One of the things you’ll notice about some of the world’s most successful investors is that they identify long-term areas of opportunity and buy into them long before they become fashionable, or even rate a mention in the financial press. They then stick with their holdings, even if they go through really bad patches.
There’s even a handful of funds that specialize in investing in the long-term themes that they believe in. The best-known is probably the P&C Global Thematic Investors Fund run by Iain Little and Bruce Albrecht, whose balanced accounts achieved annualized dollar returns averaging nearly 21 per cent in recent years.
Here is a summary of one of their recent presentations on the eight major themes they’re investing in, which are: The burgeoning global middle class, water and energy shortages, outsourcing, ageing population, Japanese restructuring, the supply/demand imbalance in commodities, and China.
The burgeoning global middle class
Globalization in trade, increasing travel, migration and working abroad, and interracial marriage, are producing cultural integration, with better opportunities for global brands.
Technology is a major driver of global wealth creation, and its impact is intensifying. “As late as the 1940s, the product cycle (idea, invention, innovation, imitation) stretched to 30 or 40 years. Today, it seldom lasts 30 to 40 weeks.”
80 per cent of the scientists, engineers and doctors who ever lived are alive today – and exchanging ideas in real time on the internet. It’s estimated that at current rates all the technical knowledge we work with today will represent only 1 per cent of the knowledge that will be available in 2050.
Retirement of a wealthy post-World War 2 generation in the developed nations will be a “major driver” of consumption trends. In the US the “Baby Boomers” (born 1946-64), who comprise 28 per cent of the population but control 50 per cent of personal income, are entering their peak earning years as they mature, offering a lucrative market for travel, entertainment and housing.
Simultaneously, unprecedented economic growth in developing countries is causing an explosion in their middle classes. Using an annual income of $6,000, adjusted to purchasing power parities, they already number some 665 million people, of which 290 million are in China and 91 million in India.
Companies catering to an increasingly active and opulent lifestyle. Travel: P&O, Carnival Cruise Lines, Intercontinental Hotels Group, China Air, Emirates.
Entertainment: Sony, Disney, Calloway Golf, Vivendi, Nike, MGM Mirage. Luxury retail: LVMH, Tiffany, Coach, Burberry, Blue Nile.
Possible plays
Firms catering to the increasingly wired world of gadgets. Consumer devices: Apple, Nintendo, LG, Matsushita Electric, Nokia, Sharp, Lenovo, Hewlett Packard.
Internet/communications: Google, Baidu, Amazon, China Telecom, Orange, Hutchison Whampoa. Retail: Best Buy, Gome Group, NEXT Retail India.
Businesses in real estate and related industries to benefit from trading-up of lifestyle. Property: Sun Hung Kai Properties, DLF, Emar, Tameer, CapitaLand.
Construction materials: West China Cement, Wuhan Iron & Steel, Pohang Steel, ArcelorMittal, BHP Billiton. Infrastructure: Fluor, Halliburton KBR.
Water shortages
“Universal access to a clean, safe water supply will be a key element to global economic prosperity in the 21st century.”
In the developing world one in every five people is without safe water, while 2.6 billion live with inadequate sanitation. 6,000 children die every day from diseases associated with lack of fresh drinking water, inadequate sanitation and poor hygiene. In the past ten years diarrhea alone has killed more children than all the people who have died in armed conflict since World War 2.
The United Nations has set targets to halve by 2015 the proportion of people without access to safe drinking water and basic sanitation. This will require massive investment in infrastructure and required supplies of materials and technology.
Although the stock of fresh water is virtually fixed (most water is either in salty oceans or frozen in ice), agriculture will require much more of it to provide more food for growing populations, and foodstuffs such as meat whose production is relatively water-intensive.
Possible plays:
Potential beneficiaries: Aqua America, Southwest Water, Aquacell Technologies, Danaher, COPASA, Ebara Corp., Doosan Heavy Industries & Construction, Arrowhead Water Products, Sanesp, Fluor, Suez, Techem, Uponor, Veolia Environnement, Guangdong Investment, General Electric, RWE, China Water Affairs Group.
Energy
Reduced rates of increase in production and in discovery of major reserves is going to mean higher oil prices. That, plus fears about dependence on supplies of oil and natural gas from politically stable sources, and about greenhouse gas generation, are focusing attention on alternative energy sources.
Readily-available options are nuclear power, coal (particularly so-called “clean” coal), liquefied natural gas and hydro-power. Others requiring further development to become commercially attractive include wind power, fuel cells, solar power, bio-fuels and tapping the energy of the oceans.
