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Investment Outlook 2019 | Looking on the bright side



In this issue of our Investment Outlook we set out the case for optimism – even in turbulent times. We also examine the importance of the soybean, discuss the power struggle in this internet age and focus on a new event in the Chinese calendar.

10 min read

In our 2018 Mid-Year Outlook, we reflected on the outbreak of a trade war between the US and China, rising interest rates in the US and the UK, and the return of volatility to asset returns after a period of calm upward movements for share prices.

Many of these themes will continue to exercise our minds in 2019, as will the likely slowdown in global growth this year.

Whilst the daily news cycle continues to obsess over the US President’s Twitter feed, the ups and downs of the stock market and tedious process of the UK exiting the European Union, we try to look to the horizon and focus on the long term where developments across the globe show how the world is changing and where there remains grounds for optimism.

One area which is certainly getting better is expected lifespans. We examine the statistics behind this and the implications for investors. We also highlight how vaccines continue to play a role in this improvement and where there are increasing opportunities for companies to create new vaccines to prevent diseases.

We look at the continued emergence of China as an economic superpower and how it affects Asia and the world, from how their ‘Singles’ Day’ shows an explosion in the spending power of their consumers to how changes to their purchasing patterns of a humble little vegetable are shaping global trade.

We write about the economic implications for central bankers and politicians of the increasing grip that powerful internet retailers have on day-to-day life.

And finally, we discuss how humans tend to have a pessimistic outlook on the world, but how, over the long term and across a large range of issues, things are generally getting a little better all the time.

We hope you enjoy reading our thoughts.


Graham Storrie

Managing Director, Adam & Company

  • 01

    Spoonful of sugar

    One of the most remarkable human achievements in the past 100 years has been the jump in life expectancies. We look at the role vaccines have played in this and some new areas of development.

    Forty years ago, the World Health Organisation (WHO) declared Smallpox an eradicated disease. A virus which killed one in ten people in the eighteenth century was no longer to be feared.

    The story goes all the way back to 1796, when one of the most important developments in human history took place as the English scientist Edward Jenner cut into the skin of an eight year old boy called James Phipps and infected him with Cowpox.

    Cowpox was a benign virus, and Jenner realised, having observed agricultural communities over two decades, that exposure to it could prevent someone getting the altogether more deadly Smallpox virus – milkmaids were seemingly immune. The mild Cowpox virus provoked the immune system to produce antibodies which were able to fight off a future invasion of Smallpox.

    Vaccines immortalised cattle in public health – Jenner having coined the word in reference to ‘vacca’ the Latin for cow – and they have protected billions of us in subsequent centuries from highly dangerous diseases.

    Where Jenner led, American chemist Jonas Salk followed – he invented the polio vaccine in the 1950s. Concerted efforts by the likes of the WHO have seen 3bn children vaccinated over the past 30 years against this terrible disease – which caused 350,000 cases of paralysis a year as recently as 1988 – and it is but a distant memory.

    The routine of the annual flu vaccine may seem quite mundane when compared to the far more lethal Smallpox and Polio; however we are on the cusp of being able to wipe out many more diseases through vaccination.

    The discovery that cervical cancer was caused by the Human Papillomavirus (HPV) led to GlaxoSmithKline and Merck developing vaccines and, for the past ten years or so, teenage girls have received this injection. This should eliminate this deadly disease in a generation or two.

    In a similar way, a meningitis vaccine is also now given to children in the developed world and increasingly in developing countries. This is especially important in sub-Saharan Africa where the bacterial version of the disease causes over 100,000 deaths a year and, indeed, Saudi Arabia requires proof of vaccination from visitors on the Hajj and Umrah pilgrimages.

    Whilst new products for the likes of shingles and dengue fever are proving successful, the biggest prize at the moment is probably a vaccine to combat malaria.

    This highly infectious disease – provoked by parasites carried by mosquitoes rather than a virus – continues to cripple the development of tropical and sub-tropical regions around the world and the 200 million infections a year result in over 500,000 deaths.

    Despite its long history – Egyptian mummies from millennia gone by have been found harbouring the infection – scientists have struggled to control it. The best prevention up until now has been nets to prevent mosquito bites and a combination of several drugs including antibiotics.

