Warning, disruption ahead

Mark Arnold

Mark Arnold

Aussie equities manager urges investors to embrace innovation in 2015

The clear winners in the year ahead will be Australian companies positioned to profit from innovation and disruption, which means investors should be choosing their stocks accordingly, according to Mark Arnold, Chief Investment Officer at Hyperion Asset Management.

The effects of disruption and innovation on the investment landscape is a key theme in Hyperion’s year ahead outlook, along with a number of others cited by Mr Arnold.

“At the macro level, global growth concerns are weighing on investors’ minds, particularly in Europe. But it’s not all bad news. The US economy is a definite bright spot with the data indicative of steady, if not spectacular growth, so we remain generally positive about the outlook for equity markets.”

Irrespective of the macro factors, Mr Arnold went on to explain that, as fundamentals investors, Hyperion focusses on the economics of the businesses they invest in – which is where the theme of disruption and innovation has become increasingly evident.

“Over the past few years, innovation in technology has led to a structural shift in the way we interact with each other and the businesses we transact with. For investment managers looking for businesses with a sustainable competitive advantage, the challenge lies in identifying those which are positioned to profit from the changing landscape,” he explained.

“That’s why we have a large exposure to online companies. They are very much at the heart of changing consumer behaviour. However, it’s crucial to understand that not all online businesses are created equal. Hyperion is only interested in those with substantial market share, a strong network effect, and pricing power.”

Mr Arnold pointed to a number of examples of Australian companies using disruptive technology either as the basis of, or as a growth agent in, their business models.

RealEstate.com (REA) has a leading market position and competitive business model within the real estate market in Australia and the ability to continue to grow earnings and profits organically over time, a key hallmark of success.

Domino’s Pizza has an innovative culture and a commitment to using the latest in information technology to drive growth. These characteristics have seen it perform remarkably well on the world stage, as it has moved into new overseas markets.

“In France, for example, Domino’s is already the market leader. And given that France is the most profitable market in the world for KFC and McDonalds, we anticipate that Domino’s will be able to grab their share of this lucrative market, continue to grow, and steal profits from the incumbents,” Mr Arnold said.

Hyperion’s strict selection criteria mean that themes such as disruption and innovation influence its analysis as to whether companies possess essential characteristics such as predictable earnings streams and the ability to grow organically over the medium to long term.

“Looking to 2015 and beyond, developments in technology will continue to create winners and losers between and within sectors. Focusing on business fundamentals is the only way investors can reliably identify winners,” concluded Mr Arnold.

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