led growth, which will be slower and more sustainable. Thus impact on commodity prices will be more sustained.

OPEC

OPEC has decided to punish the oil oversupply created by fracking in the US. It has tried to do that by increasing production and lowering prices. Even with the impact it has had on the earnings of primary oil producers, OPEC has decided to continue down this path. However, with China and most other economies slowing down and the move away from hydrocarbons as a secular trend, it is not known how sustainable this trend will be. Once oil rises to its natural price, the marginal producers will swing back into action and into viability. This will have an impact on economies such as Canada that had boomed in the era of high oil prices and fracking led production.

Europe

Europe is going through a slowdown. With an aging population and reducing workforce, it is looking at innovation to sustain its economy and looking for ways to reduce its operating costs in terms of energy. European companies that are profitable and innovative will look at entering new markets and perhaps look at innovation to offer superior products and services. Investment on its own infrastructure is likely to be low till it figures out how to get to a more sustainable operating model.

United States

US is currently the global innovation leader. It has dramatically increased and allowed innovation in all areas of its economy including energy, infrastructure, technology, products and services. As long as this trend continues, the US economy will continue to re-invent itself. Inspite of major homeland security threats, two massive bubbles in the past decade and a half, US has shown it can innovate itself out of problems that would cripple or destroy most countries. As its growth is largely innovation led, it will get affected by slowdowns in China and Europe but will maintain a secular growth trend.

The big fear ofcourse seems to be the imminent crash of the debt bubble. The federal reserve seems to be keen to start raising interest rates and that is likely to bring the bond prices down that have gone up in the recent past.

India

The Indian market has also contracted slightly but the economy is growing well. Largely driven by domestic consumption, economy is growing thanks to low fuel prices. However, as oil prices come back up this may get affected slightly.

Conclusion

Based on the above, it seems better to move away from companies that are carrying a lot of debt and focus on innovators specially those with a global footprint.

Analyzing IoT players

Internet of Things (IoT) is the name given to a utopian scenario where inanimate "things" in our surroundings, will become network aware and will start interacting with each other.

IoT Analytics released a list of companies that they analyzed to be creating the buzz around IoT (http://iot-analytics.com/20-internet-of-things-companies/).

Here is the list...

As we can see, this includes some very large players that either became big because of the Internet and Smartphone revolutions, or lost out on it. They can be categorized either as platform companies,  infrastructure companies or consumer companies.

Companies like Intel (INTC) have of course learned that they need to allow a lot of startups and innovators to flourish that eventually become competitors to their partners, if they want to keep customers to keep coming back to them. In the past, Intel waited for partners such as Microsoft (MSFT) to innovate and as a consequence lost out on the smartphone revolution. They still managed to survive in the server space as x86 and x64 became the dominant platform. Microsoft has ofcourse re-established itself as the cloud and Office applications tool company.

Future of companies like Blackberry (BBRY) is more uncertain, who are now trying to become a Platform As a Service (PAAS) for IoT. Companies like Amazon (AMZN) that defined the cloud as we know it today, ofcourse are much further than most.

A big driver of IoT is likely going to be Autonomous and Connected Driving platforms that seem to be gaining a lot of traction in the US. With an aging population who have an unmet need for mobility in sprawling American cities, to the worthy goal of zero fatalities, US federal and state governments are quite rapidly aligning themselves around this initiative. This is a space that may see the first real true IoT implementations as everything from cars to roads and traffic signs all become "smart".

A few companies like Here, earlier owned by Nokia (NOK) who are creating the digital representation of the roads will be equally big. Now owned by a consortium of Mercedes, BMW and Volkswagen, it is clear that these companies are set on ensuring that their future fleets are seen as the epitome of luxury and technology advancement.