seeing green shoots of growth…

…is relatively hard to do.

During recovery from recession or during times of structural change, it’s abundantly–and painfully–clear who the losers are.  The companies and industries involved are typically large, well-known, widely researched on Wall Street, and held in most portfolios.  Through public/investor relations efforts and industry trade/lobbying groups, they also have extensive media contacts.  They are, after all, news.  Same thing with their suppliers and customers.

So when the establishment companies/industries begin to encounter hard times, they grab headlines.  Everyone sees what’s happening.

New companies, who have innovative products and services that are displacing the older generation, are much harder to find.  They’re the other side of the economic coin from the establishment.  They’re typically small, hire and fire in miniscule numbers and have minimum visibility in the media world.  To the extent that the growing companies are genuinely novel, they may not be picked up by the radar of standard economic and media metrics.  Of course, the last thing the older generation of companies wants to do is to draw attention to them.

Mainland China is a case in point.

Since the late 1970s, China has been following the standard emerging economy economic game plan–that is, get foreign firms to establish manufacturing operations there by offering cheap labor and reliable infrastructure, and thereby develop an increasingly sophisticated work environment.  This export-oriented manufacturing model of growth depends crucially on the host country being able to supply fresh supplies of cheap labor, usually by farm workers heading toward bright city lights.

About five years ago, China began to run out of spare farmers.  Whoops!

As a result, it has had to do two things:

–shift to higher value-added, less labor-intensive manufacturing, and, more importantly,

–develop domestic demand as the driver of growth.


The losers from this shift are obvious.  They include all the labor-intensive businesses:  most state-owned enterprises, regional construction, basic refining, smelting, metal-bending and chemical processing.  Co-losers are the global natural resources firms that have supplied the inputs for China.

As it turns out, in the consumer area foreign firms also seem to be losing out to domestic rivals, owned and staffed by people the transplants hired and trained a decade or more ago.

Many of these new winners are small and opaque.


The same is true in the US–or, really, anyplace else.  We can see the struggles of behemoths, but the firms causing their woes are harder to detect.

My point?

Economic progress often looks and feels a lot worse than it actually is, especially when it’s slow, because change is uncomfortable and because the victims of creative destruction are so much more visible.

For us as investors, it means the markets may not be in as bad shape as the media suggest.   This environment also requires us to be very diligent in finding new winners.  I think this means looking for newer and smaller.





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