Carr’s top 5 investment trends

Forget the ‘noise’ in global markets, this is where the money will be made.

Summary: The Australian share market has fallen more than 8 per cent since its March peak amid fear and volatility. However, what we are largely seeing now is the ‘sell in May’ seasonality. When among such noise and not much positive commentary, it’s important to not lose sight of the big picture – of what will drive markets over the next decade ore so.

Key take-out: Five of the biggest long-term trends are that global growth will remain strong, investment rather than consumption will be the key driver, per capita wealth will surge, demand for water, food and energy will increase and that there will be a greater onus on individual wealth accumulation as the population ages.

Key beneficiaries: General investors Category: Economics and Investment strategy.

The Aussie share market is down more than 8 per cent from a peak in March. Banks look to be in bear territory and fear and loathing dominates the world again. Should we be worried?

Well, as I noted in my piece Why the market will crack 6,000,  the ‘sell in May’ seasonality  often weighs heavily on our market at this time of year – and that’s what we’re largely seeing now.

Outside of that, prospects remain good.

There is certainly a lot of noise around at the moment though – not a lot of positive commentary. While that makes for interesting reading, food for thought as it were, much of it is geared toward traders or institutional investors who are getting in and out of the market frequently.  

It’s important against that background not to lose sight of the big picture; the longer term trends that could drive investment markets over the next decade or so.  Here’s five that seem to be widely agreed among the experts.

1 Global growth will remain strong

As it stands now, the emerging or less developed economies account for about 50 per cent of the global economy. The International Monetary Fund expects that to rise to nearly 60 per cent by 2020 and not too long after that they’ll account for about three-quarters of the global economy.  This obviously brings with it some very serious implications for global politics and it will no doubt be a tumultuous period for global institutions.

Just concentrating on the economic implications for now though, this evolution in global growth has significant implications.

To see how significant this can be let’s take the example of South Korea. Back in 1980, South Korea was an economy roughly half the size of Australia’s.  Following a rapid period of growth, South Korea is now 1.7 times larger than the Australian economy. South Korea was part of that group of economies termed the ‘Asian Tiger Economies’, all of whom are now advanced high income countries.

The success of these economies has been duly noted around the rest of the region. Other countries too want to emulate that success, and reap the rewards of doing so. Wealth, prestige, political stability and of course the accompanying military power wealth can bring.

These are countries including Vietnam, Indonesia, the Philippines and Thailand (the ASEAN nations). Combined, these economies are the fourth largest economic region, with GDP of just under $6 trillion (on a purchasing power parity (PP) basis). The thing is, these economies already enjoy strong growth – over 8 per cent annually since 2009 (on a PPP basis) and have a huge, largely un-urbanised, population (over 600 million).  

2. Investment first, consumption later

Indeed urbanisation rates in ASEAN are typically low, according to the UN, at around 30-50 per cent. This compares to the developed world of around 80-90 per cent.  Going back to South Korea, they also had low rates of urbanisation back in the 60s and 70s as a developing nation: These days, that stands alongside the advanced norm at around 80 per cent.

All of this suggests that investment as opposed to consumption will continue to be the key driver of global economic growth over the next couple of decades at least. That’s not to say consumption will be weak (I’ll discuss that further below) just that investment in particular will drive global momentum over the next few decades. This is going to provide ample support to commodity producing economies by the way.

3. A global per capita wealth surge

At this point, the emerging economies like China, India and the ASEAN nations account for about 85 per cent of the global population. The thing is, per capita incomes in these economies are still very low.  According to the World Bank, the advanced economies have per capita incomes of roughly $US44,000 per person.

That compares to, say, Vietnam, with per capita GDP of about $2,000, India with per capita income of $1,400 and the Philippines with a figure around $2,700. Even in China, per capita GDP is low at around  $6,800.  As you can see there is plenty of scope for growth and in many cases per capita income has doubled since the GFC, while remaining largely flat in high income OECD nations.

Over the coming decades most credible forecasters expect per capita incomes to continue to double, triple or quadruple - and this rapidly rising wealth for 85 per cent of the world’s population, will continue to have a profound impact on the world.  

4. Food, water and energy

In the years ahead the demand for food, water and energy will continue to surge. 85 per cent of the world population will experience rapid income growth – and they will want better quality food, lighting, heat, air-conditioning as well as a car for them and their kids. All the things we take for granted. 

Putting aside larger discretionary purchases, the demand for just the basics will increase dramatically over the next few decades.  Not only as a result of the global per capita wealth surge but also population growth. The United Nations estimates that the global population is currently over 7 billion people and set to hit 9 billion by 2050.  Interestingly we live in a world now where everyone talks about the glut of commodities, the surge in supply etc. Bearing in mind current global trends it seem clear that excess supply is not key issue for investors to focus on over the long-term.

5. Aging population

Another trend that is set to accelerate is the aging population trend. In effect this means fewer workers to support an aging population. Technological change, far from being a threat to human employment will be the much needed antidote to global aging.

Other than that there are a few other important implications. An aging population, longevity and less tax revenue to support them means a greater onus on individual wealth accumulation. This suggests that most assets will continue to attract a premium relative to past history. 

Similarly, the combined forces of rapidly rising wealth and an aging population will underpin strong demand for health services and products.

The implications of the above are more far reaching that I’ve discussed and I’ll continue to write about that over time.  For now and amid all the doom and gloom it is important to focus on the real long-term trends.