WORDS ON WEALTH:
Many investors probably have immediate worries about market volatility caused by the coronavirus scare and the fall in the oil price. But those with long-term investment horizons would do well to ignore the commotion and focus on a handful of “inescapable truths” that will shape the global markets over the next decade.
At last week’s investment symposium in Johannesburg and Stellenbosch hosted by global asset manager Schroders, the head of the strategic client group, Gavin Ralston, presented the firm’s 10-year investment outlook, identifying trends that would shape market outcomes by 2030.
Economic forces
The two main determinants of economic growth are the growth of a country’s labour force and its productivity.
Populations are falling in developed countries - even China is expected to have a population decrease of 2% by 2050. The big exception in the developed world is the US, Ralston said, “which, despite what Donald Trump says, is much more welcoming to immigration than any other developed economy”.
Life expectancy has increased rapidly since the 1950s, and this trend is expected to continue. “Although that is good news for individuals, it is not good news for the economy, because it means the labour force is declining more rapidly than the population as a whole,” Ralston said.
Productivity has, surprisingly, slowed in the years since the 2008 financial crisis. Ralston said economists couldn’t convincingly explain why productivity growth had been so disappointing over the past decade, but it resulted in lower than expected global growth.
“While we expect productivity to improve, overall we’re looking at sluggish growth of between 1% and 2% in developed economies over the next 10 years,” Ralston said.
Emerging markets, however, where populations are mostly growing, fare better in predictions. “Emerging economies are preserving their premium levels of growth, and that may be even more valuable to an investor over the next 10 years than it has been over the last 20,” he said.
Consequent to the sluggish growth, there will be limited inflationary pressure and interest rates will remain low.
Ralston said talk of the “normalisation” of interest rates to pre-2008 levels was unrealistic. The high interest rates of that period were, in fact, abnormal and a better guide to the next 10 years was the entire 20th century. Under this scenario, real (after-inflation) interest rates of about 0.5% will be the norm.
Disruptive forces
* Private capital. A notable trend that is expected to continue is an increased reliance on private sources to raise capital. Fewer young companies are going public once they have grown to a certain size.
“To give one statistic, the number of listed companies in the US has fallen by half since 1996,” Ralston said, adding there was a similar pattern in the UK and, markedly, in South Africa. The upshot is that, although there are issues around private equity, it needs to be considered alongside listed equity in investment strategies.
* Automation. Certain jobs, particularly those that involve routine, repetitive tasks, stand a high probability of being automated in the next 20 years. Ralston said this is not new and is not necessarily negative. He said that in the era before computer-generated spreadsheets, there were about 400000 accounting clerks in the US. With the advent of Lotus and Excel, these jobs were lost, but about 600000 jobs, involving higher levels of clerical and accounting work, were created.
A downside, Ralston says, is that because lower-skilled jobs will suffer more than higher-skilled jobs, the rise in automation will exacerbate social inequality.
* Environmental change. There are alarming differences between the aspirations for reducing carbon emissions as set out in the Paris Agreement and what has actually transpired, and “the gap is widening”. Predictions now are that global temperatures will rise between 3ºC and 4ºC, instead of between 1.5ºC and 2ºC as targeted, with catastrophic consequences.
Ralston said, however, that climate change was moving up the agenda politically and, perhaps more pertinently, there is rising shareholder pressure on companies to do the right thing. For example, banks are coming under pressure to stop lending to fossil fuel companies. Ralston said Schroders estimates that 15% of the value of the global equity market is at risk of climate change. On the positive side, though, the investment spending needed to address these concerns is enormous.
* Politics. Referring to the work of economist Branko Milanovic, Ralston said inequality between countries had diminished, but inequality within countries had widened, and there was increasing pressure on governments to address inequality - hence the rise in populism. Until governments start doing so, the continuing political undercurrents will have implications for the markets.
Investment forecasts
Looking at the different asset classes, Ralston said there was little opportunity to make money from government bonds over the next decade, although they may be useful as a “disaster hedge” in the short term.
On equities, Ralston said expectations were that global equity returns, while remaining positive, would be nowhere as positive as they were in the past decade. The US would see the best returns, but even these would be lower - in the single digits. Emerging markets, including China, strategically remained a more attractive place to invest.
Ralston said that, generally, investors’ expectations were too high, and investment professionals needed to do a good job in managing expectations to more realistic levels.