Most Innovative Companies May Benefit from Fiscal Stimulus
Tuesday, April 7th, 2020
In Q1 2020, The Conference Board Innovation α Index powered by M•CAM for the United States declined by 23 percent and was down nearly 14 percent from a year ago. At the same time, the parallel global Innovation α Index, which tracks innovative companies worldwide, declined by 24 percent, and was down by 14 percent over a year ago. However, the reweighting of sectors in the index is pointing at potential benefits for innovative companies that can help tackle or offset the negative effects from COVID-19.
The Innovation α indexes measure a fundamental source of growth, namely innovation capabilities of companies. The indexes are expected to yield long-term results that are better than market averages. Because the market performance of companies is driven by many factors in the short term, the index returns can fluctuate compared to benchmarks. Measurement of innovation outcomes requires a long-term focus.
"In this type of supply-side crisis, obviously no sector goes unscathed and this includes the most innovative companies in the United States and around the world," said Bart van Ark, Executive Vice President and Chief Economist at The Conference Board. "However, the companies in electronics and technology services sectors are gaining importance in the index as they may be the biggest beneficiaries of economic stimulus policies, especially if they can help relieve supply constraints caused by the pandemic. We may also see a greater impact from domestic innovation in sectors that historically were net importers of innovation."
Technology companies' stock prices rose sharply over the last week of March when the Phase III stimulus in the U.S. was passed. For both indexes, the Technology Services sector is outperforming Health Technology services. Partly as a result of that, the Technology Services sector is gaining weight in both indexes. The weight of the Consumer Non-Durables sector also increased substantially in both indexes for Q2, possibly due to the boosted sales in grocery stores during the pandemic outbreak and their relatively stable financial market performance during the crisis. Although the major financial markets have also recovered temporarily during the last week of March as a response to these "crisis relief" actions, the global economic recovery outlook remains uncertain.
"Several companies have prioritized innovation investment focused on agility in manufacturing and distribution – in response to concerns highlighted by the recent global supply chain uncertainty," said David Martin, CEO of M•CAM International. "Companies that have received government patronage or make collaborations with other entities to relieve the COVID-19 crisis will also benefit. For example, General Electric has partnered with other companies, like 3M and Ford, to manufacture respirators and ventilators to combat the coronavirus since late March. Its index weight for Q2 has been set to 3.81% and 1.12% for the United State and Global Index, respectively, compared to their 1% and 0.83% company weight average."
While demand for medical services may increase during the COVID-19 pandemic, only a portion of the healthcare companies that specialize in COVID-19 related supplies, or the ones that directly receive government stimulus, might achieve stable financial performance. At the same time, most of the other healthcare companies will suffer from supply chain vulnerabilities.
Latest insights from the Innovation α Index
The Conference Board Innovation α Index Powered by M•CAM was developed by M•CAM, an investment firm that analyzes intellectual property and intangible assets to support credit and equity products. It consists of two indexes which rank and identify the 100 most innovative US companies in the Russell 1000 universe of companies and the 120 most innovative global companies in the MSCI World Index universe of companies, respectively. The selection is determined by the potential of those companies to generate substantial revenue growth through the use of proprietary technologies and innovations. The rankings result from a series of algorithms that gauge a company's innovation standing by analyzing their patents, trademarks and copyrights and the value generated from them.
For the 2020 Q2 index reset, the indexes were reweighted on April 1, 2020 depending on the expected performance of their constituents.
Based on this quarterly reset, the share of US index components in the Electronic Technology, Technology Services, and Consumer Non-Durables each increased 3 percent or more, while the share of companies in Retail Trade and Health Technology each decreased 2 percent or more.
For the global index, this quarterly reset resulted in smaller changes in the share of industries. The share of companies in Consumer Non-Durables, Technology Services and Finance in the global index each increased more than 0.3 percent. The share of companies in Communications, Retail Trade, Non-Energy Minerals, and Electronic Technology each decreased 0.3 percent or more, with the largest decrease in electronic technology at -1.3 percent.
"Both indexes suffered from large declines in the performance of the Energy Minerals sector as oil prices collapsed, but the largest contraction in the equity valuations were primarily in the industrial services sector in both indexes," said Ataman Ozyildirim, Senior Director, Economic Research at The Conference Board. "In the US index, the Consumer Services, Energy Minerals, and Industrial Services sectors were the three worst quarterly performers. Globally, Commercial Services, Energy Minerals, and Industrial Services were the three worst quarterly performers among the index constituents."