Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Colin McLean, from SVM Asset Management discusses the future drivers of market growth.
The way people live, work and travel is changing and it is clear that some industries face significant disruption, challenged by new business models.
Investors should now think in terms of whether traditional industries will survive in their present form. Simply buying a basket of large global companies might not capture the best growth areas, and some of today's blue chips may turn out to be dinosaurs that fail to adapt and survive.
Investors typically take comfort from size - but big companies with high dividend yields may not merit their "quality" label. Their journey into irrelevancy is likely to involve disappointments, dividend cuts and repeated expensive tinkering with the business model.
Woolworths, Comet and Phones 4u are recent examples of companies left behind by consumer evolution. They act as a reminder that consumer habits change but the current industry incumbents may carry too much baggage to adapt.
This isn’t just a challenge limited to the retail sector - car manufacturers could see diminished demand in the longer term with new services such as Zipcar and Uber emerging to meet changing lifestyle demands.
It is a challenge to revamp an established business with legacy assets and culture into a new business model, and particularly to change in an environment of no growth or inflation. Even the airline industry had the benefit of a background of passenger growth as it adapted and took out costs. If car manufacturing in the West is to face long-term demand shrinkage, it will be tough to keep ahead of that with cost cuts.
China's recently-floated internet retailer, Alibaba (BABA), this month sold more than £5 billion of goods in one day. But the most interesting statistic is that 43% of those sales were made from mobile devices. How quickly can established businesses adapt to this new pattern?
It could pose a major challenge for the traditional banking model. Many now want to consume financial services entirely online and typically also by mobile device. This requires simplicity, functionality and integrity. Banks will be challenged by new lending models, as some online services can now match up lenders and borrowers directly. Already, the sharp fall in demand for bank loans could ultimately make much of the traditional infrastructure redundant.
Disruption is a new challenge for investors. In some sectors, it will mean that the biggest, oldest-established businesses are the riskiest. Investors looking for income may be particularly at risk, as traditional businesses cut dividends to allow investment in new growth areas. But picking winners is difficult - and investors may need to think more about how industry structures are evolving.
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