    GlaxoSmithKline is perhaps the closest to cracking the disease, with their Mosquirex vaccine currently being rolled out in pilot studies in Kenya, Ghana and Malawi. They do not claim it is a silver bullet; however, it is the first vaccine against this extremely complex disease ever approved and will surely form an important fight against it, in combination with nets and anti-malarial drugs.

    Unlike many treatments, vaccines are also extremely cost effective when compared to the financial and social costs of treating the underlying diseases – WHO estimates the cost of the polio vaccine at not much more than 10 pence and is often delivered on a cube of sugar. Furthermore, they also play a role in reducing our dependence on antibiotics to which we can soon build up resistance to. However you look at this issue, it really is true that prevention is better than cure.

  • 02

    Living the single life

    One of the most significant events in the global economic calendar was invented barely 20 years ago by four students at Nanjing University, China.

    ‘Singles’ Day’ initially involved parties and events designed to celebrate the single life, before spreading rapidly across China, morphing into something akin to our Valentine’s Day with dates and gift giving. It occurs annually on November 11th – the date was chosen as the numbers look like single figures, or, depending on which story you believe, is a playful reference to ‘bare branches’, a Chinese phrase used to describe men who are perpetually single.

    However, Singles’ Day only really became a phenomenon ten years ago when – China’s version of Amazon – and its founder Jack Ma turned the idea into the most important day in the Chinese economic calendar. 

    They changed it from a focus on love and relationships into a shopping festival to promote their e-commerce sites with the slogan ‘Even if you don’t have a boyfriend or girlfriend, at least you can shop like crazy!’

    How successful has this been? In 2018 Alibaba sold a remarkable $30.8bn of goods in 24 hours, reaching the first billion $ in 85 seconds. And that’s just one company! For context, Black Friday in the US generates a mere $6bn in online sales. The idea being promoted is, if you are single, treat yourself and if you have a partner, buy them a present too!

    It is also a huge technical feat – the demand on technology and logistics is immense. A few years ago, as its popularity grew, it was in danger of collapsing under its own weight as it took weeks to deliver packages. These issues are history, and the event has become a showcase for Chinese technology– from mobile telephones to video platforms and package delivery expertise – and demonstrates the increasing importance of the Chinese consumer economy to the West and the rest of Asia.

    Many western celebrities are rolled out to promote products or perform – everyone from the West’s most celebrated singleton James Bond (in the form of Daniel Craig) to singers like Katy Perry. Western brands also benefit, of course, with Apple devices and Dyson vacuum cleaners amongst the top sellers in recent years. It is interesting that the West’s biggest e-commerce company, Amazon, has attempted to copy it through their ‘Prime Day’ during the past few summers.

    It is not without its critics, however. Many of these promotions – similar to Amazon’s ‘Prime Day’ and ‘Black Friday’ – in the post-Thanksgiving sales period involve slashing prices and serve to get rid of excess inventory. It is not real demand, in the sense that consumers were probably going to buy these items anyway – they simply delay purchasing until the discount period opens up, or pull forward future demand. And some would see it as an ultimately empty and meaningless festival of consumption.

    However, the Chinese authorities are keen for such focus on retail therapy. Their economy remains heavily reliant on trade, especially uncertain at the moment given the increasing tariffs on Chinese imports to the US. The Chinese tend to save – which is to be commended of course as protection from future unemployment or to save for retirement. However, if China is to continue to grow and develop it is crucial that the economy becomes more balanced in favour of consumption rather than exports. It is also important for the global economy that the Chinese buy more, and that their huge trade deficit comes down naturally rather than through a trade war with the US. This will be further helped as Chinese companies roll out the event across Asia in coming years.

  • 03

    The battle for power in the internet age

    Superstar firms are disrupting traditional channels of influence. Should policymakers be concerned?

    Jackson Hole, a deep valley between the Teton and Gros Ventre mountain ranges in Wyoming, is no one’s idea of the centre of the financial universe. And it is for precisely this reason that the US central bank, the Federal Reserve, meets there once a year to get away from the noise of financial markets to do some deep thinking.

