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Mid-Year Outlook 2018 | The World in Motion

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Summary

Welcome to the Adam Investment Mid-Year Outlook 2018 – The World In Motion

From smartphones to trade wars and the demographic disruption of Millennials, this issue of Mid-Year Outlook provides some insight.

  • 01

    Introduction

    In our Outlook 2018 back in January, we were confident that the growth of economies and company earnings would continue and that asset prices should grind higher, but warned that volatility would likely come back into markets after the benign environment we saw in 2017.

    This has certainly proved to be the case in the first half of 2018, as concerns have grown about a trade war between the US and China, higher US interest rates, and the business models of several large technology companies, dependent as they are on exploiting their customers’ data. After falls of 10% and more in the spring, many stock markets have recovered.

    This increase in volatility is entirely normal and a reversion to historic averages. In the short term, markets find plenty of things to worry about and most of them are impossible to predict. Political events and their effects on markets are perhaps the best example of this.

    Looking beyond these however, what we said six months ago still rings true – whilst wary of short term fluctuations, we must be aware of deep structural changes taking place in the world and how they may offer long term opportunities and threats to our investments.

    In this mid-year update, we discuss more of these structural themes which have emerged. We examine how a new group of consumers – those who have come of age this millennium – are affecting businesses and their strategy. We wonder whether the growth of free trade since the end of World War II is about to go into reverse. And we also look at the smart phone market and how they are influencing society.

    We hope you enjoy reading these articles.

     

    Graham Storrie

    Managing Director, Adam & Company

     

  • 02

    Millennials and their money

    Drawing the line between one generation and another is not an exact science. However Millennials – loosely defined as being born in the 80s and 90s and coming of age in the new millennium – are seen as a distinct group by demographers.

    Sociologists have been studying this group for many years, however they are now becoming of huge interest to economists and stock market analysts. Why? They are now a third of the workforce in the world’s largest economy – the US – overtaking the previous Generation X, and in 2019 they will also outnumber the post war ‘Baby Boom’ generation in terms of population by 73m to 72m. And this is not just a developed world phenomenon – there are 400m Millennials in each of India and China. The choices they make, including the way they spend their money, will define the success and failure of products and services for years to come and shape economies and society.

    As a result of coming of age during the time of economic disruption relating to the Great Financial Crisis, globalisation and huge developments in technology, research suggests they are different in a number of areas. They expect to be able to access goods and services with the touch of their phone screen; they tend to dislike globalised mass-produced food brands, and seek authenticity; and they tend to favour companies and products with environmental or social aspects.

    Finally, attracting their attention is difficult – they are watching television far less than the generation before, which could be reached with a Saturday night TV ad, preferring to spend their time on social media, YouTube and on-demand films and TV. 

    All this disruption could pose a particular challenge for consumer groups and their iconic mass marketbrands – could Unilever’s Hellmann’s Mayonnaise, Heinz Tomato Ketchup and Coke fade into history the way Nokia, Blockbuster and Woolworths have?

    Inevitably these mega-companies have been reacting. They have earned advantages such as incredible distribution networks and are boosting their ability to service customers on-line. They also have tremendous financial firepower.

    “The choices they make, including the way they spend their money, will define success and failure of products and services for years to come ”

    It may well seem that Coca-Cola has a lock on the non-alcoholic beverage market, making four of the top five selling fizzy drinks globally, however the market is in decline due to concerns of this new generation around sugar and artificial sweeteners. Coca-Cola are changing and now have 500 different brands, 21 of which generate more than $1bn. To keep up with the tastes of a new generation of customers, the types of drinks they have added include vitamin-enriched waters, sports drinks, organic bottled tea, and fruit smoothies.

    Coca-Cola’s ‘Share a Coke’ campaign capitalised on the Millennials’ need for individualism by cleverly personalising a mass produced product through the use of names on packaging. The campaign increased coke consumption in young adults by 7% in Australia, where it started.

    Unilever is also being proactive on facing up to the challenges and threats ahead. They purchased Dollar Shave Club which is a subscription based service selling men’s grooming products via an on-line portal, and whose advertising is almost completely conducted via campaigns on social media and YouTube. The price advantage and convenience of delivery to your door means they are thought to have over 10% of US razor blade sales, disrupting the market and making Gillette look expensive and digitally out of touch with young consumers.

    Source: Pew Research Center using US census bureau projections and data

    As well as buying or developing new business models to service millennials these companies are also using their financial muscle to snap up young brands such Sir Kensington’s condiments (Unilever), Alpro (plant based milks and yoghurts for vegans bought by Danone), and Freshly (direct-to-consumer healthy meals by Nestlé). These products appeal to perceptions around their authenticity, their healthiness and their freshness.

    The changes being seen in end-markets are also driving companies to act as better citizens as their Millennial customers demand higher standards of environmental and social governance. For example, Hellmann’s Mayonnaise is now moving to using only cage-free eggs, Unilever and KraftHeinz are close to having all palm oil from sustainable sources, and all three companies have commitments to reducing water, waste and energy use.

    The challenges and opportunities for companies will only increase further over coming years, as the Millennials’ generation drives economic and cultural changes with their (digital) wallets, forcing companies to adapt to their needs quickly or die.

Coming next week we discuss the growth of the smartphone and comment on the trade tensions between the US and China.

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Key Takeaways

We often think of demographic disruption as being the ageing of society and the effects that has on companies and sectors. However, the Millennials will shortly become the largest group of workers and consumers and their tastes will define the success and failure of companies for years to come.

About Adam investments

We offer discretionary investment management to individuals and their families, and to charities. We take a long term approach to investing and we believe this gives us an advantage in a world where markets and media are increasingly focused on short term news.

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