How many of you did Dry January? The ditching of alcohol in the first month of the calendar year is now an annual tradition for many people. For some, it’s part of a new year’s resolution to drink less, while others look to start afresh with a healthy detox after the excesses of the holiday season. For those starting 2021 with such steely resolve, we suspect this January proved harder than previous years. Times have been tough - to put it mildly – and whether it be the despair of the latest lockdown, the challenge of home schooling or that horrible flat feeling we suffer when our favourite Netflix/Amazon/Disney+ show comes to an end, pouring a glass of something we promised not to, has proved an itch some understandably gave in to scratching.
For those who recognised the all-or-nothing approach required would prove simply too much, the adoption of a Damp January has been a popular alternative. Through taking a more measured approach to their measures, January has now rolled into February with many people still feeling the benefits of restraint. Another popular approach – at a time when few of us are able to travel – has been to buy a favourite wine from a region or country visited and relive those holiday memories without leaving the house. All in moderation, of course.
Quest to be knowledgeable
Whether these first few weeks of the year have proved dry or damp, congrats to those who achieved what they set out to do. It will have required self-control, determination and for many, the support of others. Above all, it will have needed (or been a test of) patience and discipline to reach this personal goal. For those to whom it applies, we hope you had the chance to reward yourself, whether this be with a glass of Bordeaux, Malbec or Gavi.
Wine, as we know, comes in many different varieties and the quest to be ‘knowledgeable’ requires years of experience – and tasting – to be confident in making the right selection when presented with a long list to choose from. Having an understanding of the region of origin, the grape used and the year it was made are three of the key variables wine drinkers will seek to know. This information, coupled with some basic rules of thumb, provides the drinker with the tools needed to make an informed decision.
But what if this experience can no longer be relied upon, or what used to be right, might now be wrong?
In short, any decision is made in a knowledge vacuum and is simply a guess – albeit, an educated one. This being true whether selecting a bottle of wine or, in our case, making an investment decision.
As you would expect – and thanks to the roll out of vaccines – we have been thinking a lot about what the post-Covid world will look like. Some basic rules of thumb around (1) supply and demand; (2) the direction of interest rates and inflation, and; (3) levels of debt and unemployment have been key variables in our debate. From this, we have drawn on our knowledge and experience to shape how we think portfolios should be positioned.
This all sounds very sensible – but a deeper dive into some of these issues highlights elevated levels of uncertainty, as traditional ‘constants’ which underpin these rules of thumb now have to be questioned. For example, it has been well-established thinking that global population growth will exert a growing upward pressure on the price of natural resources, at a cost to the environment. In the late 1960s, when this theory was gaining traction, the planet’s population was increasing at a rate of 2.1% a year, taking the total from 3.5 billion to 7.7 billion today. However, this growth has slowed – and considerably so. Birthrates around the world are stuttering and stalling, and in many countries this is now fewer than 2.1 children per woman – the minimum level required to maintain a stable population. In South Korea last year, birthrates fell to 0.84, a record low despite extensive government efforts to promote childbearing. In Iran, a birthrate of 1.7 has so alarmed the government that it recently announced state clinics would no longer hand out contraceptives or offer vasectomies.
But what does population decline look like? The experience of Japan, a country that has been experiencing this trend for more than a decade, offers some insight. Already there are too few people to fill all its houses – one in every eight homes now lies empty. Closer to home, in the EU, an area the size of Italy is expected to be abandoned by 2030. France, Italy and Romania are among countries showing the largest gains in forest cover in recent years – rural abandonment on a large scale is creating afforestation, and is one factor that has contributed to the resurgence of large carnivores in Europe. A brown bear was recently spotted in North West Spain for the first time in 150 years. It seems we are looking at a future very different from the one we had been expecting in terms of demand and supply.
Turning to interest rates and inflation. Extremely low, or even negative interest rates, have now become the ‘new normal’, irrespective of your opinion as to whether this makes economic sense, or not. Thinking about rising inflation is a dynamic which many market participants have not had to consider during their working lives. To compound this, we now have a group of central bankers who, for the first time in c.40 years, have stated they are not only content to see inflation rise, but they will purposely stay ‘behind the curve’ in terms of monetary policy. This is an environment few capital allocators will have experienced and this could prove telling over the medium to long term.
Finally, let’s think about unemployment and debt. We are all familiar with the acceleration in the adoption of technology as a consequence of Covid. It has been estimated (McKinsey) that by 2030, 400m full time equivalent jobs will be displaced globally as digitisation, robotic process automation and artificial intelligence replace humans in doing work. Clearly, this will have significant societal implications and governments face enormous fiscal challenges in financing the wave of retraining needed to address this or providing a Universal Basic Income for those workers displaced. This when many countries have seen their Debt to GDP ratios hit all-time record highs. This debt burden is massive, at a time when many working populations are shrinking, making it’s servicing a growing challenge and eventual repayment seemingly impossible.
Implications for portfolios
The traditional influence supply/demand, interest rates, inflation, unemployment and debt have on financial markets have not gone away and they remain important factors for all investors as they implement capital allocation decisions. However, accelerating technological developments, experimental public policies and the tangible shift in demographics now present, mean a new set of factors need to be identified, so we may better navigate portfolios in the years to come. Lots to think about. It is enough to drive you to drink
Please do contact us with any questions.
Julia Warrander and Russell Waite
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