Possible plays:
Traditional energy players likely to benefit: PetroChina, ExxonMobil, Lukoil, Saudi Aramco, CLP, Valero, Marathon, Schlumberger, Petroleum Geo-Services ASA.
Alternative energy players? Nuclear: Rosenergoatom, Tokyo Electric Power, Guangdong National Power, Areva, Ameren, British Nuclear Fuels.
Hydro: Norsk Hydro, Electricité de France, Korea Electric Power.
Fuel cells: Ballard Power Systems, Advent Technologies, Hoku Scientific, Medis Technologies.
Wind: Florida Power & Light, Vestas, Gamesa, American Superconductor, Suzlon, Nordex, AES.
Solar power: First Solar, Kyocera, Sunpower, Sierra Pacific Resources, Suntech.
Biofuels: Elecnor, Green Fuels, Novozymes.
Coal: Arch Coal, American Electric Power, Kailuan Clean Coal.
Ocean: Ocean Power Technologies, Finavera.
General Electric is a major player in several renewable energy sectors.
Migration of work loads/outsourcing
Changing availability of skilled workers favours a shift in production to the emerging economies. In Europe the work force has actually started to contract.
“Last year China’s schools graduated more than 600,000 engineers and India’s schools produced 350,000, compared with 70,000 in America,” the US Department of Education reported in 2006.
Among the many other advantages China offers global producers are a fast-growing domestic market, an excellent infrastructure, low-cost labour with a high rate of literacy, a still largely untapped engineering workforce, an abundance of managerial and infotech talent.
But outsourcing is not without its downsides, such as concerns about business continuity and delays, risk of loss of intellectual property, demands of regulatory compliance, risks of political instability offshore and of “backlash” in your home base country.
Possible plays:
Among those likely to benefit: Wipro Technologies, HCL, Tata Consultancy Services, Infosys Technologies, ICICI Onesource, Accenture, IBM, Patni, CapGemini, Sodexho Alliance, Hewlett Packard, Achievo, Genpact, Accus, Convergys, Source I HTMT.
Ageing and demographics
From now to 2050 the world population is expected to grow 42 per cent, to 9.4 billion.
But in the developed world the more important trend will be an explosion in the proportion of populations that are elderly – from one person in every seven now to one in five by 2025. Even in Asia the proportion is expected to nearly double, from one in 17 to one in ten.
Among several important trends among the elderly will be:
– High-growth markets for their particular needs. In the US, says the fund, “this generation of retirees is more affluent than any in history.” There’s going to be a retirement boom.
– A continuing shift away from parents living with children, particularly in Asia. “At one time, living alone was thought to indicate social isolation or family abandonment of older people. (But) research in developed countries shows that older people prefer to reside in their own homes and communities, even if that means living alone.”
– “Feminization.” As men on average die younger than women, those who survive into their 80s are mainly female.
Possible plays:
Consumer products and services: Costco, Target, Wal Mart, Archer Daniels Midland, Procter & Gamble, Marriott International, Starbucks, Altria, Amazon, LVMH Group, Carnival, Coach, Sony, Diageo, Matsushita Electric, General Motors, McDonalds, Las Vegas Sands, Lenovo, Samsung, Intercontinental Hotels, Phillip Morris, News Corp., Aristocrat Leisure, Cosan, FEMSA, Gruma, Grupo Bimbo, Loyas Americanas.
Healthcare: UnitedHealth Grloup, Amedisys, Genentech, Home Diagnostics, Novartis, Glaxo SmithKline, Smith & Nephew, Stryker, Biocon, Nicholas Piramal India, Johnson & Johnson, AstraZeneca, Shanghai Pharmaceutical, Pfizer, Sanofi-Aventis, Bristol-Myers Squibb, Aspen Pharmacare Holdings.
Financial: Bank of America, Goldman Sachs, AIG, UBS, Barclays, Aegon, China Life Insurance, Industrial & Commercial Bank of China, HSBC, Swiss Re, Mastercard, Ping An Insurance, State Bank of India, Banco do Brasil, Banco Bradesco, Porto Seguro.
Japanese Restructuring
The long period of adjustment after the bursting of the land-price bubble and stock-market collapse in the 90s could be over. One sign is that the prices of commercial land have stopped falling after 14 years.
The crisis of the 90s forced radical changes upon the Japanese business community. The keiretsu conglomerates sold off many of their cross-holdings. Bankrupcy law has been reformed to make such proceedings more palatable to the Japanese psyche. There is increasing acceptance of Western corporate management practices – and even the appointment of foreigners to senior executive positions.
