Daily Archives: June 30, 2021

This years recovery, after months of life under lockdown, stands out from previous ones; it started with inflation roaring back.

Normally the symptom of overheating in a dynamic economy reaching full speed, inflation this time reflects a weakened economy taken by surprise. It was hard for anyone under lockdown on government support to believe that a solution for living with a new virulent disease would be found so quickly. It makes for a happy end to social distancing, but it also creates a new type of economic havoc.

The rush to go back to normal is being limited by the constraints of a globalised world. Differences in vaccine availability in various parts of the world have resulted in a global upturn more sequenced than synchronised. Bottlenecks in shipping and resource limitations are creating shortages. Delivery times are near all-time highs, while firms are still working overtime to replenish depleted inventories. With people not yet ready or able to return to work, firms are having difficulties hiring. In the US, among the most advanced in terms of vaccinations, prices are rising.

One must step out of the business cycle rationale to understand it properly. Business cycles are generated by fluctuations in demand. This time, the shock came from the supply side. Disrupted global production chains and labour markets keep supply from rising to satisfy demand. Inflation accelerates while industry capacity utilisation, employment rates and key commodities levels all remain below pre-Covid levels. Inflation appears just as growth begins to accelerate.

And it is for this reason that inflation will subside. It is not taking place anywhere near the peak of a cyclical expansion, where factors of production are in full use. Ample slack remains in the labour market, which will prevent wages from rising meaningfully. For the bottom fifth of US wage earners, fiscal support roughly doubled their annual income, which may create an artificial tightening in labour markets. But government programmes will be phased out in the autumn and labour shortages should ease. Supply chain bottlenecks, related to the an early reopening, will resolve with time.

Crucially, even if supply disruptions last for longer than expected, their impact on inflation can only fade if wages do not rise. The 70s are long gone and widespread wage indexation is a thing of the past.

Early evidence points towards disruptions being on the mend. Data show that US manufacturing inventories in sectors driving inflation, such as vehicles and energy, returned to pre-Covid levels by the end of the first quarter. Together with waning base effects, this should push inflation sharply down by the turn of the year.

The Federal Reserve remains calm and committed to keeping a watchful eye on undesirable inflation pressures. Its dual mandate, coupled with a new attention to social equity, including ethnic- and gender-based unemployment, gives the Fed room to manoeuvre before removing support. While growth and inflation forecasts were upgraded considerably in the latest Federal Open Markets Committee meeting, unemployment expectations were not. Markets appear to understand the message. Yet, they will use every new data and dot plot as a test.

Strong growth with no persistent inflation is likely to present many investment opportunities. This is particularly true in Europe. There is less of a risk of a policy driven consumption boom than in the US, given wage replacement was less than complete. Also, the Next Generation EU programme galvanises investment rather than consumption, with the prospect of raising potential growth and alleviating future inflation pressure. A scenario of accelerating growth with no tapering fears is the most supportive markets can hope for.

Looking further ahead, there is a concrete chance that euro area growth will normalise at a higher level than that of the last decade. The NGEU plan is focused on investment in key growth areas, such as the digitalisation and greening of the economy. Facilitating public investment in countries where it had been cut brutally after 2008, NGEU funds could increase productivity meaningfully if well spent.

The euro area has also finally tackled some of the institutional inconsistencies that have been preventing it from achieving its full growth potential. It now has a proactive and effective central bank, a safety net for governments undergoing liquidity problems, a system of fiscal transfers to smooth uneven growth shocks and a sizeable pool of safe and liquid assets denominated in its own currency. All this is not lost on long term investors. Net foreign direct investment inflows are hovering around all-time highs. Even though the direction of travel is clear, the ride may still prove bumpy.

Agns Belaisch is Chief European Strategist, and Matteo Cominetta is Director of Economic Research at Barings.

More:

Increase in inflation will not last - OMFIF

Does Your Organization Extract Enough Value from Valuable Data?

Half my advertising spend is wasted. The trouble is, I dont know which half.

