by Virginie Maisonneuve, PIMCO
- The combination of demographic changes, climate change and the ongoing shift in emerging markets over the next 30 years will have long-term consequences for supply and demand factors and business sustainability for many companies.
- The impact of these long-term trends must not be underestimated. It is crucial for equity investors to not only be attuned to them, but also to understand how companies are adapting to the shifts in the global corporate operating environment.
The challenge of thinking long-term
It is sometimes difficult for equity investors to identify and integrate long-term themes into their stock selection processes. While we know fundamental long-term investing wins over time, constant global real-time news access can leave the impression that short-term issues are more important. In fact, the daily reality of content fragmentation – not only news pertinent to companies we invest in, but also macroeconomic and geopolitical events – likely affects our cognitive patterns. Attention fragmentation, as a result, can lead to the temptation of excessive shorter-term trading, particularly since modern technology has made trading so easy in the financial industry. While access to more information can be helpful, the shape in which we receive it might be “rewiring human cognitive processes and limiting so-called deep engagement with information,” as Nicholas Carr warned in his book, “The Shallows: What the Internet Is Doing to Our Brains.” In this environment, it is more crucial than ever to have investment frameworks with long-term road maps that help filter out short-term noise that is not relevant to the longer term. At the heart of the debate is really the topic of sustainability and long-term competitiveness, key to all stock pickers.
Do you remember the companies in high-labor-cost countries that did not adapt to key long-term shifts in the global supply chain, such as the emergence of China as a global economic power and the internet? No – because they have most likely gone bankrupt. Long-term trends take time to have an impact on the global economy, but when they take hold, they can be brutal. Companies that do not have the vision to embrace them, or at least pay attention to them, may lose a lot in terms of competitiveness. As investors, understanding how the operating environment for the companies we select is likely to evolve due to certain dramatic long-term trends is crucial.
Looking forward, what are those trends?
Three key themes stand out: Demographic shifts, climate change and the ongoing impact of the emerging markets’ marginal growth of market share in the global economy over the next 30 years will have long-term consequences for supply and demand factors for many companies.
Demographics: the silent revolution
Demographers predict that the global population will increase from 2.3 billion people in 1940 to 9.6 billion in 2050 – a shift the planet has never seen before. This, combined with increases in life expectancy on a global basis (from 47 in 1950 to 77 in 2050) and unprecedented population ageing (the number of older people has tripled over the last 50 years and will more than triple again over the next 50 years), has profound implications. As mortality declined with medical progress and fertility trended lower, the percentage of the population 60 years old and older worldwide increased from 8% to 10% in the second half of the 20th century and is expected to reach 21% in 2050 (source: United Nations, Population Division, Department of Economic and Social Affairs). In the UK, it was recently reported that the number of centenarians increased by 73%. Every second around the world, two people celebrate their 60th birthday (a total of 58 million people every year), according to “Ageing in the Twenty-First Century,” a 2012 study published by UNFPA and HelpAge International. The increase in the old age dependency ratio has important implications for consumption but also for savings patterns and pension systems. While 30 years ago there were no “aged economies” in which consumption by older people was higher than that by young people, in 2010 there were 23 aged economies where consumption by older people was higher, and in 2014 there will be 89, according to the same study.
Finally, another characteristic of this important demographic shift to come is the expected growth of the global middle class. For example, the global middle class (defined as earners of income between US$6,000 and US$30,000) increased by 700 million between 1980 and 2009 to 1.9 billion people. This is expected to increase by an amount between 3.6 billion and 4.9 billion people in 2030 (source: Goldman Sachs, the Brookings Institution and the United Nations).
Emerging economies: short-term headwinds, long-term potential within a shift to maturity
With over 80% of the world’s population, and expected to account for over 90% of population growth between now and 2050, the emerging markets’ share in global GDP is continuously increasing, with over 50% currently. Interestingly, the growth of the middle class is in large part linked to the wealth effect in emerging markets (EM). While the latest financial crisis has affected the world balance, and in the short term the normalization of monetary policies and Fed tapering are a headwind for many emerging market economies, opportunities for long-term growth still exist. While the share of earnings coming from emerging markets (including both EM corporations and developed market corporations deriving revenues from EM) is 29% of the MSCI All Country World Index, it is still below potential, in our view. Looking forward, the key in selecting emerging market stocks will be to understand how the adjustment to a new post-crisis world in transition will play out. Fragmentation within emerging markets will become more obvious as maturing cycles unfold at various speeds.
Climate change: a cumulative, not a spot, event
The combination of increased global intensity in industrial development and demographic and emerging market evolution points to a third important theme: that of sustainability and of climate change. Many still dispute the climate’s ongoing changes partly because it is too disruptive to current human activities as we know them. Because the shift in human activity has happened so fast, the impact on the climate is being felt with a lag, but it is powerful. In fact, in May 2013, Co2 concentration in the atmosphere around the Mauna Loa Observatory in Hawaii hit 400 parts per million, a critical level. The last time such values prevailed on earth was, according to scientists, in the Pliocene epoch, which was 4 million years ago when jungles covered northern Canada (see “The measure of global warming” in the May 2013 issue of The Economist). Because carbon dioxide emissions are essentially cumulative, it is hard to reverse. Current policies of progressive tightening of carbon caps or placing limitations on total Co2 emissions are not adequate to mitigate the structural issues around climate change. The depth of the financial crisis has also meant that politicians have put climate change at lower priority levels on their agendas. The consequences, however, of an “undealt with” climate change could be drastic, particularly as they involve arduous negotiations between emerging and developed nations at differing levels of wealth and stages of development. While policymakers need to address this issue, corporations with a vision in all sectors of the economy will find business opportunities in helping to mitigate or adapt to climate change.
While these three long-term trends will continue to develop over many years, the impact they have as they combine and unfold must not be underestimated. It is crucial for equity investors to not only be attuned to them, but also to understand how companies are adapting to the shifts in the operating environment that the trends above, and the sub-trends that will stem from them, generate.
Important Disclaimer
Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets.
Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice. Investors should consult their investment professional prior to making an investment decision.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index consists of the following 24 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. It is not possible to invest directly in an unmanaged index.
This material contains the opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. This material has been distributed for informational purposes only. Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P. and Pacific Investment Management Company LLC, respectively, in the United States and throughout the world. ©2014, PIMCO.
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