According to Investopedia, “A secular trend or market is one that is likely to continue moving in the same general direction for the foreseeable future. Secular trends are contrasted with cyclical trends, which are affected by the boom and bust swings of the market.” Let’s look at a more detailed view.
Typically, a rising tide lifts all boats—this is when the economy is doing fine and all investments perform. But some perform better than others and differences between the best ones and worst ones can be important. Obviously, stock market performance is driven by multiple factors, but it ultimately boils down to the supply and demand equation or how a specific company can address or respond to a specific demand.
We could write-up numerous examples of companies that shaped the entire industry and consumer behavior in the way they delivered their goods or services. We note, however, that behind every single successful company there was an initial event present in society, and the company simply and successfully conquered it. Growth can occur in two specific ways: a) cyclical and b) secular.
Examples of cyclical events include if you have a car you will be required to change the tires after x-thousand miles because the rubber is off. A second example of typical cyclical growth can include air travel when consumers tend to use their disposable income for recreational activities which benefit from above-average spending during an economic expansion. Given these key examples, cyclical growth relates to a passive action from a given economic situation.
Secular growth occurs when there is a structural change in a company, sector, industry, or society. By definition, secular growth depends on changes in consumer comportment rather than changes directed by central bank policies that drizzled down to the consumer. Archetypes of secular growth cases are e-commerce and developments around alternative energy resources. In both cases, consumers were the initiators; in the case of e-commerce, the differentiation factor is accessing goods and services from anywhere at any time while in the case of alternative energy production and consumption, consumers were seeking a response to more eco-friendly consumption.
According to research undertaken by Morgan Stanley, only a fraction of companies benefiting from a secular growth trend can persist with the same once a full economic cycle has been completed. This occurs on the back of fast-changing consumer behaviors which often depend on overall economic outlook and assumptions.
Types of Secular Growth
Secular growth can take multiple forms and trends depending on the underlying industry sector. Yet overall, there are three groups of secular growth trends: a) technology-driven, b) market-driven, and c) product-driven. Let’s look at them individually.
Technology-driven secular growth trends
Technology is powerful; it helps to make a process lean, efficient, and robust. Most often, these innovations help drive multiple industrial processes and have the capacity to impact entire industry segments. The introduction of the World Wide Web (www) in the late 1980s is one of them. It was created by engineers at the European Organization for Nuclear Research (CERN) established in the suburbs of Geneva, Switzerland. The very initial use was to transfer large chunks of research papers from one place to another. Some 40 years later, almost all of humanity has access to the internet, and companies such as Amazon, Google, and Netflix, amongst others, have leveraged their business upon it.
In the same vein, cloud computing has probably a similar future ahead. This simple idea is most likely the base for the emergence of many new companies. The benefits are evident: faster with greater accessibility and more focus on deployment. Accessing content via the cloud has larger ramifications. Companies can adopt their revenue models from one-off services to recurring models such as subscription business models. This in turn increases customer retention ratios and makes revenues for investors much more predictable.
Market-driven secular growth trends
This is the kind of hamster-rad case, and it is about addiction, ease of use, and convenience! When a company delivers an existing service in a new manner, and when it is done well, consumers can’t stop using it.
Traditional shopping has evolved a lot since the end of WWII. On the back of government-based initiatives (to offer citizens an abundance of products as the shortages experienced during WWII still existed), small corner shops converted to large shopping malls and more recently to online supermalls. Amazon, Alibaba, and Zalando are probably prime examples of these digital marketplaces. People feel comfortable buying standardized products based on photos, detailed descriptions, and customer-sourced satisfaction inputs. Moreover, digital marketplaces offer 24-hour accessibility, easy search, comparative analyses, and often free returns.
Product-driven secular growth trends
Product-driven growth trends are often the result of some changes that occurred upstream. A company can merely impose a new way of doing things, but it can also anticipate and translate a given cultural change. Steve Jobs’s idea for creating the iPhone was to pack up a phone, pc, camera, watch, and more into one device. He responded to the quest of consumers not to travel with heavy and bulky equipment. Elon Musk with his Tesla cars responds to another consumer demand. He captured one of the first developing trends of environmentally conscious consumers who desired to reduce their carbon footprints. The very initial electric cars were by no means efficient and convenient, but there was a demand for them. The progress made between then and now is a great product success story. We believe that other product-driven growth trends will initiate and grow when it comes to making electric cars fully eco-friendly. This applies especially when it comes to the recycling of batteries and power generation.
Investing into secular growth trends
Oftentimes, innovative startups and companies have an offering that captures the forces of multiple levels. The arrival of powerful and cheap communication channels opened up unprecedented services. In the absence of any meaningful competition, some companies such as Google, Microsoft, and Apple, amongst others, interacted in all three levels of possible secular growth trends.
As an active asset manager, we are constantly searching for opportunities that offer multiple-layer exposure. By definition, these companies are expected to have a broader view of understanding of the ongoing changes taking place and are expected to generate sustained revenue growth irrespective of a potential misfortune in one area.
Investing in secular growth companies does not necessarily come with a higher level of risk. Higher growth opportunities only become an issue when fundamental factors change (changes in consumer sentiment, government orders and compliance, economic cycles, and geopolitical instability, amongst others). It is for this reason that we recommend investors seeking higher growth opportunities stay well diversified so that eventual market mispricing and market adaptions do not meaningfully impact the performance.
In the coming section, we will provide insight into several secular growth trends that we closely follow:
– EV and Alternative Energy Sources
– E-commerce
– Cloud-computing (including semiconductors and cybersecurity)