Business pioneer John Wanamakers legendary quip, now more than a century old, is ready for a reboot. Today, at many organizations, the real puzzle is wasted data.

In sectors including finance, manufacturing, telecoms, and pharma and healthcare, many organizations struggle to manage their ever-increasing volume of data and convert it into insights that help them innovate, create value, and lead their competitionin essence, to turn their big data into big decisions.

Call it the data paradox: 67% of organizations in a recent Forrester study*, commissioned by Dell Technologies, said they need more data than their capabilities can provide, yet 70% are already bringing in data faster than they can process and analyze it. The pandemic has only intensified this dilemma as the growing on-demand economy generates more data for organizations whose skills, culture, and infrastructure cannot always keep up.

To tap its greater utility, organizations need to rescue their data from traditional silos and legacy infrastructure and share it widely, opening the way to greater predictive accuracy and more meaningful discoveries. Achieving all this requires implementing new end-to-end technology and services.

Data Novices and Data Champions

While six in 10 organizations agree that an as-a-service (aaS) model would help them become more agile, and scale, only two in 10 have migrated most of their applications and infrastructure to aaS systems. More than half of companies are data novices, drowning in their own data; only a few data champions are extracting the insights they need from multi-cloud and aaS models and from processing data at the edge.

For data novices, the risks of keeping legacy processes and technology in place are significant. Organizations that cannot generate data-based innovations and strategies risk losing market share to rivals that know their audiences and can improve the customer experience (CX) because they can see, distribute, and integrate their real-time data.

Data champions create data-driven cultures and boost their competitive edge by democratizing data: breaking down internal barriers and bottlenecks to motivate their workforces, inviting more employees to make critical data-based decisions. Cloud-based aaS data models can also help these organizations boost their data security while lowering the costs of data storage.

Here is how two organizations became data champions.

Speed, Accuracy, Reliability

Healthcare company Medacist helps hospitals and healthcare professionals apply artificial intelligence (AI), machine learning (ML), and analytics to data and uncover unusual patterns in drug distribution at every stage.

To support latency-sensitive analytical and AI workloads faster and more reliably, the company replaced its fragmented legacy infrastructure with a private cloud-based platform running software-as-a-service (SaaS). This migration helped Medacist cut data processing times and deliver noticeably faster and more accurate analysis.

Delivering analytics that once needed a 24-hour turnaround now takes five minutes. The infrastructures greater reliability meets clients strict requirements, upholding service level agreements 99.99% uptime guarantee, which saves Medacist millions of dollars in fees. This greater speed, accuracy, and reliability has proved critical to Medacists expansion of its customer base from 600 providers to more than 2,000.

Speed, Accuracy, Reliability

Great Little Box Company, a small packaging-materials manufacturer in Vancouver, determined its legacy forklift IT infrastructure was underperforming by clogging up data that kept the company from responding to customer demands, creating innovative designs, and efficiently producing and delivering its inventory.

To connect the data from its factory-floor machinery directly to its sales and service team, GLBC introduced aaS-powered enterprise resource planning (ERP) technology that enhanced its IT infrastructures performance: a key improvement in a competitive sector.

After GLBC selected an integrated modular solution, its IT partner installed and deployed the ERP infrastructure within 48 hours. The changes upgraded the companys data-center computing, storage, and networking resourcesand helped lead to performance increases of up to 100%.

Shifting to this system also led to other economic and sustainability gains, as GLBC eliminated the significant demands of powering and cooling its standalone servers. We rely on it day-to-day to streamline our business processes, from sales to the factory floor, said Sorel Apreutesei, GLBCs IT manager.

Making Your Data Work for You

John Wanamaker may have been comfortable wasting half his ad spend, but your organization cannot afford to waste half your data. Tapping data for the business insights that can improve the experiences of your employees and your customers will mean shifting from an infrastructure that bottles it up.

Adopting an agile aaS data-driven infrastructure can help your organization remove these barriers and turn data into insights, so your business can uncover once-hidden opportunities and become a market-leading data champion.

Learn more about the Dell solutions that can help your organization use your data to its fullest.