    The ‘Fed’ is arguably the world’s most powerful organisation as a result of its control over US interest rates, which historically have had a huge effect on the US and global economic cycles. One of the oldest mantras of investment is ‘don’t fight the Fed’ – if they are determined to change the course of growth and inflation, they have the tools to do so and will succeed, so don’t bet against them.

    However at this year’s summit they showed scope for humility by asking themselves if they really understand the new economic and business models which have emerged in recent years.

    We have all witnessed the rise of these giants such as Amazon in the West and Alibaba in the East over the past decade; they have truly disrupted the retail industry – just witness the collapse of UK retailers in recent years. The questions that now intrigue us, and that are understandably concerning global policy makers, are: Just how powerful are these ‘superstar’ firms becoming? Is the Fed still in charge? Can they stimulate consumer demand more effectively than central banks? And do the internet giants now have the power to control the labour market and affect the future direction of interest rates?

    Consider the role that such firms play as leaders in the retail industry in the US. Amazon has a 50% share of the US retail e-commerce market. This dominance means that it is a price leader which acts as a ‘signal’ to other retailers. Sophisticated pricing algorithms enable competitors to identify price movements and attempt to price match instantly. Similarly, the same technology enables them to instantly respond and pass on the impact of external shocks to customers, such as big currency moves, economic shocks or the recent increase in tariffs on Chinese imports. Online prices can be adjusted rapidly.

    As Harvard Professor Alberto Cavallo postulates; “A few large retailers using algorithms could change the pricing behaviour of the industry as a whole”.

    This effectively means that a handful of large firms can rapidly instigate nationwide price changes which will impact consumer spending and inflation.

    By contrast, traditional central bank policy tools such as interest rates and money supply, can take a year or more to influence the economy. If these mega companies can influence consumer spending more effectively and rapidly than institutions can, this has implications for policymakers around the world. With consumer spending accounting for 70% of total GDP in the US, the growth and direction of the economy looks set to be increasingly influenced by the actions of these behemoths.

    Superstar firms are also able to exert their influence on labour markets. At the beginning of November last year, Amazon introduced an increase to their minimum wage across its employee base. In the US, this level has increased to $15 an hour, whilst it has risen to £9.50 in the UK. This will help over 250,000 US workers and 17,000 UK workers, as well as several tens of thousands of seasonal workers.

    However the company did not stop there as they have started to lobby Congress to raise the US Federal minimum wage, which currently sits at $7.25. Why would their boss Jeff Bezos do this? Is it an altruistic move for the benefit of his employees? Or is this all part of an aggressive business strategy?

    Such is the scale and influence of these gargantuan firms that their wage rises will place the onus on competitors to follow suit. The US and UK labour markets are currently extremely tight, with unemployment at multi-decade lows. Whilst wage rises are great for staff, central bankers will worry about the inflationary effects and politicians will worry that internet giants have a metaphorical chokehold on industries such as retail.

    If competitors want to retain or attract new staff (especially in the holiday season), they may not have any option but to try and match Amazon. Placing further pressure to raise wages could well be the final hammer blow to many struggling retailers across the US and the UK, which would enable the online giants to continue to tighten their grip on the industry – surely a motivation for Amazon’s move.

    How to react to superstar firms’ growing influence will be a question keeping many policy makers up at night. We will continue to follow with interest how these channels of consumer and economic influence evolve, and the potential ways in which policymakers may consider responding.

  • 04

    Protein punch up

    As the emerging world has grown in wealth, so it's people have been consuming more meat in the form of pork and chicken and the demand for soy protein has been rising.

    Caffeine addicts would probably say the coffee bean; chocoholics, cocoa. And many of the rest of us would identify it as oil. However, if you want to pick a commodity to understand many of the trends shaping the world today it is useful to examine the humble soybean.

    This vegetable was originally native to East Asia and has formed an important part of the human diet, being found as tofu and miso in Asian cuisine, as well as the ubiquitous sauce. It is also increasingly cherished globally by vegans and the lactose and gluten intolerant in everything from soy lattes to yoghurts and desserts.

    It is however, as a food for animals that its popularity has exploded in the past century. It is a remarkably rich source of protein and fibre as well as vitamins and minerals. It is very low in cholesterol and is relatively friendly to the environment given that it can be densely cultivated; although there are concerns over water use and deforestation to cultivate it. Finally, it is very cheap relative to other potential feedstocks.