The turnaround in Japan “is still an enormously under-appreciated reform,” say the fund managers:
– With outside directors on the boards of major corporations, firms are leaner and more agile. Companies are now “far more shareholder-friendly, profitable, entrepreneurial and cost-focused.”
– A renewed self-belief is emerging and a domestic-driven recovery is now well under way. In addition, China has an “insatiable appetite for goods and services.” It has become Japan’s largest foreign trade partner.
– Pension reform policies have changed Japanese saving habits, boosting investment in equities.
– The aging population “poses challenges – but also presents opportunities.”
Despite the problems it has experienced, “Japan is still the No.2 economic powerhouse in the world,” and it has “turned the corner.”
Possible plays:
Stocks to benefit: Mitsubishi Tokyo Financial Group, Sumitomo Trust & Banking, Komatsu, Mitsubishi Heavy Industries, Fanuc, Kobe Steel, Sumitomo Metal Mining, Mitsubishi Chemical Holdings, Matsushita Electric, Japan Tobacco, Seven & I Holdings, Toyota Motor, Kirin Breweries, Sony, Daiichi Sankyo, Eisai, Yahoo Japan, Kyocera, Advantest, Softbank, NTT DoCoMo, Tokyo Electric Power, Tokyo Gas.
Commodities: inelastic supply
“A global population boom, coupled with the increased industrialization of emerging regions going forward, herald an explosion in global… demand” for oil, base metals, foodstuffs, water, even gold (as “newly-prosperous nations look for safe havens for their wealth”).
The fund managers believe that for various reasons supply will be inelastic – not growing enough to meet rising demand. Moreover, that supply will be price-inelastic – quantities will not grow at the same rate that commodity prices rise.
Possible plays:
Here are some probably beneficiaries… Oil: see traditional players listed above for energy.
Base metals: Anglo American, Rio Tinto, CVRD, BHP Billiton, Norilsk, CODELCO, Freeport McMoRan, Alcoa.
Foodstuffs: Monsanto, Syngenta, El DuPont de Nemours, Mosaic, American Vanguard, EDEN Bioscience Corp.
Water: see the list under the heading Water Shortages.
Gold mining companies: Newmont, Agnico Eagle, Barrick, Kinross, Yamana, Rio Tinto, Anglo American.
Shipping companies such as: COSCO, CSCL, K Line, Neptune Orient Lines, Frontline, Star Shipping, Diana Shipping.
China development
China is a land of giant achievements, challenges… and investment opportunities:
– Its national output per person has been growing at a rate of nearly 10 per cent a year since 1979. Its economy is now the world’s fourth largest and will soon overtake Germany to become the third biggest. Remaining growth potential from globalization, urbanization and “exploding demand across the board” is “enormous.”
– China is already the world’s third most important trading nation. Its exports and imports reached $1¾ trillion last year, generating a foreign trade surplus of $178 billion.
– Foreign direct investment reached $250 billion by 2004. (It is now probably more like $400 billion).
– Although its population growth rate is low (below that of the US), it’s off such a huge base that the country’s natural increase is nearly 21,000 every day – compared to fewer than 3,400 for the whole of the developed world.
– Over half-a-century major improvements in healthcare raised average life expectancy at birth from 41 to 72 years.
But…
– 160 million Chinese still live on less than the equivalent of one dollar a day, 150 million work in cities without a social safety net, and seven of the world’s ten most polluted cities are in China.
Possible plays:
Global large-cap beneficiaries: General Electric, Caterpillar, FedEx, PepsiCo, Starbucks, Goldman Sachs, Wal-Mart, Altria, Mastercard, SABMiller, Cisco Systems, Las Vegas Sands, General Motors, ArcelorMittal, Swiss Re, Siemens, HSBC, Total, Novartis, Intercontinental Hotels, Mitsubishi Heavy Industries, Komatsu, Matsushita Electric, Sony, Japan Tobacco, Rio Tinto, Saudi Aramco, Lukoil.
Domestic players: PetroChina, Aluminum Corp. of China, China Shenhua Energy, West China Cement, Guangdong National Power, Kailuan Clean Coal, ZTE, Sun Hung Kai Properties, Baidu, China Mobile, China Life Insurance, Bank of China, China Construction Bank, Sinopec, China Telecom, Baoshan Iron & Steel, Ping An Insurance, Huaneng Power International, Air China, Shanghai Electric, Wuhan Iron & Steel, CITIC Securities, Lenovo, China International Marine Container, China Shipping Container, Kweichou Moutai.
By Martin Spring in On Target, a private newsletter on global strategy