I am regular listener of Dividend Talk. IMHO, it is one the best podcasts out there on the subject of dividend growth investing. Both the hosts, European DGI and Engineer my Freedom are pretty active on social media and maintain blogs/youtube channels. European DGI, in particular, has been very supportive since the early days of this blog and provides a lot of inspiration. If you are looking for good investing podcast to listen to in your free-time, ride to work, early morning run/walk, I highly recommend this podcast.
In Episode #103, the hosts discussed the subject of which of the 11 sectors will dominate the next decade in terms of performance. Listening to this episode got me pondering on the subject. Quite frankly, this was a lot harder to answer than what I originally thought. So I wanted to pend down my thoughts as a blog post.
For context, the 11 sectors of the stock market, as per the Global Industry Classification Standard (GICS), as are follows:
- Consumer Discretionary
- Consumer Staples
- Information Technology
- Communication Services
- Real Estate
I wanted to list out some of the challenges I faced when trying to think about this subject.
The first approach that anyone takes while answering this question is to think of companies that belong in this sector and think about the future of these companies. Surely, if we think that these companies would outperform the broader market, we have a reason to believe that the corresponding sector would also dominate the next decade. However, it is not always straightforward to classify a company into a given sector.
To illustrate my point, take Amazon (ticker: AMZN) for example. This is such a giant of a company that it is hard to classify it one sector alone. Is it purely a Consumer Discretionary business? Is it also a tech company? What about its Whole Foods business? Does that also make it it a consumer staples? Not convinced? Take Visa (ticker: V) for another example. It is easy to see this as a company that belongs in the Finance sector. However, they are classified in the “Information Technology” sector, and rightly so, because they are heavily into technology that facilitates digital payments.
The interplay between sectors
It would be hard to argue against the notion that Information Technology would be one of the top performers (if not the top performer) in the next decade. The industry is abuzz with new advancements/research in Artificial Intelligence, augmented reality, self-driving cars etc. A lot of this is going to require enormous amounts of data crunching, which ultimately means that data storage and retrieval in an organized fashion is going to be of paramount importance.
If you stick with this thought alone, you could see a potential bull case for real estate ventures that will lease out space for data centers (eg. Digital Realty Trust (ticker: DLR)). For certain applications, data availability is going to be highly critical, which would mean the load on power grid lines around the world to provide stable power at all times would be crucial. This could also bring companies from Utilities into play.
If you could look at self-driving electrical vehicles, apart from the aspect of artificial intelligence here, there would also need to advancements in battery technology. This would mean companies from the Materials sector, involved in mining Lithium (eg. Albemarle Corp. (ticker: ALB)) could be potential winners. Here again, if the world gradually moves to electrical vehicles, the load on electrical power lines to support charging stations to consumers all throughout the world would be a non-trivial business venture, which could bring Utilities into play again.
Who are the Losers?
Pondering over which sectors are going to underperform is even more harder. Lets pick one. Lets assume that we will make significant advances in the EV technology such that owning an affordable EV for an average middle-class family would become a reality. So would this be a death knell for the Energy sector? But what about all those other modes of travel that continue to rely on fossil fuels? Do we think that our advancements in technology are going to progress fast enough that we can completely avoid relying on these sources for our transportation needs?
Thanks to cryptocurrency, the Financial sector has been in the news a lot over the last couple of years. I have seen and heard several commentaries about how the banking industry is “waiting to be disrupted” and that “it is a matter of time”. Yet, somehow, none of the major central banks around the world have given that much importance to cryptocurrency, and continue to prefer fiat currency. Is that going to change in the next decade? IMHO, no. But I could be wrong.
Ok Enough…So what do I think?
You get it. This is not a straightforward question to address. But if I had to venture a guess, my top performers would be: Information Technology, Healthcare and Communication Services.
Information Technology being on the list is self-explanatory. As an engineer, I am hopeful that the major tech giants use their engineering prowess to solve some really hard technical problems that could impact future generations in a positive manner. If I were to be very honest, over the last decade, most of our collective engineering talent around the world is focusing on solving problems that are rather useless. As an example, trying to grab people’s attention through algorithms, serving them ads and curated content are not worthwhile endeavors. If we could instead focus on problems such as managing global pollution (low-cost self-driving electric cars), countering global terrorism, space exploration, preventing natural disasters etc. this is far better use of everyone’s time. I am hopeful that research and development in fields like Artificial Intelligence, augmented reality etc. are directed towards such pursuits. However, I do realize that I am being an idealist here.
We are still living in the times of a pandemic and coming to some sense of normalcy, so it would be hard to argue against Healthcare being on the top-performers list. Due to the very nature of this sector, there will be no shortage of research work in new drugs to fight various diseases. I cannot see how this field will suddenly lose relevance in the coming decade.
Communication Services as a sector is somewhat of an interesting pick. My thesis here is that Internet communication, as it stands, would need to improve manifold in order to support all the advancements in online gaming, streaming media and overall network traffic in general. I presume that the WFH/remote work dynamic is not going to go away in a hurry.
As far as the losers, this is a hard one to guess. But my picks would be: Industrials, Materials and Real Estate.
The Industrials sector is highly cyclical as-is. I think the supply chain issues we have right now will take a few years to resurrect and this is going to hurt the Industrials sector the most. With Materials, who knows how the geo-political scenario in Eastern Europe is going to evolve in the next few years. I think this will impact the Materials sector. With Real Estate booming right now, it is getting to a point where I could foresee a “reversion to the mean” like scenario playing out sometime in the next 10 years.
Again, these are just random guesses and I could be completely wrong about this. This is perhaps yet another reason why I choose to diversify among sectors and ensure that I am not overweight in one sector.
So, what are your picks?