With U.S. Economy on Solid Footing, Experts Offer Investment Tips at Darden

November 18, 2014

Nancy Lazar, a partner of Cornerstone Macro, told investors something they wanted to hear Friday at the University of Virginia’s Darden School of Business: The U.S. economy is on solid footing.

“The tailwinds are tremendous,” she said at the seventh annual University of Virginia Investing Conference. With a theme of “Investing in Innovation,” the two-day conference brought industry experts from around the world to help investors find the best strategies to deliver positive returns while managing investment risk.

The event was hosted by Darden’s newly named Richard A. Mayo Center for Asset Management. At the conclusion of the conference’s first day, Darden Dean Robert F. Bruner formally announced the naming of the center for Darden alumnus Richard A. Mayo, who received the honor for his lifetime contributions to the school.

“Close the book on how you look at the world right now. It’s changing,” said Lazar, who leads Cornerstone Macro’s economic research team. “Past evaluations don’t work. Emerging markets are no longer the driver of global growth. The U.S. is the driver of global growth.”

The tailwinds are many, she said, citing less fiscal drag, the effects of stimulating federal policies, low inflation, good company profits overall, declining commodity prices and banks – finally – wanting to make loans.

Headwinds to economic growth in the U.S., however, continue and include geopolitical turmoil, Federal Reserve tightening and foreign economic slowdown, she said. The housing recovery in the United States is also slow. And consumer growth has not been a major driver of growth.

“But we have a healthy private sector,” she said. “That’s why the stock market is doing well.”

Though Europe is still a mess economically, there’s some good news. Since 1990, after every drop in oil prices and decline in global short rates, growth has been stimulated, she said.

Innovation Accelerates

Darden alumnus Ned Hooper, founder and managing partner of Centerview Capital, said Friday that some entrepreneurs and investors believed innovation would slow in the 21st century after a 20th century of incredible changes, which included electricity, indoor plumbing, and television and radio. “But what we’re seeing is an accelerated pace of innovations. Innovation is the single most important driver of local economies,” he said. 

Hooper, also a board director for InfiniteZ, a startup driving innovation in immersive, holography platforms, added that, “Innovation starts with hardware and is complemented by cheaper and faster storage and cheap, ubiquitous connectivity.” And everything in technology is getting cheaper and more available.

He believes a tech bubble is forming, but not as large as the one that popped in 2000.

“There are a lot of signs that we’re overvaluing,” he said. “We know this will adjust and decline in the future. But it’s not as broad-based as the one in 2000. The overvaluation tends to be isolated.”

Cyber-attacks Are a Constant Threat

Darden alumnus Charles R. Cory, chair of Morgan Stanley & Co. Inc.’s Global Technology Banking group, said Friday he believes the biggest issue facing technology and innovations is security. “That cuts horizontally across all issues. It’s a fantastically complex problem to solve. It’s a fascinating big data problem. It’s a fascinating human problem.”

That issue was addressed in depth Thursday when Kathy Warden, corporate vice president and president of Northrop Grumman’s Information Systems sector, told investors that no one was safe from cyber-attacks. “With the proliferation of technology, there’s a whole new breed of threats,” she said. “But human capital is the limiting factor in cybersecurity.” She said the need for cybersecurity professionals is dire, with tens of thousands needing to be trained.

John Siegel, a partner at Columbia Capital, said cyber-attacks are not just coming from lone hackers but can come from nation-states. “Imagine thousands of guys banging away at servers.”

Michael F. Sola, vice president of T. Rowe Price Group Inc. and T. Rowe Price Associates Inc., said a product that fully protects against cyber-attacks would be invaluable. “If a product does produce a protection like that it will be bought and deployed.”

Technology Will Continue to Be Disruptive

“We’re living in crazy and amazing times,” Dr. Peter Diamandis, chair and CEO of the X PRIZE Foundation and co-founder and vice chair of Human Longevity Inc., said Thursday. “Our lives are far more robust because of the impact of technology. Technology takes what’s scarce and makes it abundant.”

