The world is passing through a period of massive change – which themes will drive markets in the years to come?
In an age of instant communication in which investors have become drawn into the daily contortions of financial markets, it pays to stand to back and consider some of the longer-term themes.
Many of the most rewarding investment returns in the last two decades have been the product of the most compelling and intuitive narratives.
The emerging markets became a bone fide asset class and the “BRICs” moved from marketing gimmick to a serious engine of economic growth.
The term “commodity super-cycle” was coined to reflect the resource hungry demand of industrialising emerging markets. Rallies in finite resource sectors such as oil and metals, or in internet stocks, or in gold in an age of money printing have all garnered investor attention based on persuasive premises.
Investors have always been drawn to compelling narratives. Turning points in markets are often associated with the emergence of a new story or the widespread adoption of an existing one.
Change is afoot
The world today is barely recognisable from 1980. The developed world is likely to see slower growth rates for some time due to the multi-year deleveraging required to reduce the high debt burdens created by the financial crisis. The outlook for growth in emerging markets remains far in advance of the developed world and the gap has been exacerbated by the ongoing effects of the financial crisis.
The cornerstone concept of ‘risk free’ is being reassessed in the light of the Eurozone debt crisis and has significant implications for investors. Meanwhile, recent developments in the energy space are significant, with the commercial exploitation of shale gas & oil discoveries likely to make north America a net exporter of hydrocarbons. Investors must take stock of these shifts and consider whether they have adequate exposure to the fastest-growing parts of the world.
Long-term themes for investors to consider
Here are some of the most prominent multi-year themes that are likely to have a significant impact on investment returns.
A ‘two-speed’ world with a shifting balance of power: Emerging economies are benefiting from a multi-year shift in the global balance of economic power. The investment universe is becoming increasingly polarised between low-growth, mostly developed world economies and higher-growth, mostly emerging economies. The fallout from the credit crunch is a multi-year hangover as developed economies face macroeconomic headwinds.
The US dollar’s position as dominant reserve currency will be challenged: The loss of the US sovereign’s triple A rating and the rebalancing of economic power will support calls for a new reserve currency system, particularly as the Chinese renmimbi (or Yuan) is increasingly internationalised.
Do not underestimate demographics: Demographics are perhaps the least understood, yet most significant of multi-year trends for economies and investment markets. Some countries have already consumed their demographic dividend; others are now reaping the benefit of young and productive working age populations.
The reassessment of “risk-free”: The conceptual cornerstone of risk-free assets in the shape of triple-A rated government bonds has been shaken to the core, due to the sovereign debt crisis. Investors will be forced to reassess outmoded ideas about risk. In a developed world characterised by low bond yields, investors are likely to embrace income as a means of boosting total return. This will mean a move up the risk spectrum in order to get yield, with equity and property playing a greater role in providing income.
The age of the emerging market consumer is here: Consumption in emerging markets is growing strongly and this theme has the power to support equity investment in companies based in emerging and developed markets who can take advantage of this growth.
Don’t write off the US just yet: The US may have lost some of its dominance but the obituaries are premature. Despite the rise of the BRICs, the US remains a dominant economic and consumer power, well ahead China and India in per capita growth terms, and with a long track record in creating in creating shareholder value.
Energy shake-up: The discovery and commercialisation of extensive shale-based hydrocarbons in North America are a game changer in the natural resource landscape that will have a significant impact on the balance of power in energy markets.
Watch out for the “disruptive” technologies: The impact of disruptive technology is one of the most powerful forces in the corporate sector, creating billion dollar companies like Apple, Google, and Facebook, while relegating other firms to obscurity. Distinct ages in technology are now apparent – 1990s was the decade of desktop internet; the 2000s moved into mobile internet; and the 2010s seem set to become the decade of cloud computing.
Time taken understanding the narratives driving current and future investment thinking is invariably time well spent.
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