Hamish McRae: How global investors can counter corporate disasters

If you wanted to take a moment to say that the banking catastrophe of 2008/9 has found closure this week is as a good as any. Britain’s three biggest banks give their annual results: HSBC tomorrow, Lloyds on Wednesday and Barclays on Thursday. If the solid return to profits last week at RBS is any guide, these figures should signal the sector is back to some sort of normality. Some court cases rumble on but the endless string of fines and provisions is moving towards a close.

It has taken a decade for banking to recover from its own arrogance, greed, mismanagement and stupidity. However, investors in the sector, including the government, are still nursing losses. For many in Scotland, who thought the safe thing to do was to split their savings between RBS and Bank of Scotland shares, it has been a catastrophe.

So the question is how might investors avoid such systemic destruction of value in an industry in the future.

There are obvious candidates of entire sectors that may be devastated over the next decade. The motor industry is one. The combination of Elon Musk’s visionary use of laptop batteries to drive a car, coupled with the switch from diesel, precipitated by VW’s manipulation of emissions testing, has utterly transformed the industry. All the skills of the German manufacturers in developing sophisticated internal combustion engines and transmission systems may be worth nothing. Instead the expertise (and low production costs) of battery technology developed in China will dominate the globe.

Of course Western car manufacturers will fight back, and will retain some market share. But note two facts. Last year China built more than half the world’s electric cars. And save for a couple of models, including the Mustang, Ford is stopping making traditional cars in North America.

Another sector facing seismic change, and I think destruction of shareholder value, is high-tech America. I am in awe of the way a clutch of West Coast companies have over one generation utterly transformed our lives: Apple, Google, Facebook, the old stager Microsoft, and so on. But while the high-tech revolution has many years to run, the dominance of these companies will ebb. The reassessment of their value began last autumn. Apple, the first company in the world to have a market capitalisation of more than $1 trillion (£775 billion) is back down to $800 billion.

Facebook is being challenged for its ethical practices - today MPs said there needs to be independent ethical oversight of it - while Google and Amazon are under pressure over their accumulation and use of personal data. These companies have changed the world, but it is not hard to catch a sense that customers and governments will push them back. That has started already. Amazon being forced to abandon its plans for a New York headquarters was last week’s example of a reversal that would have been unthinkable a few months ago.

The question for anyone interested in building wealth through investment is: what do you do about the systemic risks that dominant sectors inevitably face?

One obvious response, and a wise one, is you spread risk. You spread investments geographically, including now at least some foothold in emerging markets. You spread between sectors. You spread between large corporations and smaller ones. And you have some stake in alternative investments and property. Had those Scottish families followed those rules 10 years ago they would not have come such a cropper over RBS and HBoS.

The more specific reaction to corporate disasters is to screen for environmental, social and governance (ESG) risks. The screening does what it says on the tin. With environmental risks identifies specific dangers that management is ignoring, such as the damage from being caught cheating on emissions.