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.
Managing Director, Adam & Company
Spoonful of sugar
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 Alibaba.com – 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!
The battle for power in the internet age
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.
Protein punch up
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.
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.View more from investments