*A May 2021 commissioned study, Unveiling Data Challenges Afflicting Businesses Around The World, conducted by Forrester Consulting on behalf of Dell Technologies. Base: 4,036 Director+ decision-makers responsible for data and data strategies in NA, EMEA, APJ, GC, or LATAM

See the original post here:

Is Your Organization Extracting the Value in Your Valuable Data? - SPONSOR CONTENT FROM DELL TECHNOLOGIES AND INTEL - Harvard Business Review

Published 4 hours ago

Submitted by WSP

PENSACOLA, Fla.,June 30, 2021 /CSRwire/ -The Nature Conservancy (TNC) and partners announce the start of construction on the Pensacola East Bay Oyster Habitat Restoration Project to boost oyster populations in East and Blackwater Bays. The project is the largest scale estuarine habitat restoration undertaken by TNC in Florida33 oyster reefs will be placed along approximately 6.5 miles of Santa Rosa County shoreline, to return oysters to a region where they thrived historically but have since declined.

The restoration project is funded by a $15 million grant from the National Fish and Wildlife Foundations Gulf Environmental Benefit Fund (NFWF GEBF) through funding from the criminal settlement of the Deepwater Horizon oil spill. The reefs will help to restore oysters to the bays and in doing so benefit the oyster fishery, wildlife, water quality, and nearshore habitats. The project aligns with the new regional oyster fisheries and habitat management plan, created to improve the resilience and sustainability of the oysters in the bay ecosystem. Implementation of the oyster management plan will be led by the Pensacola and Perdido Bays Estuary Program.

Oysters play a vital and often overlooked role in the health of our estuaries, our fisheries and our economy. Reinvigorating and conserving the oyster population in Pensacola Bay helps restore a vital part of the regions rich history and puts to good use funds from the Deepwater Horizon Oil Spill that impacted the region so profoundly, said Temperince Morgan, executive director of The Nature Conservancy in Florida. Were grateful to NFWF, the State of Florida, Santa Rosa County, the community, and the many partners who have worked to make the effort to recover the oyster population here possible. Joint efforts such as this demonstrate the power of collaboration and can be replicated across the Gulf to great conservation and economic benefit.

The oyster habitat restoration project reflects the long-term and collaborative effort of a diverse team of partners, including the oyster fishing community and a technical working groupa committee formed by TNC to provide feedback and expertise on the project design and monitoring. Participants include Eglin Air Force Base, Florida Department of Agriculture and Consumer Services Aquaculture Division, Florida Department of Environmental Protection, Florida Fish and Wildlife Conservation Commission (FWC), National Fish and Wildlife Foundation, National Oceanic and Atmospheric Administration, Santa Rosa County, Northwest Florida Water Management District, and the US Fish and Wildlife Service.

NFWF appreciates the significant work done by The Nature Conservancy and its partners to advance the Pensacola Bay oyster restoration project to the construction phase, said Jeff Trandahl, executive director and CEO of NFWF. This project, like so many others in the State of Florida, is a testament to the outstanding partnerships among state and federal resource agencies, conservation organizations and Page 2 of 3 local governments. These strong partnerships are the key to advancing conservation and restoration projects at a scale that will have meaningful benefits for Floridas fish, wildlife and habitats impacted by the Deepwater Horizon oil spill.

"Oysters are unique in the marine world in that they are a species that forms a habitat that other species rely onand they are a fishery, said Anne Birch, marine program manager for The Nature Conservancy in Florida. Oysters and the reef habitat they form are vital for the health and well-being of our environment, economies, and communities throughout the Gulf of Mexico. As one of the indicators of the health of our estuaries, a decline in oysters is a signal to us to figure out why and intervene with actions to reverse the trend. Restoration of the habitat and addressing the root causes for their decline are critical steps toward their sustainable future.

We are fortunate to work with The Nature Conservancy on this project, said Chris Verlinde, UF/IFAS Sea Grant Extension Santa Rosa County. Like oyster populations throughout the world, our local oyster populations have declined. This project will increase oyster and marine habitat in our local system and provide benefits for the local community both environmentally and economically.

