Gavekal Capital: Knowledge Leaders Are Handling Increased Volatility Better Than Knowledge Followers

Monday, October 13, 2014

Knowledge Leaders Are Handling Increased Volatility Better Than Knowledge Followers

As we never tire of saying, we believe that companies that continually invest in knowledge-intensive activities such as research and development and have deep reservoirs of intangible capital on its balance sheet are structurally misunderstood and undervalued in the financial community. These companies are the innovation leaders in their industries and based on academic research we have named them Knowledge Leaders. As well as being innovation leaders, according to academic research these companies also have less volatile earnings and sales growth when intangible capital is properly capitalized. These lower volatile fundamental qualities in Knowledge Leaders thus lead to lower volatile stocks. This is once again being demonstrated in real-time over the past month as we have experienced a pickup in volatility in the equity markets.

Over the past month, the average Knowledge Leader in the MSCI World Index has declined by 6.7% and over the past year the average Knowledge Leader has gained 4.3%. This compares favorably to the average Knowledge Follower which has declined by 8.2% over the past month and has gained only 1.5%. Finally, as we have been stating over and over recently, the health care sector has been the sole sector that continues to keep this market propped up. You can see this as both Knowledge Leade health stocks and Knowledge Follower health care stocks have both managed to massively outperform the other 10 sectors over the past month and year. If health care stocks start tumble, this may be a bad sign for the broad market in general.

Knowledge Leader Performance

Knowledge Follower Performance