    As the emerging world has grown in wealth, so it's people have been consuming more meat in the form of pork and chicken and the demand for soy protein has been rising. Nowhere is this more evident than in China, which was self-sufficient in soybeans 20 years ago, but where demand has more than quadrupled, meaning that China now imports 90% of their soybean needs, and purchase 65% of all soybeans traded internationally. Remarkably, half of all pigs in the world are in China.

    The Chinese have plenty of land of course, however not enough is arable for self-sufficiency and with pressure on the supply of water, they have become more vulnerable than they would like to be to the global trade in this commodity. China is acutely aware of its food security, given millions died of starvation in the Great Famine, a mere 60 years ago and in 2017 purchased the Swiss agrochemical company Syngenta for $43billion as part of a strategy to become more self-sufficient.

    The United States imposed tariffs on large numbers of imports from China during 2018 in a crude attempt to reduce the $600bn trade deficit they have with them. In contrast, China imports little, relatively speaking, from the US and so has few targets for retaliation. However, in the summer of 2018, they introduced a 25% tariff on US soybean imports.

    On the face of it, this looks strange – just as US taxes on Chinese imports push up prices for American consumers, so Chinese import tariffs on American soybeans will push up their import costs. But China seems to have a long term plan.

    Firstly, they intend to wean their farmers off this American produce – and currently 30% of their demand is satisfied by the US – by cutting the recommended amount of soy ration used in pig feed from 20% to 12%. The current level was set in the 1980s in consultation with American farmers, who now use this lower level themselves. Next, they have increased imports from places such as Brazil and Argentina. And finally, they intend to set aside more land to grow their own – currently this is mostly used for human consumption.

    Whilst none of these represents a perfect solution – for example, the US and Brazil are in different hemispheres, meaning together they deliver an all-year-round supply – the Chinese do not want to be bullied and they will look through the short term disruption, knowing that American farmers – often in Trump supporting states – will suffer more in the long term.

    Unsold inventories have risen sharply in the US. The fact that President Trump has had to introduce a $12bn aid package to help American farmers hit by this Chinese retaliation surely shows the futility of trade wars.

  • 05

    Great expectations

    Longer lifespans mean we need to prepare better for the future.

    We are all living longer and many people retiring now can expect to live for another 20, 30, or 40 years. It is well known that the UK’s population is ageing, with the latest estimates from The Office for National Statistics projecting an additional 8.6m people aged over 65 by the year 2066.

    The reasons for this are twofold. Life expectancy continues to rise, driven by improvements in health such as the decline in smoking and new medical technologies which are able to cure diseases, or at least make them chronic rather than fatal. The second reason is the decline in fertility – women are choosing to have fewer children and to have them later in life.

    As shown in the chart, if you are male and live to 65, the probability of living until you are at least 80 is 67% and if you are a woman there is a 76% chance of making it to 80. The odds of living until you are 90 are also good and if you have a partner, there is a 50-50 chance that one of you will make it that far.

    Longer average lifespans are of course something to be celebrated, however it is important both as individuals and as a country that we are well prepared and can adapt to this.

    The changing age structure of the population brings a broad range of challenges to society in the form of welfare (pensions), health care costs, transport and housing requirements. With more people living longer it will place further pressure on Government budgets as well as our own finances, and a crucial consideration will be around funding those years.

    For example, there will be an increased pressure on health and social care spending, as the bulk of a person’s consumption of these comes in the last few years of life. Exacerbating this further, older people tend to live in rural and coastal areas where costs of care are higher than in cities.

    In addition to this, an ageing population will strain Government finances by way of pension payments. These are already the largest component of welfare expenditure at 4.6% GDP, and it seems likely that state pension schemes will have to become ever less generous.

    Income tax revenues relative to government spending seem likely to fall to a worrying degree.

    As individuals, we will have to act prudently and consider that the pension you get from the State may not be enough to fund the life you want to live. The younger that we can start to prepare for the future the better. We may well have to work into later life or build up large funds to draw on, or most probably both. Whilst we should all rejoice at the possible longer lives we will hopefully enjoy, it is important to prepare for the future by thinking long term, saving and investing.

