Megatrends are going to dominate economic behaviour for years to come, both threatening your personal wealth and providing opportunities for personal profit.
Jeff Harding, writing recently in The Daily Capitalist, offered an American perspective of what those megatrends are likely to be:
► The culture of consumption is broken and won’t return to former levels.
Between 1980 and 2007 personal consumption’s share of US annual output rose from 54 per cent to 77 per cent. “We went on a spending spree financed by borrowing, reduced savings and asset inflation,” Harding says.
With homes and retirement funds rising in value, Americans lost their motivation to save. But between a high in 2007 and early 2009, their net worth plunged 20 per cent, destroying $12 trillion, or the equivalent of one year’s production of goods and services.
This is having a major impact on consumer spending. People know they have less of a wealth cushion to provide for retirement or major unexpected expenses. They have to, or want to, repay debt. An uncertain future encourages people to save.
Every percentage point in personal saving reduces consumption by about $100 billion a year, yet it will take years to reduce debt-to-income ratios to more normal levels, such as those of a decade ago.
This represents a massive change for an economy which is about 70 per cent based on consumption — growth will remain subdued for a substantial period.
► People will need to save more to provide for retirement. About two-thirds of those born in the baby boom after the Second World War and soon to retire won’t have enough income to meet even 80 per cent of their pre-retirement spending levels.
Realizing what’s coming down the track, they will seek to delay retirement,
staying longer in the workforce, and cut back their spending so they can save more. Most Baby Boomers “think their parents are going to leave them a lot of money.” But “only about 7 per cent of the population will ever inherit money” and there is going to be less of it, as parents “are living longer and medical and nursing home costs are eating up their assets.”
► Sluggish consumer demand in the US will hit the rest of the world economy. Developing nations don’t generate enough internal demand for consumer goods to drive their high growth – they depend on demand for their products in advanced countries, especially America.
Only 36 per cent of the economy of China, for example, is based on domestic consumption. It has pumped in massive Keynesian stimulus, equivalent to 14 per cent of annual output. But with falling exports, it is unlikely that the super-high growth rates of recent years can be sustained.
► Deflation – prices generally falling, rather than rising, as we have been used to — will continue for some time. That’s because economic uncertainty influences people to restrain their spending to accumulate cash and/or pay down their debts.
In the US the main asset classes experiencing deflation are residential and commercial real estate. When asset values are falling, or investors are nervous that they could fall, they tend to prefer “risk-free” cash.
Money supply is continuing to decline because people don’t want to borrow, or are unable to do so.
“Debt reduction and bankruptcies will continue to put downward pressure on prices,” Harding says.
Don’t expect another property boom
► Home ownership rates will decline. Although over the long term population growth favours construction of millions of new homes, in the short term this positive factor can be swamped the disappearance of demand based on the prospect of capital gain.
For about a decade from 1995 onwards, home ownership rates grew because potential buyers were told that home prices would never decline, as they hadn’t done so in any year since the 1930s. They are now painfully aware that “certainty” was untrue.
Eventually the market will bottom, but there won’t be another boom driven by cheap credit and false hopes about rising prices.
“This will dampen the market for home builders, reduce construction industry jobs, and squeeze profit margins.”
► Government stimulus programmes will delay recovery and deepen the pain. “For example, Cash for Clunkers just ‘borrowed’ against future sales.”
► Massive federal deficits will double the US national debt, result in higher taxes, and act as a permanent drag on the economy.
Borrowing to finance the deficits will put downward pressure on the dollar, threatening its status as an international reserve currency, which in turn will drive up interest rates and the cost of capital for private borrowers.
Themes to invest in
For a less US-centric view of the future, I prefer the long-term themes favoured by Iain Little and Bruce Albrecht of the P&C Global Thematic Investors Fund. I reported them at length in the December 15, 2007, issue of On Target, but here is an updated summary:
China opportunities: The growth potential from globalization, urbanization and development of healthcare and other public services for the population of 1.4 billion is still enormous. As rural people move to the cities, the equivalent of a new city the size of Houston is created every month. As incomes soar, so does the middle class, with all its desires to “catch up” by buying better homes, personal transportation and services.
All this creates opportunities, not only in China itself, but also in its neighbouring countries and those supplying its needs such as natural resources and foodstuffs.
Ageing populations: With people living longer but having fewer children, there are “greying” populations, especially in Japan, European countries and China. As the proportion of the elderly to the young changes, so do the needs of consumers for specialized services and products.
The most obvious investment opportunities are in pharmaceuticals, although there are many others such as those in residential accommodation, travel, medical services and financial management.
Burgeoning global classes: The growth in world trade, increasing travel, migration and working abroad, and interracial marriage, are producing cultural integration, with better opportunities for global brands.
In the mature, developed economies, Baby Boomers are in their peak earning years, offering lucrative markets for travel, entertainment and housing. In the developing economies, there is an explosion in the middle classes and in their consumer spending.
Supply shortages: 30 years of under-investment in production of natural resources means inadequate supply of commodities such as industrial metals, foodstuffs, soft commodities and precious metals at a time of surging demand in China, India and other high-growth emerging markets.
Similar under-investment in infrastructure means that in the mature economies services such as electricity and water supply, and facilities such as mass-transit, bridges and ports, are in urgent need of modernization and expansion.
source and CopyRight OnTarget Newsletter by Martin Spring