Waning central bank influence puts investors on notice

“Gone are the days when central banks could pull the levers and set global economies on the right course. Their actions still have an effect, but they have clearly failed to resolve many of the fundamental problems facing world economies post GFC.”

This is the view of John Birkhold, Partner at global investment manager, Origin Asset Management, who today warned investors to take new technologies seriously in their search for investment performance.

Following the GFC, central banks adopted policies which, in Origin’s view, failed to address the real issues facing many developed economies. Aggressively accommodative monetary policy, like quantitative easing in the US, may have staved off disaster in the short term, but is likely to have far-reaching, longer term negative consequences in many cases.

“Together, low interest rates and ample liquidity have allowed many struggling economies to put off addressing the difficult re-structuring decisions that need to be made. And more than that, I would argue that the actions of central banks are in fact creating some of the same economic conditions which led to the GFC in the first place,” Mr Birkhold said.

Nonetheless, investors understand that they must make their calls based on the world they are faced with and not the world they would like to have. And if innovation and disruptive technology are here to stay, the challenge lies in identifying the companies most likely to create wealth for their shareholders going forward.

According to Mr Birkhold, by its very nature, disruptive technology is deflationary and, as with all major change, there will be both winners and losers as a result.

“The consumer often wins as technology becomes better and cheaper, whereas previously profitable companies see barriers to entry diminish and previously profitable markets dissipate. This is particularly true for organisations stuck in the middle of flattening business environment and find themselves disintermediated,” he explained.

Mr Birkhold went on to say that relying on actual evidence and analysing individual companies using a bottom-up approach is the best way to trying to identify long term winners. Origin is invested in a number of areas where current trends appear supportive, including:

Home builders in the UK, which continue to be relatively cheap while exhibiting strong underlying fundamentals.

Parts of the global auto industry also appear attractive thanks in part to increasing demand for cars in some markets, as well as technological innovation.

Information technology firms in industries such as smart phone supply chain, the “internet of things” and cloud-based software providers.

Bio-technology, which is being helped by aging demographics globally and also from significant advances made in the treatment of chronic disease such as Hepatitis C and prostate cancer.

Mr Birkhold concluded by saying that investors should not fixate on central bank manoeuvrings and instead should try and identify firms that will be able to survive and even prosper in the intrinsically deflationary environment that the developed world is likely to face for the foreseeable future.

“And for my money, firms that are able to adapt and innovate will be the ones that will most likely create significant wealth for their shareholders going forward,” Mr Birkhold said.