Foolin’ Around

I’m writing this month’s musings on All Fools Day. It’s past noon. While I seem to have got away unscathed, with the benefit of hindsight, sitting in my car with the doors locked for five hours seems a lot of trouble to go to simply to avoid looking a fool. Still, it seemed a good idea when Mrs R suggested it...

We married young, although at the time we felt very grown-up. She was 19 and I had just turned 21. Back in those days, life was somehow more straightforward. You had to wait until June to get fresh strawberries (and even then, it was touch and go), shops didn’t start selling Christmas cards until December and there was one day a year when you had to tread very carefully to avoid any banana skins. We tied the knot in March so our first April Fools’ day came around fairly quickly. I was at the stage where I was playing the role of ‘responsible young man’ (don’t worry, it didn’t last) and as such felt it inappropriate to engage in childish frivolities. Unfortunately, as I plunged my foot into a boot full of cold water I realised my new wife had no such inhibitions.

Over the years I’ve come to accept I’m a soft target – a combination of being easily distracted and fundamentally trusting leaves me vulnerable to even the most amateur trickster. The one positive I draw from Trump and Brexit is that they suggest I’m not alone in being easily fooled.

Of course, our clients put a lot of faith in us not being easily fooled. This means we spend a fair bit of time trying to avoid leaping in before we’ve had a good rummage around. Lately we’ve been looking closely at Megatrends. Most of the time we focus on the current environment but we were interested in the investment potential of the long-term structural engines of change in three key areas – demographics, technology and the environment

Radi and James (respectively, our Head of Investment Research and our Investment Analyst) have put together a joint research paper that throws up some interesting and unexpected observations. Our starting hypothesis was that our longer term investors (our multi-generational clients) could benefit by investing early in areas that were likely to see higher levels of growth over the very long term but where the exact timing was difficult to pin down.

If you’d asked me before we’d carried out the research which of the three drivers would have the greatest impact over the next 50 years, I’d have said technology. Once you start looking at it properly it quickly becomes obvious that, while all three drivers interact to a degree, demography is way, way out in front as the most significant influence.

I’d previously thought of the ageing population seen in most developed economies as primarily a resource problem. I hadn’t fully appreciated the impact a declining working population has on economic growth. It’s obvious when you think about it – GDP is fundamentally the total of individual productivity multiplied by the number of working people.

The Japanese example shows us that, even for a technologically advanced nation, it is very difficult to achieve sufficient productivity improvements to maintain growth against the background of a falling population. Since the financial crisis, productivity in the UK has lagged well behind most of the developed world and what GDP growth we’ve experienced correlates pretty closely with immigration levels. Just saying…

Other areas that got me thinking were the regions where the population is continuing to grow. Developing economies have higher growth potential – for example, South Korea saw per capita GDP increase almost 13 times over the 30 years to 2010 – so surely investing here makes good sense? Well, maybe…

In the jargon, Economic activity is the result of the application of two factors of production Capital and Labour. Capital in this case is you investing your pension, ISA, portfolio, or whatever so companies can invest in factories, equipment and all the other things they need to produce goods and services. Labour is the people working for the companies. The economic benefits of this activity are not shared equally.

What tends to happen is that when an economy is developing a greater share goes to Labour. We can find evidence for this in the burgeoning middle class in many of these countries. As the economy matures so the share going to Capital increases until we get to the sort of situation we have in the UK, Japan and other developed economies. Wages stagnate as economic benefits increasingly flow to capital even though an aging population should mean Labour becomes a rarer (and therefore more expensive) commodity.

So, if we were considering investing in some of these developing economies perhaps we should be looking at demographic and social indicators rather than economic expectations to better judge whether we are likely to see a reasonable share of the growth cake?

The final demographic aspect I hadn’t really appreciated is the rise in spending power of the Millennials as they benefit from a combined inheritance of $30 trillion over the next thirty years - the largest ever intergenerational transfer of wealth.

Looks like I’m going to have to start treating our bright young things with a bit more respect!

Talking of which, if you’d like to read Radi and James’ excellent report it will be available on our all-new website in a couple of weeks’ time – or email me for a pdf.

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