23rd November 2010
Speaking at conference in London last week, Virginie Maisonneuve, head of global and international equities at Schroders, said that, going forwards, three themes will determine the environment in which companies operate and affect their earnings sustainability. Yet, at present, these 'megatrends' are often ignored because they are long term in nature and so unable to offer investors "instant gratification".
But for Maisonneuve they are central to investment decision making as they can help in the selection of quality companies offering clear and sustainable competitive advantage.
Addressing delegates at the Schroders International Media Conference 2010, Maisonneuve noted that on the climate change front it has been globally acknowledged that emissions per unit GDP need to be 25% of current levels by 2050 to avert environmental disaster. To support this target, Schroders estimates that around $20,000 billion investment in cleaner, more efficient energy infrastructure will be required by 2030.
Such demands will have a major impact on the corporate competitive landscape, with implications for sales, margins earnings and valuations. Yet the costs associated with the changes needed have yet to be factored into consensus earnings forecasts or valuations.
Turning to demographics, she pointed out that the global population is predicted to increase from seven billion to nine billion by 2050. Almost all of the growth expected to take place in developing markets, with India likely to account for a quarter of the increase.
Also by 2050, it is forecast that 22% of the population will be over 60 compared to just 10.5% today and that the number of people over the age of 80 will quadruple. More specifically, the Russian population is forecast to decline by 10% in the next two decades while in Japan, it is expected there will be one retiree for every two Japanese workers by 2025.
Maisonneuve says it is important to appreciate that both developed and developing countries are undergoing demographic transitions with potentially huge long-term fiscal impact globally.
In terms of investment, changes in global demographics will clearly shape consumption patterns and demand trends. Yet investors, in general, are failing to recognise such long term trends, with slow-moving nature of the data tending to encourage ‘under-reaction'.
Typical broad-brush long term trends include the likes of India and Brazil, with a younger population, needing to focus heavily on areas like education and infrastructure and higher consumption of food, beverages and tobacco.
Conversely, the likes of Japan, UK, US, Germany and Italy will likely see increased need for death services and healthcare, but with their generally wealthier, older population also likely to spend more on recreation, travel and restaurants.
China's demographics outlook is complicated by its ‘one child' policy, which is having the impact of slowing both population and labour force growth. The country is currently home to 20% of the world population but the UN is forecasting absolute decline will set in after 2030.
It is also reckoned that the proportion of the Chinese population in the working age range has now peaked and that the workforce will start shrinking from 2015. China, furthermore, will have to contend with a rapidly ageing population going forward, with the number of over-65s forecast to treble by 2050.
That all implies that China will experience wage inflation and slowing growth over the long term, although it will still continue to boast the world's largest labour force. As this Wall Street Journal article points out, the upward pressure on wages there is already starting to build up a head of steam.
The demographic outlook for the US is also a little more complicated than it might seem – Maisonneuve says it actually boasts the "most favourable demographic profile in the developed world". Its higher fertility rates and a relaxed attitude to immigration imply that the prospects for sustained economic growth and consumption are better than for Europe, Japan and, in the long-run, even China.
Meanwhile, notions of an economic supercycle, is gaining ground. As reported here by Wall Street Journal, Standard Chartered Bank has just echoed Schroders view that the world is in the midst of a "supercycle" driven by emerging markets. StanChart believes this will lead to trade between emerging markets growing to 40% of global commerce, up from the current level of 18%, with trade lanes between China, India, Africa and the Middle East emerging as some of the world's busiest.
StanChart expects emerging economies to account for 68% of global growth by 2030 and forecasts China's economy to expand at an annual average rate of 6.9% over that period, even as the US and Europe grow at a much slower pace of 2.5%.
Acknowledging these three ‘megatrends' is one thing. For investors, the big question is how does it all mean for stock picking? For Schroders, the key elements when it comes to assessing stocks are: quality, competitive advantage, valuation.
Quality encompasses consideration of aspects of a company like management track record, corporate governance, financial strength. Sustainable competitive advantage covers issues such as business model and barriers to entry; while valuation will cover metrics such as fair market value and comparison to the global sector and universe.
Stocks cited by Maisonneuve as showing positive characteristics when assessed on such measures include London-listed BG Group, the integrated gas company. There is also New York-listed Yum!, the leading Western fast-food brand in China with three times as many restaurants as McDonalds. Yum! is looking to build similar positions in other Asian markets, including India.
Another stock that appears to have positive characteristics in relation to the ‘megatrends' is Nasdaq-listed Ctrip, the largest travel consolidator in China. Ctrip is the market leader in the China online sector with more than 55% of the market share and experiencing fast growth in package tour and corporate travel.