Market penetration rates are a good guide to sustainable growth. For example, online retail accounts for just 16% of China’s US$4 trillion consumer market, and penetration continues to tick up. Even in mature sectors like semiconductors, the fabless model (where the design and manufacture of chips are done separately) accounts for less than 20% of global semiconductor revenues, and has increased by roughly 1 percent each year since 2002. When investors focus too closely on daily news flow, they often overlook structural shifts like these, which can affect a company’s operating environment.
Identifying secular growth markets is only half the battle. It’s just as important to understand a company’s competitive advantage and its industry structure. Consolidating markets often provide a company with more pricing power and help increase profitability for industry leaders.
Companies with a highly defensible competitive moat are well placed to deliver sustainable growth. In India, the “financial inclusion” of millions of people into the banking system is creating a huge growth opportunity for publicly listed lenders. We believe that well-managed banks with strong brands, large distribution networks and an innovative digital offering will have an advantage in a vast country like India and will continue to gain market share in years to come, especially as many of their competitors are state run and inefficient.
Growth investors always strive to identify companies that can produce growth for longer than expected. Today, we think it’s more important than ever to find businesses with sustainable growth prospects that are being overlooked in favor of the fastest-growing companies. With a patient and persistent perspective on the future, investors can cut through the short-term noise to discover reliable sources of superior long-term returns.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.
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