TNC lends science and conservation management expertise to the project, complemented by the efforts of coastal professionals including coastal engineering firm Jacobs, managing the design, permitting and construction; coastal construction firm CrowderGulf, installing the reefs; and professional services firm WSP, conducting science-based monitoring for the project.

The reef structures have been designed to maximize oyster settlement and success under specific local conditions, enabled by the collection and review of data reflecting over two years of pre-construction monitoring and an intensive design and engineering process. The reefs will be constructed of limestone rock of select sizes and oyster shell. They will be placed between 200-500 feet off the east shores of East and Blackwater Bays in about four feet of water and may be visible at low tides during certain times of the year.

Once completed, the reefs will offer a place for oysters to settle, grow and contribute to the ecosystem by filtering water and providing an important habitat for commercially and recreationally valuable finfish, crabs, shrimp, and birds. These reefs may also serve as a source of oyster larvae for the adjacent harvestable reefs restored by the state. Monitoring will continue for up to five years following the completion of construction.

This project will enhance the diversity of estuarine habitat adjacent to the FWC Escribano Point Wildlife Management Area, and enhance the living conditions for countless fish and wildlife species that use oyster reef systems, said Kent Smith, Biological Administrator for the FWCs Habitat Conservation and Restoration Section. Collaboration between these partners has led to a large scale enhancement effort that will benefit these species and provide opportunities for the people that use and visit this system as well. The resulting oyster reef network will provide natural resilience to the effects ofsea levelrise, create fishing opportunities, stabilize sediments and improve water quality through the filtration provided by oysters growing on the structures. The FWC is pleased to be a partner with The Nature Conservancy on this regionally significant aquatic habitat project.

Oyster reefs are considered one of the planets most imperiled marine habitats. Over the last two centuries more than 85 percent of the worlds oyster reefs have been lost, and this statistic is echoed in most of Floridas bays and estuaries. Oyster reefs face a variety of threats including overharvesting, disease, pollution, and damage from boat traffic. TNC is working to restore these critical ecosystems in Florida and around the globe.

# # #

The Nature Conservancy is a global conservation organization dedicated to conserving the lands and waters on which all life depends. Guided by science, we create innovative, on-the-ground solutions to our world's toughest challenges so that nature and people can thrive together. We are tackling climate change, conserving lands, waters and oceans at an unprecedented scale, providing food and water sustainably and helping make cities more sustainable. Working in 72 countries and territories: 38 by direct conservation impact and 34 through partners, we use a collaborative approach that engages local communities, governments,the private sector, and other partners. To learn more, visit http://www.nature.org or follow @nature_press on Twitter. In Florida since 1961, with support from our members, we have helped protect more than 1.2 million acres of vulnerable lands and waters across the state. We own and manage more than 52,000 acres in 25 Conservancy preserves in Florida. nature.org/florida, facebook.com/NatureConservancyFL, twitter.com/nature_florida, instagram.com/natureflorida/

WSP is a global business providing management and consultancy services to the built and natural environments. The firms expertise includes environmental remediation and urban planning, engineering of iconic buildings, design of sustainable transportation networks, development of the energy sources of the future, and implementation of new ways of extracting essential resources. It is one of the worlds leading professional service firms, with 15,000 employees based in more than 300 offices in 35 countries. From offices across the USA, our environmental professionals are part of an international team of specialists that draws on best practices and brings solutions to our clients most difficult business and technical challenges.

More from WSP

Read the original:

The Nature Conservancy and Partners Begin Oyster Reef Constr - CSRwire.com

Outfitters call on feds to reopen Canada-U.S. border to fully vaccinated Americans

Tourism was hit first, hit hardest.

That from David MacLachlan, executive director of Sault Ste. Marie-based Destination Northern Ontario, speaking to a group of concerned Northern Ontario tourism industry operators in a virtual presentation held Tuesday.

The industry has been under extreme duress since the start of the pandemic. Weve been operating under some form of lockdown or restriction for almost 16 months, MacLachlan said.

