Equity markets have a pivotal role to play in driving global economic progress. In essence, the core purpose of an equity market is to match capital to the best long-term ideas, thereby allowing investors to participate in the financial success and growth of individual companies and indeed the economy as a whole.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
History suggests that financial markets have ultimately been successful in this role, fostering innovation and helping to drive productive long-term economic growth. With this growth has come many other benefits, such as the creation of new jobs, opportunities for social mobility and long-term wealth generation.
Schumpeter’s gale
Positive progress does not always feel entirely comfortable, however. It involves what the 20th century Austrian-American economist, Joseph Schumpeter, called “creative destruction”, the process by which innovation and technological advancements lead to the replacement of old industries over time. This is an important part of capitalism and the efficient allocation of capital but, by its very nature, the process always involves winners and losers. Consequently, it takes a shrewd investor to focus on the former, while avoiding the latter.
With “Schumpeter’s gale” blowing continuously through financial markets, it can sometimes feel as though the economy must take a step back in order to make multiple steps forward. This is reflected in the cyclical nature of the economy and, indeed, in the volatility that we see in stock markets in the short term. Because of it, investors should always take a long-term view. The force of Schumpeter’s gale is ultimately felt in the innovative and prosperous long-term progress that economies, and financial markets, can make. In essence, it is this process of creative destruction that creates the long-term opportunities that growth investment funds look to capture.
Innovative progress
Not all innovation needs to involve disruption, however. We are living in an age in which many things that were once deemed unthinkable now seem possible. This is an age in which science fiction can appear to blur with reality. The phrase creative destruction assumes something old that is ready to be disrupted. But in the modern economy, we are seeing genuine technological innovation, with the birth of radical new technologies and industries.
In the fields of healthcare, information technology, renewable energy and beyond, we are seeing new solutions to old problems, with positive benefits for the individual, for society and for the global economy. The convergence of traditional science with digitalisation, cloud computing, automation and artificial intelligence, is fuelling a new wave of innovation that has the potential to transform economies and societies, while helping to tackle truly global challenges, from climate change to future pandemics. Growth equity funds provide an excellent way for long-term investors to access the full power of this future potential.
Emerging growth
Innovation often seems to be the exclusive domain of the developed world, with the mature economies of North America and Europe historically seen as the source of most technological progress. This stems from their more established academic systems, from schools through to universities, as well as more mature capital markets that can provide the funding to convert nascent research concepts into tangible long-term commercial successes.
Nevertheless, as emerging markets mature, they appear capable of contributing more to global innovative progress. China, for example, has transformed from a technological backwater into an innovation powerhouse over the last twenty years, and has made clear its intention to continue to invest in areas such as artificial intelligence and quantum computing in the years ahead.
Furthermore, the rise of businesses such as Samsung, TSMC, Vale and Tata Group demonstrate how emerging markets can spawn multi-national industry leaders that are more than a match for their developed market counterparts. We should expect to see more of these long-term emerging market success stories over time, as the gap between developed and developing economies continues to narrow. Indeed, the growing role that emerging markets have to play in global innovation should help to narrow that gap at an increasingly rapid pace.
Frontier markets, meanwhile, represent the next generation of emerging markets, following what is now a well-trodden path towards economic prosperity. These markets, including the likes of Thailand, Colombia, Kazakhstan and Poland, which are at a much earlier stage of economic development, have the most to gain from global innovation, and are creating some extremely exciting long-term growth opportunities in the process.
Investors can gain exposure to the long-term theme of emerging and frontier market innovation through investment trusts seeking capital growth.
Necessity is the mother of invention
Of course, the primary driving force for any new innovation is need. The emergence of the climate crisis as arguably the greatest risk currently facing investors and the planet as a whole, underlines the paramount importance of thinking creatively to craft sustainable long-term solutions. Capital markets are already playing an important role here, providing capital for the technological innovations that can help continue to drive and accelerate the energy transition. With risk comes opportunity for growth investors to capture. And, with respect to the climate crisis, the positive outcomes are much broader than just financial.
Looking forward, there is plenty of room for the process of creative destruction to add value to our lives individually, as well as to society and the economy more broadly. As it has done in throughout history, innovation can help to deliver the answers to the biggest challenges humanity has faced. From this perspective, the future looks bright. History suggests the optimist will be rewarded.
Find out more about how Blackrock’s range of growth-focused investment trusts are positioned to capture the potential of global innovation, by visiting our Global Growth Opportunities Content Hub.
