[In-Depth Review] Gigantic Acceleration

Nam Dong-jun, CEO of Tekton Investment Advisory

Recently, as the rapid fluctuations centered on U.S. technology stocks have continued, many questions have arisen regarding market outlooks. Instead of interpreting the recent volatility in overseas stock markets, what if we viewed the stock price trends since the early 2000s financial crisis from the perspective of an inflection point in industrial structure? What kind of underlying picture does the long-term trend, which can be said to have begun with the full-scale advent of artificial intelligence (AI) in 2015, or even earlier from 2009 after the financial crisis, paint?

In the stock market, new alternatives have always been the answer. Until 2010, the world grew through the horizontal expansion known as 'globalization.' This global growth was largely driven by new market demand from China. However, since 2010, global growth has been achieved through the vertical expansion called 'digitalization,' based on AI algorithms and data. New alternatives capable of completely transforming industries and companies have accumulated, and structural changes have accelerated.

This change entered another acceleration phase with the 2020 outbreak of the novel coronavirus disease (COVID-19). Although known by various names such as untact (contactless), remote, and smart, the outputs of the technological revolution have come closer to us in a clearer form. The global consulting firm McKinsey described this phenomenon as 'The Great Acceleration' in a report. According to the report, industries and related companies in online delivery, education, telemedicine, video conferencing, and others?which we expected to become widespread only in about five years?are growing at speeds 3 to 10 times faster.

Since the turbulent period following the financial crisis in 2009, the U.S. S&P 500 index has continued to rise more than threefold over nearly a decade. During the same period, the Nasdaq 100 index, centered on technology stocks, has recorded a rise more than twice that of the S&P 500. The biggest contributors were the so-called 'FAANG' companies?Facebook, Amazon, Apple, Netflix, and Google. Especially since 2015, the market capitalization gap between these companies and others has widened further. Over the past five years, while the total market capitalization of the U.S. market increased by about 40%, the market caps of FAANG and Microsoft (MS) have grown more than threefold.

Although somewhat delayed, the Korean market is also beginning to resemble the recent five-year trend in the U.S. As of the 11th, among the top 10 KOSPI market capitalization stocks, three have changed compared to the end of last year. Hyundai Mobis, POSCO, and Samsung C&T have stepped down, while Kakao, Samsung SDI, and LG Household & Health Care have newly entered. The combined market capitalization of the seven stocks known as 'BBIG' (Bio, Battery, Internet, Game)?LG Chem, Samsung SDI, Naver, Kakao, Samsung Biologics, NCSoft, and Celltrion?has more than doubled since the beginning of the year. Meanwhile, the composite stock price index has risen by only about 9% during the same period.

There is a common driving force behind global stock markets: industries whose growth rates have sharply accelerated since 2015. These are data technology-related industries leading the Fourth Industrial Revolution, showing growth rates that significantly outpace overall industrial production growth. While stock price volatility may increase, the underlying direction of these industries is unlikely to be disrupted.

If one constructs a portfolio centered on countries where the growth blueprint is being drawn (China, the U.S., Korea, Japan) and monopolistic companies (digitalization + AI), this could represent a very significant long-term opportunity. It is essential to follow the approximately 30-year trend and the technological advances occurring every five years. For investments now, focusing on first, companies connected to the value chain of core global industries; second, companies directly or indirectly linked to digitalization industries such as AI, cloud, electric vehicles, and platforms; and third, companies with sufficient financial capacity or cash flow is more important than ever.

Nam Dong-jun, CEO of Tekton Investment Advisory