Diamandis, an innovator in the fields of space travel, incentive education and health care, provided leaders some tips on what the future holds for business:

  • We are going to enter the era of perfect knowledge, in which you can get information where and when you want and how you want it.
  • The only constant is change, and the rate of change is increasing.
  • Competition is now the guy in the garage – the entrepreneur.
  • Disrupt your own business or someone else will.

Disruption – a recent business theory and practice of rapid, cheap innovation that brings down an established business – can be seen everywhere. Skype gutted long distance. Craigslist helped drag down newspapers. Google sidelined libraries. Uber is slaying taxi businesses. “Technology today is turning every two to three years,” said Kathy Warden, corporate vice president and president of Northrop Grumman’s Information Systems. “It took 10 years just a short time ago.”

American Oil Boom May Alter World Economy

Change is also hitting the energy business hard – but in a good way for America. New techniques for extracting oil from shale and the discovery of massive natural gas reserves will soon change America’s dependency on foreign energy fuels.

“The innovation done by early pioneers in shale exploration – people thought they were crazy,” said Darden alumnus W. Barnes Hauptfuhrer, chief executive officer of Chapter IV Investors LLC, on Thursday. “Things have changed dramatically in the past five years. I call it the shale gas revolution. The shale oil revolution.”

“It’s a very exciting time to be in the business,” said Darden alumnus Robert S. Craine, president and founder of Lynx Production Company Inc. and Lynx LNG LLC, who has been an independent oil and gas producer for 30 years. “Horizontal drilling and other advances we’ve seen have come from independent oil companies. It used to be from big oil.”

Look for America to disrupt the world’s economy. “We’re not ready to export oil yet because of political issues, but America’s production will change the world’s supply and demand in a fundamental way,” Hauptfuhrer said.

Craine said the fallout from the new wealth of oil in America would change the geopolitics of the world, better the trade balance and fatten the country’s budget. “We’re getting the job done,” he said.

Health Care Continuing to Shift

Innovations in health care are also on the way – with big changes expected quickly. But don’t expect the Affordable Care Act to go away. “The Affordable Care Act caused a big fight, but we think it’s here to stay,” Samuel D. Isaly, managing partner of OrbiMed Advisors, said Thursday. “Except at the beginning, I think it’s been implemented fairly well.”

But health costs have to be cut in a country with an aging population and one that spends 18 percent of its GDP on health care. It’s unsustainable, the experts said.

Technological advances will transform health care, said Bryan Johnson, founder of the OS Fund and also of Braintree. But important ideas need to be funded and innovators need to be given capital to bring their dreams to life. Risk tolerance needs to be raised.

Biological innovations can happen fast, Johnson said. “The return in biology will be phenomenal.”

Digital health care will include technology that will capture vital data from patients, analyze that data and spit out the results, he said.

Darden alumnus Robert J. Hugin, chair and CEO of Celgene Corp., said the good thing about America is that “patients matter.” If companies deliver drugs that help patients, “you will get reimbursed.”

Hugin noted that 5 percent of patients run up 50 percent of health care costs. “We have to find a way to reduce that.”

Invest in Argentina

The conference concluded with words from Kyle Bass, principal of Hayman Capital Management LP, who described Argentina’s economic woes and yet urged investing in the country. The country defaulted in 2001, has no access to capital markets because of lawsuits over a debt exchange, and appears to be “circling the drain.”

“But in actuality, the country is … fiscally solid,” Bass said. Upcoming elections should improve the country’s leadership, and settling the lawsuits will allow access to money markets.

“You want to invest right now when things look so bad it couldn’t get worse,” he said.

Columbia Triumphs

The conference’s first day concluded with the announcement that Columbia Business School won the Darden @ Virginia Investing Challenge, a stock pitch competition, which included 15 top business schools.

Darden Capital Management sponsored the challenge. Darden Capital Management is Darden’s innovative student club through which MBA students invest a portion of the school’s endowment. The club’s assets under management have grown to over $9 million.

Mark Your Calendar and Update Your Passport

Darden’s Richard A. Mayo Center for Asset Management will present the second annual Shanghai Investing Summit on May 8. Held in Shanghai, China, the summit’s theme will be “Cross-Border Investing.”

— By Carlos Santos

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