Shares for the future

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Alec Hogg suggests the "new normal" may excessively reward disruptors.

If this article fascinated you, you might want to read what Kerrin Howard had to say at the Discovery Invest seminar tomorrow, for a sneak preview check out her slides below.

JOHANNESBURG - The world economy is changing. This will be permanent.Moneyweb (JSE:MNY) CEO Alec Hogg presented his views on what's driving the change, what the changes will be and companies that are set to profit from the change at the Discovery Invest Seminar .

In the apartheid era it wasn't uncommon for South African companies to have profit margins around the 50% level. This was seen as a "risk premium" for investing in a third world country at the bottom of Africa. The wave of globalisation has been forcing margins to "normalise"/be slashed throughout the world. South African companies have not been spared. This is the first driver of change.

The balance of power has shifted from the corporation to the employee. Employees have more power to make their own rules than ever before. A further complicating factor is that current graduates are ill-equipped to deal with the working world. Essentially there is a gap between what is taught/learnt at school/university and what a job actually requires. This is the second driver of change.

Technology has changed the way people operate, allowing unprecedented collaboration between people anywhere in the world. This can make small companies more successful than big, bureaucratic ones. This is the third driver of change.

China is often called a "game-changer" but the reality is that the numbers do tell a story. China has historically accounted for 25% of the global economy, versus Britain around 3%. This means that China's economy should be 4X as big as America's.

The Chinese plan to rectify this by changing from a business-model of "put your competitors out of business and push up profit margins" to "low margin and high volume". China is establishing the new normal for business models but commoditising everything. This is the fourth driver of change.

The first consequence of these drivers is that people are becoming increasingly time poor. Leisure time is highly valued and we are increasingly prepared to pay to have it.

The second consequence is that the future will be owned by companies that adopt business strategies that benefit and anticipate the "new normal". These are disruptors. They use innovation to change the playing field in their industries and disrupt the dominant players.

An example of a disruption is Naspers (JSE:NPN) versus Avusa (JSE:AVU). A few years ago the companies were the same size, now Naspers is almost 100X bigger.

The final consequence of this is how it influences ones investment strategy. Brian Joffe, CEO of Bidvest (JSE:BVT), recognises this. He says "Bidvest businesses in all geographies are adjusting to a ‘new normal' - a fundamentally different set of parameters that will continue to influence corporate strategy and management behaviour."

The confluence of these drivers and the consequences of their interactions on the new playing field mean investors have a tough job. Investors need to invest for the long term in companies where management demonstrates that it knows what its doing.

Based on these observations Hogg gives this guidance of five shares for the future:

Steinhoff (JSE:SHF) - A vertically integrated business. This means that Steinhoff not only grows the trees but makes all the furniture too. One couldn't put together another Steinhoff as the Competition Commission would stop you. The group owns powerful assets as well as having global operation which dominate some sectors.
Pallinghurst (JSE:PGL) - The Gilbertson factor, he put BHP Billiton (JSE:BIL) together. Gilbertson has his family money in Pallinghurst and it looks like he's building another winner, follow the money.
Discovery (JSE:DSY) - Massive disruptor in the medical aid scene. The company is dominant now as it has the best products. Discovery Invest is doing the same in the investment industry. The Prudential business in the UK is extraordinary.
Altech (JSE:ALT) - Craig Venter is an interesting guy who has taken a huge bet on East Africa while the rest are fighting over what to do with Telkom. Altech has control of Seacom in East Africa and expects major profit growth.
PSG (JSE:PSG) - Capitec Bank, PSG Online, Jannie Mouton has disrupted everything.

Based on the experiences of Discovery in the medical aid field as well as the way the drivers look set to play out, the "new normal" may excessively reward these disruptors.

For more on the presentations check out the slides

Moneyweb Investment Focus, with Discovery Invest (November 2009)

View more presentations from moneyweb.

Write to Chris Blaine: chris@moneyweb.co.za