Though MacLachlan said he is encouraged by the COVID-19 vaccine rollout and a decreasing number of COVID-19 cases, he and his fellow tourism officials are calling on the federal government to reopen the Canada-U.S. border to fully vaccinated Americans and other international travellers July 22.

Much of the Northern Ontario tourism industry is dependent on American anglers and hunters heading north of the border to enjoy what the region offers them.

Campgrounds, parks, hotels, motels and cabin rentals, along with sports events and festivals, have taken a devastating blow due to the pandemic-induced border closure.

Typically, one million Americans visit Northern Ontario annually and spend half a billion dollars, generating $150 million in taxes for the three levels of government, MacLachlan estimated.

While the federal government has encouraged northerners to visit their own backyard in terms of tourism as a result of closed borders, MacLachlan said theres just not enough anglers in Ontario to replace anglers coming from the U.S.

We have a short season. We have three months left to this season at this point. While (government assistance) programs have been helpful, we know from the research we did last winter that theres been a 91 per cent revenue drop in the resource-based tourism sector, and that goes as high as 97 per cent in the northwest.

A lot of operators have exasperated and used all their personal resources, their business resources and on average have taken on more than $100,000 worth of new debt, MacLachlan said.

This sector is close to my heart. My familys been in the business for 65 years...I think everyone feels that nows the time to get started, MacLachlan said, speaking to SooToday.

Noting that the U.S. economy is beginning to reopen and that infection rates are lowering in Ontario, MacLachlan said what were asking for is not automatic extensions of these border closures, but lets put some effort behind opening it as opposed to just putting the decision off and off and off. Thats not helping anyone.

Susan Crane, owner and operator at Cranes Lochaven Wilderness Lodge in French River, said he U.S. customers have indicated their wish to visit her lodge and are willing to be tested for COVID at the border.

I have 75 per cent international travel (most of them from U.S. tourists)...Ive gone from 95 per cent occupancy to 15 per cent, she said.

Crane said many of her U.S. customers are holding their reservations for this summer, hoping the border will open in July.

We dont know if the border is going to open for August. Were hoping it does. If it doesnt, our numbers will be significantly less (for the second consecutive season) with major revenue loss, Crane said.

Carol Anniuk, who owns and operates Young's Wilderness Camp in the Lake of the Woods area in northwestern Ontario, critized thepractice of extending the border closure month by month.

While Anniuk said she understands health concerns over COVID-19, she said she is exhausted with the wait for the border to reopen despite having observed COVID restrictions.

The lack of a long-term plan from the government makes me feel like Im dying a slow death, Anniuk said.

Whileshe said she's not calling for the border to be wide open to non-vaccinated Americans, she feels vaccinated Americans and other international tourists should be allowed in to enjoy Northern Ontario tourism.

I know the governments answer to this will be the possibility of the Delta variant, but I also know the vaccines were using seem to be beneficial in fighting this also. There are always going to be variants. We must learn how to live with COVID. We cant live in a bubble forever, Anniuk said.

Federal government aid, much of it in the form of low-interest loans, have been made available to tourist industry operators throughout the pandemic.

However, Laurie Marcil,who heads up Nature & Outdoor Tourism Ontario (NOTO) in North Bay, said right now, what were asking for is that more of those loans be made forgivable. Originally, there was a portion of those loans that were made forgivable.

Now that were facing a second season of massive losses, were looking for more of those loans to be made forgivable and were also looking for longer timelines on when to pay those loans back if theyre not going to make more of them forgivable, Marcil said.

Optimistically, MacLachlanbelieves the industry will rebound quickly, but the border first needs to open in order for that to happen.

We really need the government to hear these stories. This industry cannot sustain any further closures. We have two to three months left for most of these businesses to generate revenue in this season. Many of them have not had any revenue since 2019, Marcil said.

Marcil pointed to projections that 70 per cent of Ontario residents will be fully vaccinated by July 19, while75 per cent of all Canadians will be fully vaccinatedby Aug. 1 as an impetus to reopen the border.

The time is now, Marcil said.

