SPECIAL PROJECTS
SALES REPRESENTATIVE: ELMARIEMARTIN WRITER: ALF JAMES What do you believe the key thematic drivers of the world economy are likely to be, over the next 25 years or so? Herman van Papendorp, head of macro research at MOMENTUM ASSET MANAGEMENT says the key thematic drivers of the world economy over the next 25 years are likely to be: global urbanisation and ageing populations; inadequate funding levels of global pension funds; and the rise of Africa as a global economic powerhouse. Michael Power, strategist at INVESTEC ASSET MANAGEMENT says key themes are the impact of demographics on both the West and the Rest, the continued rise of the Asian Sinosphere and the growing weight accorded to China in the determination of risk and currency valuations and through them both, the global cost of capital.
“In a very real sense, all three are connected, and will become only more so as the Chinese Renminbi becomes ever more freely tradable and the Chinese capital account more open.
“And for every rising trend, there will be a falling trend, at the very least relatively, at most absolutely. These falling trends will be concentrated on the aging, indebted West, initially in Europe, and subsequently in the US; Japan will remain stuck in its low-growth rut notwithstanding revival efforts like Abenomics.
“A significant number of countries in the Old World will endure sovereign debt crises during this period; the Club Med countries are particularly vulnerable in the short term.”
Power says while China’s demographic dividend may well become a drag by the end of the 2020s (reflecting the long term fall-out of the one child policy), Asia as a whole will see its massive numerical advantage in terms of its share of global population translate into commercial advantage as numerous cities with significant and growing populations dot its landscape and poor rural subsistence farmers migrate to become richer urban middle classes.
The China story is well known and the Indian story clearly outlined on the horizon. Less commented upon is the emergence of ASEAN as a leading economic bloc that will rival the European Union; ASEAN’s 600-million population already outranks the EU’s 500-million.
“The investment story will spread beyond Asia to other parts of the emerging world. In Latin America, countries facing Asia across the Pacific Ocean will be the biggest winners; in Africa, the same will be the case for those facing Asia across the Indian Ocean.
“In Eurasia, the outlook towards the “Eur” will decline as the orientation towards the “Asia” intensifies. This will be particularly the case for Turkey and the Stans and even for Russia. The Arabian Gulf will draw closer to India and, to a lesser degree, East Africa.” next 25 years is a near impossible task, what we can be sure of is that there will be many major surprises, inventions, crises, disasters and opportunities.
“Looking back at the past quarter of a century, one can see just how much has happened and how surprising many of these events have been.
“Twenty five years ago PW Botha was president of South Africa, the ANC was a banned organisation and Nelson Mandela was in prison; the Berlin wall was still standing and countries in Europe had their own currencies; the internet was in a testing phase and e-mail did not exist; the term ‘dot com’, was not yet in use and the ‘dot com’ bubble that was to follow a decade later inconceivable.
“One can go on and include major events such as the 9/11 attack on the US in 2001, and the global financial crisis that started in late 2008 which greatly impacted the global economy. Who could have predicted these events and their influence on investment markets?
“As investment managers we do, however, have to think about the future. Coronation takes pride in thinking about investments with a longterm perspective and in particular to try to look through cycles in an attempt to focus on what is normal.
“One clear current abnormality in our view is the monetary policies of zero interest rates and quantitative easing that have been followed by the major Western economies over the past five years. Looking forward, we expect a normalisation of interest rates as one clear investment theme we would identify.
“Another might be some re-adjustment within the European Union. The euro crisis is far from resolved and it is difficult to see the status quo being maintained. What adjustments will ultimately be made are however far from certain.
“One of the more predictable themes relate to demographic trends. In China, for example, the population is expected to start declining due to the impact of their one-child policy. Economic growth in China will almost certainly be far lower over the next 25 years than what we have become used to.
“Turning to the field of technology, the enormous amount of brain power devoted to the study of alternative energy will at some point deliver results. The progress made in exploiting shale gas will result in the US being less dependent on imported oil, which in turn will have an impact on the world order.” Sandy McGregor, portfolio manager, ALLAN GRAY says it is remarkable the extent to which the future is hidden from us.
“There are some known unknowns which are concerning. Demographic trends in developed countries, and now increasingly in China, suggest that we face a major crisis due to inadequate funding of pension and health obligations.
“South Africa is no exception in this regard. Matters are aggravated by continuing developments in medicine, which could improve longevity dramatically.
“The euro crisis can be regarded as the first stage of the crisis of the European welfare state. Japan’s two decades of stagnation is a chilling ex- ample of the consequences of adverse demographics.
“There is no simple solution to this problem and the outcome will probably involve extreme financial and political oppression of the propertied classes.” Andrew Canter, CIO at FUTUREGROWTH says global bond yields are near record lows, and since initial conditions have a huge impact on long-term results, it’s easy to forecast low returns from bonds, and better returns from equities, over the coming decade or more.
The recent success of some emerging countries with “state capitalism”, central control and limited freedoms is merely a phase: The success of China arose from its under- utilisation of human resources, while its future growth will come from the spreading of freedom and empowerment of those people.
Also, you can't fight with the demographics of a young, growing, educated and empowered people. The fact that the developed world is saddled with aging populations and large debt loads should bias investors toward less burdened growth economies.
The billion dollar question is whether the institutions of democracy, freedom and consumption will be allowed to improve the human condition in the next tier of countries.
That question is compounded for Africa with the concern about whether African nations are really Peter Brooke, head of the MacroSolutions boutique at OLD MUTUAL INVESTMENT GROUP says the main drivers of very longterm themes are politics and demographics. A major potential theme is the “End of Plutonomy”, whereby there is a reversal of the trend towards a smaller and smaller elite controlling more of the world’s wealth.
Increased automation has increased profit share of GDP at the expense of labour, and embedded in this is a growing potential for conflict. With globally elevated profit margins, this is a key risk for equity investors.
Platform companies with an ability to deliver globally will be best placed to manage this risk.
“The area with the biggest demographic dividend is Africa, the youthful population of which is in stark contrast to the “old” world. This is a double-edged sword, with superior growth potential offset by the risk of turmoil if aspirations are not met.
“Here we expect winners and losers, and a key differentiator will be whether governments manage to have inclusive growth instead of extractive growth.
“This is true for most emerging markets with, for instance, extractive Russia looking terrible compared to an inclusive US. China faces both of these challenges with deteriorating demographics and a very complex transition, both politically and economically.
“China’s transition towards consumption and away from investment, within the context of a steadily slowing trend growth rate, is another major theme.
“There will be positive opportunities for new low-cost manufacturing centres, primarily in Asia, while some commodity producers will face headwinds.” Charles de Kock, senior portfolio manager at CORONATION FUND MANAGERS