A Tale of Two Worlds

https://markets.businessinsider.com/news/stocks/stock-market-outlook-long-term-returns-determined-technology-innovation-forecast-2020-9-1029624795

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way…” Charles Dickens, A Tale of Two Cities

The stock market, in any country, aims to channel savings into investment and boost the economic productivity of its various players. In each country, there are stock indexes, which are a reflection of the economic activity, technological development, and the ability to generate innovation.

In the United States, the most representative index is the S&P 500, which is made up of the 500 largest companies in its economy by market capitalization.

In the last 20 years, the S&P 500 has undergone significant changes, as has the United States economy. At the end of 2000, the most valuable companies in the index, by market capitalization in billions of dollars, were: General Electric ($463), Microsoft ($320), ExxonMobil ($290), Pfizer ($260), Citi ($235 ) and Walmart ($230), reflecting the strength and stability of the automotive, oil, pharmaceutical, banking and commerce sectors.

However, today the most valuable companies in the United States are technology focused on the Internet or services; for example, Apple ($1,970), Microsoft ($1,650), Amazon ($1,600), Google ($1,100), and Facebook ($810).

These companies have had spectacular growth, if we compare them with their market capitalization in 2000 or when they went public, when they barely reached a few billion dollars.

The momentum of the use of technologies, in combination with the Internet, has marked a radical change in the United States economy. Without a doubt, in 20 years the list of the largest companies in the S&P 500 will have significant changes and only those that have the capacity to adapt, technify and innovate will be the ones that will endure.

And if we make the same comparison in a developed market, say for instance Mexico, what has happened in the stock market?

We found that the most valuable companies, by market capitalization in billions of dollars, in the index (IPC) in 2000 were: Telmex (today América Móvil) ($23.7), Walmex ($7.8), Banacci (today Citibanamex) ($7.7), Cemex ($5.1) and Televisa ($5.0).

We find that 20 years ago the stock market in Mexico reflected its strength and stability in the telecommunications, commerce, banking, construction, and media sectors. If we run the same analysis today, we can see that they are still at the same levels, and some of them are even worth more than 20 years ago; for example América Móvil ($42.9), Walmex ($44), Cemex ($6.3) and Televisa ($4.3).

If also, we look for the companies with the highest market capitalization of the IPC today, we will realize that companies from the same sectors continue to dominate the index: Walmex ($44), América Móvil ($42.9), Grupo México ($23), FEMSA ($20.6) and Grupo Elektra ($14).

The three new companies that make up this list were worth 20 years ago: Grupo México ($1.2), FEMSA ($1.7), and Grupo Elektra ($0.6).

Even though these companies have grown up to 10 times what they were worth in 2000, the Mexican stock market has not shown radical changes compared to the American stock market, since the top positions are still held by the same companies and the strength and stability of the economy continue to be based mainly on the commercial, telecommunications, and industrial sectors.

Will we see a radical change in this list in Mexico in 20 years, based on greater innovation and technological development?

For the past 20 years, the United States has harnessed technological development and science to transform and digitize its economy. Some of the catalysts for this transformation have been:

Smart investment in Venture Capital: According to the National Venture Capital Association (NVCA), in 2000 there were more than 1,000 Venture Capital funds in the United States, managing $260 billion dollars together; today there are about 2,400 venture capital funds with assets under management for $740 billion, practically triple the number in 20 years. In Mexico, in the last 10 years, approximately $29 billion has been invested in private capital.

Support for the invention of new technologies: 295,926 patent applications were registered in the United States in 2000, and in 2019 this figure climbed to 621,453, according to the United States Patent and Trademark Office (USPTO). In contrast, in 2000 there were 13,061 patent applications in Mexico, and last year the applications amounted to 15,941, according to data from the Mexican Institute of Industrial Property (IMPI). This means 105 patent applications per 100,000 inhabitants in 2000, compared to 189 in 2019 in the United States; while in Mexico that number ranges between 12 and 13 patent applications for every 100,000 inhabitants in both years.

Corporate innovation initiatives (such as Corporate Venture Capital): In the United States, investments by Corporate Venture Capital funds (CVC) have increased in recent years. Over 200 such investments have been registered in any one quarter for some time, representing approximately 25% of total US Venture Capital investments today. These investments translate into more than $57 billion dollars that were invested in about 3,300 startups in 2019 by corporates.

The depth of the capital market: The number of Initial Public Offerings (IPO) in the United States is also a good parameter to measure the impact of technological innovation and development. In 2019 alone, 82 companies with Venture Capital funding went public, representing 43% of all public offerings that were made in the United States in that year. In Mexico this year two companies have been listed Cox Energy on BIVA and Acosta Verde on the BMV.

Venture capital investment is undoubtedly a catalyst for new technologies, innovation, disruptive business models, and entrepreneurship. Corporations, through their open innovation tools and Corporate Venture Capital funds (CVC), play an important role in this development. Other aspects that also influence this transformation are:

- Quality education: It is a fundamental pillar in the development of innovation and technologies in a country. Thus, solid foundations in math and science are required, as well as talent retention programs by corporations, organizations, and government.

- Culture: The example of the United States and other developed countries is the formation of individuals with values ​​and attitudes aimed at honesty, risk-taking, and independence, seeking their personal and professional maturity through responsibility. As a Japanese proverb would say, “don’t give him the fish, teach him to fish”.

- Structure and governance: Emerging countries must foster genuine competition and avoid the creation of oligopolies, promoting technological development and innovation. Besides, entrepreneurs, organizations, and governments are an essential part of the creation and promotion of the innovation and Venture Capital ecosystem.

The digital transformation, driven by investment in innovation and technology, will make emerging countries like Mexico develop competitive advantages and economic growth over time. To do this, it is essential to have a long-term vision with defined objectives and a culture of innovation and entrepreneurship that permeates all levels of society.

“For a ship without a course, any wind is correct” — Anonymous

Note: please refer to the original publication at EL CEO: https://elceo.com/opinion/mexico-empresas-innovadoras-bolsa/

Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance.

Gonzalo Soriano. Investment analyst at ACV.

ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.

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ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.

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