The long-term outperformance of the US stock market has many possible explanations: it has a more flexible and efficient corporate culture; entrepreneurs are incentivised to do well; it has a huge domestic market with which to experiment. However, part and parcel of that is its ability to innovate and to capitalise on that innovation.
This has proved self-reinforcing. As Silicon Valley has shown itself to be an effective nursery for good ideas, money has followed, and then innovators have followed because they know they can raise finance. It is a virtuous circle; one that has helped create some of the most powerful technology companies in the world and turbo-charged its stock market. Outside its astonishing technology names, the growth of the stock market is fairly lacklustre.
Could this be about to change? There are signs that not only have Chinese companies proved effective emulators of American technology, they are now forging a new path. This is particularly notable in the field of commerce, where Chinese companies are adopting new models. For example, in the recent Oppenheimer Emerging Market report it said: “Chinese internet giant Alibaba is experimenting with new multi-use stores through its Hema chain. Hema combines a bricks-and-mortar supermarket with a distribution centre for super-fast delivery. The group has also innovated a huge range of technology options to improve consumers’ experience.”
The scope of Chinese innovation is, as yet, quite limited and mostly focused on the consumer. They have yet to challenge the US in any corporate-based technology and are unlikely to do so in the near-term. However, if the Chinese can create a virtuous circle, marrying innovation and capital as has been seen in Silicon Valley, this may come with time.
However, Kirsty Gibson, an investment manager on the Baillie Gifford American fund says that Chinese companies may struggle when they come out of China: “There is a lot more innovation. We are seeing Western-educated CEOs take their experience back to China. However, for companies wanting to expand beyond China, they will find the playing field outside is much more level.” She believes this may cause problems.
As it stands, nowhere else touches these two behemoths, so it looks like the US can retain its crown for the time being, but the trade war may galvanise China. The US should look behind it.