2019 provided investors solid returns across many asset classes. Led by a resurgent technology sector, the S&P 500 gained 28.9% while NASDAQ rose over 38%1. Bonds also gained as interest rates dropped to record low levels, with the Federal Reserve cutting interest rates three times in the second half of 2019.
President Trump signed the USMCA agreement and announced China had agreed to a “Phase I” trade deal adding to the improving economic fundamentals seen around the globe.
Central banks in Asia, Europe and the United States continued providing monetary stimulus in various ways across the board. The net result was the 4th best performing decade for stocks in history. Adit believes the decade ahead holds tremendous potential as well.
Given this backdrop, and generally positive earnings from most sectors, the equity markets hit new highs. In fact, the various equity indices hit new highs 33 times in 2019, as the prospects for continued economic expansion in the decade ahead looked increasingly favorable.
Investors continued to be optimistic as Holiday retail spending rose +3.4%2 versus a year ago, led by increased online sales, which are now nearly 15% of overall consumer spending. Housing looks good, helped by solid employment growth with November recording 266,000 new jobs3. Farmers and commodity investors cheered the initial wave of Pork & Soybean orders placed by China in December and the overall economic sentiment remains positive across most economic sectors.
The IPO Market, characterized as “Broken” in the press, saw an average gain of approximately 20% in 2019, slightly below the historical averages of the past three decades. This “Broken” market saw the largest IPO’s in history occur in December as ARAMCO raised over $29b, valuing the company at $1.75 trillion4.
The shares traded up over 14% in the two days after this IPO, the maximum allowable limit in the Saudi market, making it the most valuable company in the world. Subsequently, several other IPO’s went out with good results so the “Won’t Work” hangover is hopefully behind us, as the markets go into 2020. We expect to see robust IPO activity in ‘20 with Airbnb likely doing a direct listing in Q2.
Fundamentals matter, as Adit has believed since its inception, so we remain constructive on this company and the others in our diversified portfolio of Growth Equity names. Please reach out for additional information or come to our website www.aditventures.com to learn more about Adit, our approach, people, philosophy and portfolios.
Venture Capital and Private Equity remain attractive asset classes given the potential robust return profile, and the lack of yield on bonds. Assets increased as the fundraising activity increased in 2019 to record levels. Dry powder is over $2.5 trillion in both PE & VC given the proliferation of mega-funds north of $5B in size5. Softbank continued to wrestle with the fallout from WeWork, and while Vision II will likely get done, it isn’t easy explaining away the irrational exuberance of valuations with many of their portfolio companies announcing layoffs.
While there are pockets of excess in both private & public markets, there also is logical, rational thinking displayed in analyzing relative valuations. The failure of WeWork is a positive sign that there is investor discipline left. This dynamic also reduces the crossover buyers in the growth equity sector as many mutual fund firms no longer play ahead of the public offerings post-WeWork debacle.
Expect to see continued positive momentum for the economy, and thus the markets, although we believe we are overdue for a market correction of 3% - 5%. Hard to know what, when or how it will occur, but it likely will, when investors least expect it. When complacency comes calling, corrections follow, generally. Adit believes this will represent a major buying opportunity as we see tremendous opportunity in the decade ahead. See Adit’s “Ideas of a Decade” in February!
This coming decade promises to deliver on the potential of the decades past, with 5G networks providing seamless streaming of calls, music, videos and more, AI combined with Big Data to actually provide real-time networks enhancing productivity and results-driven searches among other things.
With companies taking longer to go public, Adit’s thematic investment process remain of paramount importance: AI/ML, Big Data, Cloud, Cyber, Defense, Digital Healthcare, Education,, IoT, Logistics, New Media, Shared Economy, and Space all remain solid drivers. The coming wave of innovation, building on the decades of past achievements of technology pioneers, is allowing firms to provide superior experiences to business, consumers and society.
The voice-actuated computer models will be greatly improved in years ahead, with smart buildings, autonomous vehicles, drone delivery, and robotic services becoming commonplace. Nanotechnology and quantum computing offer glimpses of potential solutions to seemingly intractable problems today. Progress in communications, connectivity and more will continue to drive progress in many areas, as Adit is publishing thought leadership pieces monthly in 2020. Massive dislocation in agriculture, food, nutrition & wellness as well as education offer Adit two new areas of opportunity. Expect to see Adit’s research on these dynamic investment themes.
We remain positive on the decade ahead, despite the conventional wisdom being negative on the outlook. Perhaps the surprise might be that things continue to progress better than expected, and the results surprise everyone, even the naysayers.
Only time will tell. Adit remains focused on our fundamental approach of buying good businesses, at a fair price, and monitoring their progress, reporting it to our clients in an ongoing basis, and being opportunistic by allocating capital to gifted entrepreneurs with a good team, and a thoughtful approach to growing businesses that have a purpose and serve a broad constituency of clients, community, employees and shareholders. Happy New Year to you all. Happy investing we say, confident in the knowledge that Adit’s best days are still ahead. May happiness, health & abundance fill our days in the decades to come.
Eric Munson & the Team at Adit Ventures
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