John F. Kennedy once said: "The rising tide lifts all the boats". In stock market terms this translates into picking the best stocks in expanding sectors.
The lessons to be learnt from contracting sectors:
By examining the causes of contraction we may unearth companies that are profiting by disrupting sectors. Clues as to which companies were provided by Business Council of Australia (BCA) president Catherine Livingstone. She was quoted in the Australian Financial Review (AFR) warning that :
a) Time was running out to respond to the major changes heading towards Australia and that "we need to act with a sense of urgency. If we don't, we are going to find ourselves slipping further behind".
b) "The forces that are shaping our world – digital technology, significant demographic change and globalisation – are not benign".
How to profit by investing according to these worldwide trends?
1. Telstra Corporation Ltd (ASX: TLS) is an example of a company benefiting from both digital technology and globalisation. Back in May, when Telstra CEO David Thodey announced an ambitious target to have 33% of net profit and revenues derived from Asia by 2020, his comments were met by widespread scepticism from the broking community. However, recent clarification by Telstra and approaches by foreign companies have overcome fears of an acquisition limiting Telstra's ability to pay a fully franked dividend.
The clarification related to Telstra's aim to partner with foreign companies and even help companies to build networks in exchange for an interest in the network or company. One example has been Nippon Telegraph And Telephone Corp (TYO: 9432), Japan's largest telecommunication company, that is lobbying Telstra to be its biggest partner in becoming a dominant player in Asia.
2. Crown Resorts Ltd (ASX: CWN), the combined resort and casino operator has had a meteoric rise over the last two years. This is a testament to being in an expanding sector and the upside derived by extracting synergies from global expansion. It is also benefiting from demographic factors that have vast numbers of Chinese tourists travelling and gambling at its existing casino locations including Macau, Perth and Melbourne.
The proposed locations of the Crown Sydney hotel resort, the "City of Dreams" casino in Manila and Crown Sri Lanka should provide additional upside. Japan also may provide some significant impetus as changes to gambling laws may allow the likes of Crown Resorts to obtain permission to develop casinos in Japan.
Now what: In my opinion, the way to achieve superior portfolio returns is by taking advantage of sectors that are expanding because they are aligned with forces transforming our world. Both Telstra and Crown Resorts are stocks in the right sectors at the right time.