Marcil said correspondence expressing concern from northern Ontario tourism industry operators, along with recommendations, has been sent to the federal government.

SooToday

Read the original:

The time is now to reopen the border, Northern Ontario tourism businesses say - Northern Ontario Business

Understanding the layers and drivers of polarisation is now critical for achieving success in the Indian market.

It is evident to most observers that the Indian stock market has sharply polarised over the past decade insofar as a handful of companies now drive the Indian market. Where investors differ, however, is in their understanding and in their rationalisation for this polarisation. In particular, a popular school of thought contends that this polarisation is somehow driven by the loose monetary policies that have been followed by the Western central banks since the Global Financial Crisis of 2008. An analysis of the fundamentals of the Indian stock market shows that it isnt so.

As we explain below, polarisation in the Indian market is being driven by two sets of structural forces one Indian and one global which have nothing to do with quantitative easing and which will continue to play out over the forthcoming decade.

In our March 5 column, Indias Top 20 Leviathans Awe-Inspiring Dominance we demonstrated that, The top 20 profit generators in India (the Leviathans) now account for 90% of the countrys corporate profits. Beyond dominating the countrys profit pool, the Leviathans also reinvest these profits far more efficiently back into their businesses.

However, the polarisation dynamic in the Indian market extends beyond mere profitability. In the decade ending Dec. 31, 2010, the Nifty added around Rs. 35 lakh crore in market cap. In these ten years, 80% of the value generated came from 26 companies, and the median Total Shareholder Return CAGR was 34% for these 26 companies. Moving forward by a decade, in the decade ending Dec. 31, 2020, the Nifty added Rs. 71 lakh crore in market cap. 80% of the value generated in these ten years came from just 16 companies whose median TSR CAGR was 21%.

Wealth creation by Nifty companies is being driven by fewer and fewer companies that account for 80% of the wealth creation in the stock market. A decade ago, the 26 companies which accounted for 80% of the decadal wealth creation in the Nifty (in the decade ending Dec. 2010) accounted for just 26% of India Incs PAT. Now, if we look at the 16 companies which have driven 80% of the decadal wealth creation in the Nifty in the decade ending Dec. 31, 2020, they account for 79% of India Incs PAT.

In fact, polarisation in the Indian stock market, therefore, has three separate dimensions:

A handful of companies precisely ten are now taking home almost the entire PAT generated by the Indian stock market. This profit concentration in the hands of the top 10 companies has quintupled in the past decade and it has nothing to do with quantitative easing by central banks. Fewer and fewer companies precisely twenty now account for around 55% of the Free Cashflow to Equity generated by the Indian stock market. A decade ago, the top 20 Free Cashflow generators accounted for around 41% of Indias FCFE. Once again this has nothing to do with QE.

In comparison, 26 companies accounted for the same proportion of the wealth created by the Nifty in the decade ending December 2010.

So why is this happening? Two different dynamics one Indian and one global are at play here. We begin by highlighting the Indian dynamic at play which is the networking of the Indian economy over the past decade.

A networked economy helps more efficient companies

In our March 1, 2019, blog Exit the Kirana Store, Enter the Supermarket we had highlighted how over the past ten years, the length of roads in India has increased from 3.3 million kilometres to 5.9 million kilometres (CAGR of 6%). The number of mobile phone subscribers has increased over the same period from 392 million to 1.161 billion (CAGR of 12%). The number of broadband users has increased from 6 million to 563 million (CAGR of 57%). A decade ago, around 44 million Indians were taking flights each year. Now 3x as many Indians are flying each year (CAGR of 13%). 15 years ago, only one in three Indian families had a bank account; now nearly all Indian families have a bank account.

For example, as the economy gets integrated, lending, which was once dominated by regional players is now seeing the emergence of a few national leviathans like HDFC Bank and HDFC with both lenders entering the list of top 20 PAT generators over the last 10 years.

The global dynamic is the rise of affordable, easy-to-use enterprise technology which if implemented increases profit margins, reduces working capital cycles, and increases asset turnover.

