Drawing attention to the outlook and big themes present in the economy is always a healthy perspective. Below are a number of key themes to think about as you monitor your portfolios as a long-term investor:
- Baby boomer industries to thrive. The percentage of people aged over 60 years old in the Western World is rising at an unprecedented rate. It therefore makes sense to focus on industries which profit from this sector. Any company which derives sustainable profits from wellness and good health could have appeal. Healthcare, consumer staples, recreation/travel and utilities are all areas of focus, although beware of stretched valuations in some of these popular sectors.
- Asian outbound tourism to grow. A rapidly growing middle-class in China, India and other emerging economies means greater demand for tourism and luxury goods. Chinese outbound tourism is now bigger than the USA with 83 million people travelling, up eight-fold since 2000. This won’t stop here, so it is worthwhile comprehending how you can profit from this trend.
- Technology will advance beyond mobile and tablets. Only 20 years ago, Google didn’t exist, Nokia phones weren’t yet popular, CD players were yet to hit their peak and Kodak cameras with film were in their prime. It is dangerous to predict the future of technology, except to expect that it will move fast and unpredictably. Steady profits rarely come from this space, so long-term investors are better to think about companies that won’t be disrupted by technology than those who provide it.
- A combination of high debt levels and rapid credit growth will be unsustainable. The world of rapid credit growth and excessive debt is not sustainable and appears more likely to deleverage or stagnate. In other words, you will probably want to think about whether your investments can thrive in a world of shrinking or stagnating debt. High earnings growth from traditional banking in western markets may be difficult.
- The need for infrastructure will grow. The global population will continue to rise, even if at a slightly lower percentage, and infrastructure investment will be required. It is worthwhile thinking about the companies that can reduce the burden of increasing traffic and make steadily growing profits by doing so.
- Food sustainability will become a global issue. With increasing food demand and less land per capita than ever before, a rising middle-class in emerging markets and greater education on the climate implications of food production, we will likely see a movement towards more sustainable food sources.
- Geopolitical tensions will remain. Islam is the fastest growing religion in the world and acts of terrorism are increasing. Unfortunately, 10 years henceforth will probably still have geopolitical issues which will cause ongoing volatility.
- European political tensions will be ongoing. Having one monetary policy stance for 17 countries is problematic and it will be a miracle if the Greek economy fully recovers whilst remaining in the European Union.
- Clean energy will gain traction. Climate change is a long-term issue that will attract further investment. However competition will be rampant and political intervention could cause disruptions.
- Bonds to probably disappoint. Bond yields that are currently negative in real terms appear to have almost no option but to go up eventually, and as they do, prices must fall. If nothing else, don’t expect double-digit growth out of bonds.
- Shares will likely rise, albeit with volatility. Industries will rise and fall, companies will boom and bust, but tomorrow’s companies will generally be more profitable than yesterday’s. The support of a generally growing population and productivity gains means there is every reason to think that shares will rise over the long-term.
- The labour force will become more educated but less active. Hours worked per person continues to fall, whilst education standards gradually improve. Technology will be a key driver of the future workforce.
- Quantitative easing is an area to watch. It is the unconventional monetary policy that every distressed economy seems to be reverting to. Unless we start to see consequences such as inflation, this will continue to be the stimulus of choice.
- Budget deficits are a long-term challenge. With ageing populations, the social welfare system will come under increased strain both locally and globally. This will create ongoing political tension.
- Commodities are not dead. Withstanding any major improvements in clean energy or future supply, scarce commodities should move higher as global energy demands grow. The Chinese only have 85 cars per 1,000 people, compared to the USA who have approximately 797 cars per 1,000 people. Steel demand is also expected to grow 65% in the next 15 years. In other words, low-cost producers of commodities could still make substantial profits.
The themes above are intended to be thought-provoking rather than strictly predictive. Hopefully some or all of the points resonate with you in thinking about an advancing world. We also warn that investing based on themes requires meticulous care as the underlying investments can be overpriced and leave you exposed. It is worthwhile using Warren Buffett’s wisdom in this regard, “only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”.
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