Simon Pryke, chief investment officer at Newton, says the folly of relying upon trend extrapolation could be likened to that of the Christmas turkey: “Each day for over three years the turkey is well fed by the farmer, and so would be forgiven for thinking such a practice will continue and he will carry on getting plumper. Then on the 1,001 day the turkey is killed for Christmas dinner, which results in a catastrophic fall in his wellbeing index!”
1,001 days in the life of a Christmas turkey
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Pryke says a similar disastrous outcome could befall investors’ capital if they rely too strongly on recent trends: “There has been a strong recovery in the MSCI World Index since September 2008, but that recovery has not been driven by earnings growth. Rather, the stocks have re-rated. Why have stocks gone up if they have not been driven by earnings? The US Federal Reserve’s balance sheet has expanded from US$1 trillion to US$4.5 trillion over the same period, and every time we see a wobble in stock markets we wait for central banks to take action and then extrapolate the trend. But we don’t want to end up like the turkey.”
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This is why Newton uses themes as an alternative to forecasting, two of which it has recently evolved, Pryke adds.
“Newton’s investment theme of ‘Financial concentration’ has evolved into ‘Financialisation’, which reflects our concern that financial institutions have become too big and are distorting markets and decision making because the world is awash with finance,” he explains, “We do not dispute the financial sector has an important role in society but since 1998 world GDP has increased by 142% to $75 trillion, while world non-financial private sector debt has increased 214% to $157 trillion. Over the same timeframe, the annual foreign exchange market turnover has ballooned 253% to $1.3 quadrillion.[1] We have to question whether all of this activity is socially useful or if speculative trading has increasingly been encouraged over productive investment?”
At the same time Newton’s ‘Smart’ theme, which sought to capture the wide-ranging changes occurring as the result of increasingly intelligent and responsive technologies, has evolved into ‘Smart revolution’.
“Technologies are having a profound impact on how businesses and economies operate, but we also want to make sure we are focusing on the human impact that some of these changes are having,” Pryke said.
An example of a revolutionary technology in history is illustrated by the proportion of Americans working in agriculture, said Pryke. Back in 1900 around 40% of the American population worked in agriculture, which was down to 15% by 1950 and just 1.5% by 2014.
“Now it is not tractors and horses but smartphones that are ringing the changes and they look to be just as disruptive. The taxi app Uber, for example, has been banned by some countries to protect the income of traditional taxi drivers, while in other countries its impacts on the industry are already being felt.
“This is interconnected with one of our other themes, ‘State intervention’, which sees governments seeking to slow the pace of change in some areas and offset some of the near-term challenges thrown up by such change with short-term stimulus measures. Finally, it shows our global themes do not operate in isolation, and since the world we live in is more interconnected than ever our approach to investing should be too,” Pryke concludes.
Important Information
Past performance is not a guide to future performance. The value of investments can fall as well as rise, so your client may get back less than they originally invested. For professional clients only.. Any views and opinions expressed are those of the investment manager, unless otherwise noted. For further information visit the BNY Mellon Investment Management website. CP14169-11-03-2015(3M). Issued 11.12.2014.
[1] Source: Bloomberg, Bank for International Settlements, Newton, October 2014