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Issue 1070, 24 September 2021. Subscribers: read the digital edition here

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From Merryn Somerset Webb, MoneyWeek’s editor-in-chief

In this week’s podcast (moneyweek.com/podcasts) I talk to Rob Arnott, the chair of Research Affiliates. We talked a good bit about the UK market: he is as convinced as we are that now with Brexit off the front pages (the gas shortage has nothing to do with Brexit) and the UK’s Covid-19 strategy proving to have been more successful than one might have suspected last year, there is no good reason for our market to be trading at a 60% discount to the US market. We talked about the US market too – I wondered if it is possible that the valuation differential between the US and the UK might be closed not by the UK rising, but by the US falling. 

In part, yes, says Arnott – there are parts of the US market that are definitely not in a bubble of any description (think energy) but there are other parts that are (technology). It makes sense for investors to steer away from the super expensive to the reasonably valued. 

The case for optimism

I’m minded to agree with him, of course (MoneyWeek tends to be biased towards value investing). But there is also a very compelling alternative view. Kirsty Gibson, co-manager of the Baillie Gifford US Growth Trust, suggests looking at some of the more “optically expensive” US companies – not with an eye to short term price/earnings ratios, but with one to the idea of the stage we are at in our current technological growth cycle (see carlotaperez.org for more on the theory regarding this). Much of the time nothing much happens; but every now and then (five times in the last 550 years) we get a sudden speeding up in innovation – a technological revolution. Think the Industrial Revolution, the age of steam, the widespread adoption of electricity, and the age of oil and mass manufacturing. 

In all cases there are two stages. First, the “installation” stage, in which the new technology enhances a few sectors and makes a few great fortunes. These stages – which typically last 20 years – tend to be characterised by rises in inequality and social unrest. Next comes the good bit – the “deployment phase” – the bit when the new technology enters all parts of the economy and benefits everyone. We are, reckons Gibson, around the beginning of this bit of our stunning information technology revolution right now (a little earlier than we might have been without Covid-19). 

One example? Education. She points to the rise of Coursera, one of the originators of massive open online courses (MOOCs) and a company now using the internet to open access to high-status education to anyone with the ability to take it on. Health is another example: diagnosis is well on its way – via artificial intelligence (AI) and genomics – to being less educated guesswork, and more accurate, personalised and efficient. Think about the change underway, the change to come and the almost limitless opportunities there are for companies set up to grasp them; and, while one-year valuations are not meaningless, they can’t offer the information that is really important – about the potential tied up in revolutionary companies. 

I love this gloriously optimistic way of looking at it – there’s a reason I have and will keep holdings in a variety of Baillie Gifford funds. But there’s room for both views in a portfolio – and sometimes price really does matter. I am topping up my conventional energy holdings too.