Sunk costs drive industry concentration

In 1991, John Sutton of the London School of Economics wrote a prescient book titled Sunk Costs and Market Structure which foresaw how the application of modern marketing techniques, R&D, and technology was leading to the polarisation of profits.

Sutton said that companies which invest in brand building, in R&D basically, invest in intangible assets (something that cannot be physically touched or felt) which are critical sources of competitive advantage go on to dominate that industry provided, of course, intangible assets are a source of competitive advantage in that industry i.e., this theory is not applicable to sectors like cement and steel where intangibles confer little by way of competitive advantage.

The technical name of such investments in intangibles is Endogenous Sunk Costs or ESC and Sutton said that in absence of ESC, an industry would see tough price-based competition [which is exactly what we see in sectors like steel, cement, construction, and wherever else intangibles dont matter].

Companies that invest in technology benefit from increasing returns to scale

Suttons book was followed by a remarkable paper published in 1996 in the Harvard Business Review by Brian Arthur. Titled Increasing returns and the new world of business, Arthur highlighted that the conventional idea of diminishing returns to scale is being replaced by businesses that are generating increasing returns to scale. Increasing returns basically mean the tendency of returns (on the goods produced or the services provided) to keep increasing as output increases whereas diminishing returns imply the opposite.

In Arthurs words: As the economy shifts steadily away from the brute force of things into the powers of mind, from resource-based bulk processing into knowledge-based design and reproduction, so it is shifting from a base of diminishing returns to one of increasing returns. A new economicsone very different from that in the textbooksnow applies, and nowhere is this more true than in high technology. Success will strongly favor those who understand this new way of thinking.

Furthermore, network effects (for example, the compatibility of software with hardware and its development) kick in along with customers, who after some initial training, need only adapt a little as the products update, further strengthening the positive feedback loop.

Growth in profitability is increasingly not related to traditional capex

Jonathan Haskel & Stian Westlake then developed this line of thinking further in their 2017 book Capitalism Without Capital.

The central theme of the book is that corporate investments, in the past 40 years especially, have become increasingly intangible rather than tangible. Aggregating data for the developed world, the authors show that around the turn of the century, the developed economies started investing more in intangibles (which traditional accounting techniques do not capture as capex) and less in tangibles (like factories & machines). The pre-eminence of intangible investing according to the authors have brought to the fore four effects that intangible assets showcase:

These four effects are crucial for a company to become a consistent compounder because once a company scales using intangibles assets (such as a proprietary database), it can then extract spillovers from other companies investments in intangibles (such as a third party software platform like SAP), and then create synergies between intangible investments (the proprietary database feeds the SAP with big data) which can potentially help the company corner the entire industry (first in its home market and then in the global market).

The rise of giant companies, which are not only utterly dominant in the context of their specific industries but are also increasingly dominant in the context of the broader economy, poses a challenge to conventional valuation techniques (both relative and absolute). Whereas conventional valuation techniques assume that great companies fade to mediocrity over the course of 10-20 years, the evidence on hand in India suggests the converse (thus rendering ineffective conventional valuation techniques). This in turn is compelling investors to look for other more effective ways to assess the fair value of the Leviathans.

As time progresses, the consistent compounders are likely to continue increasing their share of the total profit pie of India Inc.

Investing in the dozen or so companies that will drive 80% of the wealth creation in the Indian market in the coming decade, therefore, involves an in-depth understanding of the companies ability to make intelligent use of technology to build a dominant position in its sector. Investing in this manner is far harder than traditional P/E-based investing. For the same reason, investing in this manner is far more rewarding.

Saurabh Mukherjea and Nandita Rajhansa are part of the Investments team at Marcellus Investments Managers. Marcellus forthcoming book Diamonds in the Dust: Consistent Compounding for Extraordinary Wealth Creation will be published by Penguin in July.

Note: HDFC Bank is part of many of Marcellus portfolios.

The views expressed here are those of the authors, and do not necessarily represent the views of BloombergQuint or its editorial team.

Go here to see the original:

Three Distinct Layers Of Polarisation In The Indian Stock Market - BloombergQuint