In our June 2015 edition of VFTD we wrote how much we benefit from attending investment conferences and the impact they have on our thinking and processes – whether it be listening to external speakers, having the chance to share ideas with our peers, gaining one-to-one access to fund managers or simply having time to pause and think. We recently returned from a London conference, hosted by Morgan Stanley Investment Management, where a former UK Chancellor of the Exchequer spoke to an audience of international delegates. We also met with members of the emerging market equity team, who manage assets on behalf of our clients. Once again this has galvanised us to revisit a whole range of issues from debt, disruption, demographics and whether a digital detox should be considered the new yoga.
We will return to the latter in due course but, before doing so, we wanted to share some of the reflections of what we, and many other attendees, considered the most interesting presentation. It was delivered by Ruchir Sharma – the firm’s Head of Emerging Markets and Chief Global Strategist – who posed the question whether we are at, or post, the peak of a range of important economic and social factors. Ruchir argued that, in combination, they should prompt all invested in financial markets to consider the cyclical and secular shifts they may create. We outline the key factors below.*
2017 was the best year for the world’s economy since the Global Financial Crisis, with GDP accelerating to 3.4% and characterised by synchronised growth across all regions. But is this as good as it will get? Rising yields, debt, inflation and commodity prices will be headwinds to growth.
The post-war ‘economic miracle’ from 1950 to 2008 can be attributed to numerous factors, but many of these can be distilled into two categories; namely population growth and productivity gains. The growth in the working age population is plummeting, particularly across big economies like China, Japan, Germany and Italy. In fact, labour shortages are already manifesting themselves in some countries and one could argue robots are arriving just in time.
In 1980, the total market value of global stocks and bonds was valued the same as global GDP; today it is valued at 3.5 times. The wealth effect this has created across many millions of households has boosted spending, at the expense of saving. This represents a fragile world, where future market tremors will likely have a huge impact on the real economy.
Of the 192 countries tracked by the International Monetary Fund (IMF), only 13 suffered a recession in 2017 and, according to their forecasts, only 6 countries are expected to be in recession this year. If correct, this would be a record low and a calm this deep goes against the volatile nature of capitalism and markets.
The below chart provides compelling evidence to demonstrate the case that assets – particularly in developed markets – are as expensive as they have ever been. Valuation, as a single metric, is not a reliable indicator for market timing, but it is a key determinant of future returns for long term investors.
Rather than walking readers through the entire presentation, the speaker also highlighted Peak liquidity (extraordinary monetary policies slowly being withdrawn); Peak passive (huge flows into ETFs and what could happen if these reverse) and Peak size (a recent Harvard Business School study highlights corporate resources devoted to lobbying had the second largest impact on increasing margins in the US – a major advantage for big companies).
Notwithstanding the impact of the previous points, it was the remaining two which we found the most interesting; the first is Peak tech. Ruchir highlighted seven of the world’s ten biggest companies, by market cap, are in technology, including all of the top 5. The largest, alone, is worth more than Europe’s 10 largest banks. He suggested markets are skewed too much towards one sector, with this dominance and concentration being a concern and a rebalancing is desired.
This sentiment was also shared by high profile delegates at the recent World Economic Forum in Davos, where there were calls for government regulations to rein in the ‘search and social powerhouses’. George Soros went further by saying ‘social media companies exploit the social environment’ in the same way oil companies used to exploit the natural environment. He singled out Google and Facebook as ‘utilities’ needing to be taxed and regulated much more aggressively. Officials weighed in too, with France’s President Macron suggesting governments should seek to set a new international tax framework for the digital economy.**
Implications for portfolios
Judging by these comments from Davos, the perception of the big tech companies, by the elite, has turned 180 degrees over the last 12 months. The cool kids from the Valley face problems, however, the cradle of innovation and creativity that it is, suggests whatever the changing landscape, they will adapt and hopefully continue to drive the next wave of global prosperity.
This ‘techlash’, however, should not be ignored and brings us to the last point made by Ruchir; Peak distraction. Smart phones now dominate our lives, with statistics suggesting the average user stares at their screen for nearly two and a half hours over the course of a day. He highlighted other studies have demonstrated smart phone distractions undermine relationships and lessen cognitive ability. It has also been argued they are the invisible reason behind weak productivity, when – intuitively – they should be boosting it.
The emotional value of a digital detox is receiving more and more column inches and now touted as the new yoga. Indeed investing in your intangible, vitality assets – as opposed to financial – should be a growing priority to ensure Peak performance.
*Tales from the Emerging World – What Happens After the Calm? Morgan Stanley Investment Management
** Davos 2018: Fixing a Fractured World. RBC
Julia Warrander and Russell Waite
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