The rise of the investment industry drives up competition, drives down prices, and ends up subsidising consumer spending.

As capital has become more available, fixed costs have become less important in competitive industries. Overcoming a billion-dollar fixed cost to achieve gross margins above the market ROI has become commonplace. As investments lead to market expansion for companies, competition becomes more intense. The impact is even stronger with smaller fixed-cost businesses. As competition increases, profit margins fall and consumers are the ultimate beneficiaries.

When profit margins fall in an industry, companies may not achieve the ROI they expected, and investments grow increasing downside risk.

In this speculative possible state of the world, investors might expect:

• more downside risk from the equity markets,
  (underweight equities relative to other asset classes)

• more default risk from the corporate bond markets,
  (underweight credit risk relative to high credit quality)

• more downward pricing pressure (aka lower inflation),
  (overweight bonds relative to other asset classes)

• higher profit margins available to larger-cap companies
  (overweight large cap relative to small cap)

I left out another impact: as competition lowers prices for consumers, consumption goes up even if spending stays the same. More consumption means more demand for commodities. Supplies of commodities may grow, too, if investment improves mining, agriculture, etc. If demand growth exceeds supply growth, expect commodity prices to rise.

Labels: Investment, Public Policy