    As investment managers, the structural change of an ageing population will also bring a number of opportunities for the country and for businesses that continue to look to the future and develop innovative products and solutions. Areas such as healthcare, transport and technology continue to offer exciting opportunities in this regard.

  • 06

    Getting better all the time

    Human beings seem hard-wired for pessimism, but there is huge scope for optimism.

    It is difficult to recall a time when the human race was not about to be wiped out by impending disaster – a virus pandemic, nuclear war, a lack of food, a lack of oil, acid rain, falling sperm counts and now the lethal combination of Trump and Brexit. Survey data shows how gloomy we are – when asked ‘Over the next 15 years, do you think living conditions for people around the world will get better or worse?’ only 25% of Britons thought they would get better compared to 32% who thought they would get worse. And we are optimistic compared to the French (13% better and 49% worse). Interestingly, the most optimistic responders were all in the developing world, topped by the Chinese at 58%.

    The inconvenient truth for the doom-sayers is that the world as a whole is getting better on almost every measure which matters and has been doing so for decades.

    When Bill Gates, Microsoft founder and now philanthropist, asked Oxford University’s ‘Our World in Data’ team for three facts everyone should know, they highlighted three data series: the vast improvements in infant mortality; the fall in fertility rates; and the number of people who have moved out of extreme poverty. Understanding these provides a framework for understanding what is going on in the world. Bill Gates funds this team of statisticians partly to help inform his philanthropic decisions – what should we be trying to achieve and how?

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    Source: Our World in Data September 2017, via Ipsos. Title: 'Perils of Perception'.

    Long term positive trends such as these may surprise us. Why is this? Do humans have a pessimism bias? It seems that we do. We fear events such as terrorism and plane crashes when in fact the odds are massively against us suffering from these – in 2017 there were zero fatalities in commercial passenger planes.

    Evolution seems to have equipped us with filters – we are constantly bombarded with information in the form of sights and sounds, as well as our modern stream of data. We tend to be very efficient at seeing and hearing the bad stuff – our peripheral vision is attuned to picking up movements, maybe a lion on the horizon. And the same is true with all the data modern life throws at us. We filter out the vast majority of it but remember the bad stuff – the stuff that can cause us harm. It has helped the human race survive and indeed thrive throughout our history; however it also means we tend to get a misleading impression of the world.

    Media organisations are of course familiar with our propensity for noticing bad news. ‘If it bleeds it leads’ is a maxim which drives what is shown and published. Furthermore, the positive changes we are seeing tend to take place over a very long period of time, whilst the media serves an increasingly short news cycle.

    For example, the number of people living in extreme poverty – defined currently as being without shelter, basic healthcare and surviving on less than $1.90 a day – has fallen from 1.9bn in 1990 to below 700m today, with the main improvements coming in Asia, especially in China.

    The evening news could have run a story every day for the past 30-odd years with the headline ‘130,000 fewer people living in extreme poverty than yesterday’, however the types of changes we are seeing take place over long periods of time and are often unseen to western eyes and as a result you will rarely read about them.

    Of course, no one is suggesting that the world is close to being perfect – no one would suggest that $1.90 a day is a good number – or indeed that you could ever get 7.5 billion people to agree on anything.

    Does this matter? Yes it does. Despite everything which has happened in recent years, facts still matter. Misconceptions about big issues can affect everything from our general mental health to how we vote. It can also affect our wealth.

    High profile stock market falls such as the one experienced in 2008 live long in the memory. Investors who suffered may be scarred and fear losses. However, irrational fear can hold us back and make us poorer – stock market corrections happen every year and usually consist of a fall of 10% or so at some point during the year. It is as pointless as worrying about cold weather in winter – it simply happens. Very few of them turn in to a proper bear market with losses of 20% or more over several years. And even when they do, bear markets soon turn to bull markets, with history suggesting stocks deliver positive returns three in every four years.

    As Warren Buffet says, the stock market is a device for transferring money from the impatient to the patient.

  • 06


    Thank you to all contributors not named above.

    For All Enquiries Please contact Susan Boyd

Key Takeaways

From increased life expectancy to greater spending power, life for the majority of us really is getting better all the time.

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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