Best of 2014: Creative Destruction or “The Market’s Messy Way of Delivering Progress”

To say that 2014 has been volatile doesn’t even begin to describe it. While this allusion to economist Joseph Schumpeter’s theory of creative destruction might sound a little extreme, I think it succinctly (and optimistically) sums up much of the volatility that has come to characterize global markets over the past year.

In the face of such uncertainty, it is our goal here at the Enterprising Investor to provide you with practical examinations of current issues in finance and investing. Below is a selection of analyses, advice, and, if nothing else, some simply interesting opinions that address the myriad changes markets have experienced this year.

Although in the wake of the 2008 financial crisis and the subsequent low-rate environment, investment managers hailed emerging markets for their growth potential, 2014 began to challenge these strategies:

• While it will be hard to forget Alibaba’s IPO in September, China made headlines all throughout 2014. If you’re thinking you missed the boat, start by debunking some misconceptions you might have about Chinese stocks.
• Fears of a Chinese real estate bubble might be rising, but at the CFA Institute China Investment Conference, panelists concluded that shadow banking is unlikely to threaten the Chinese financial system.
• Likewise, some analysts believe that the Philippines has finally shed its “sick man of Asia” title.
• Even Argentina, a country some investors have dubbed “so bad it can’t get any worse,” might still have some value opportunities.
• So how should investors take advantage of such volatile growth? Emerging market debt might be the answer.

Not only has emerging market instability disrupted markets, so has technology:

• A quick refresher on financial market history will immediate remind you that we live in some very innovative times.
• As investment managers becomes increasingly technological, is the appearance of robo-advisers challenging traditional financial advisory practices?
• Without a doubt, Uber has revolutionized the transportation industry. You might learn a bit more about consumer surplus by examining this disruptive firm.
• Indeed, technology is enabling markets to move faster and faster. If you didn’t get a chance to read Michael Lewis’s Flash Boys: A Wall Street Revolt, you should at least know something about how high-frequency trading is transforming the market.

Of course, no analysis of 2014’s market volatility would be complete without a discussion of the Fed’s tapering and the end of quantitative easing (QE):

• While the United States has remained a beacon of stability amid global market volatility, the Fed’s unwinding QE might not be as simple as reversing rates.
• The United States might not be out of the woods just yet. The recent governmental push into housing, the Fed’s monetary policy, and US trade policy suggest we haven’t learned all our lessons from the 2008 crisis.
• Before the Fed starts raising rates in 2015, know what increasing rates mean for bonds and bond portfolios with this bond convexity primer.

So in a time of much uncertainty, how have investment managers continued to find alpha?

• While emerging markets have been volatile, global equities remain an important part of a diversified portfolio.
• When legendary bond investor Bill Gross left PIMCO in September, he reminded us all that, like any other product, bonds are not immune from market shocks.
• So, what continues to separate the good from the great investment managers? Among other skills, two enormously overlooked qualities are discernment and scaling.

Thank you for reading and Happy 2015!

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.