The ‘Trump effect’ is only one aspect of the big changes happening to four forces that have shaped economic growth and stockmarket performance for 30 years, according to Alan Bartlett, partner at Goodhart Partners and co-manager of the £114m Global Opportunities trust.
Investors will have to act very differently to how they have done in the past to succeed in this fundamentally changing world.
The four world-shaping factors Bartlett identifies are demographics, security, the environment and technology.
Demographics
“The largest component of economic growth historically has been population growth, accounting for roughly 40% of economic growth over whatever time period you want to look at over hundreds of years. It just comes from having more people,” said Bartlett. But now, populations are getting older, with all the issues that come with that, including lower productivity and lower GDP growth.
Security
Not just national defence, but this theme also encompasses security of supply chains, and cybersecurity. “One of the themes that we think is a negative for economic growth over the coming years is the move away from a more benign world where, on lots of different levels, people didn’t have to worry as much about security as they do now,” he said.
Protecting sovereign security has become more of a priority. While this creates opportunity in areas such as cybersecurity, it also brings risk and uncertainty which is bad for economic growth. “If you can produce things in the cheapest possible way because you don’t have to worry about the logistics, military security or cybersecurity of supply chains, then that is a good thing for productivity,” Bartlett said.
The environment
“In the 30 years of so up to Covid, environmental issues were only local, not global. If you pollute a river, it would cause issues. smog in a city could require changes in the way businesses operate in order to improve the local environment. But, in aggregate, we essentially operated like the world’s natural resources were free,” Bartlett said. “Free is the best price for productivity.” But now, climate change has come home to roost and physical climate risk is a huge consideration for companies and their supply chains.
Technology
The last 30 years also saw the rise of the internet and many business models were able to use technology to make it possible to produce things in emerging markets, Bartlett added. “These four themes together were enormously supportive and explain a lot of what happened over that time period with low inflation, falling corporate taxes and a massive boom in asset prices against the background of surprisingly anaemic economic growth.”
While acknowledging these themes are not new, Bartlett says they could have a more dramatic and immediate impact than many people realise. The amount of national debt in many countries has increased so much that “some of the wiggle room we’ve had over the past 20 years to kick the can down the road” has now gone. The US has 120% debt to GDP, for instance, and the interest on that debt could break 20% of the total tax take next year, even without a recession, said Bartlett.
The macroeconomic fears that were always in the future such as an ageing population and environmental damage are no longer in the future, they are here today. In markets, a rising tide has lifted all boats for many years.
“If you were in the right things, which over that time has been tech, you could do better, but the cost of being wrong has been really low. This explains the rise of passive investing where you can just own a little bit of everything,” he said.
Now, business cycles, economic and political cycles are getting shorter and volatility is rising. This has “huge ramifications” for how money is managed, said Bartlett. “A lot of investors have become very comfortable with the idea that you can just pick stocks and ignore the macro. Well, not anymore.”
Active management and becoming a specialist
So what will investors need to do to succeed in this environment? They will need to be more flexible to identify investment opportunities. Bartlett argues for becoming more specialist and focusing on narrower areas.
Currently, the Global Opportunities trust he co-manages has several high conviction bets far removed from its benchmark, the MSCI World. It has 13% in small- and micro-cap Japanese value stocks through the AVI Japanese Special Situations fund, around 9% in defence companies, and nothing in the US consumer. Other top positions are the Volunteer Park Capital fund, Alibaba and Unilever.
Bartlett advocates for active management above passive investing and smart beta, and to beware relative value as a measure of attractiveness. Investors should think about the absolute return potential of investment opportunities for the long term, not how they look relative to other asset classes.
Investors will also need to reframe how they think about diversification and risk, including having the liquidity available to be able to change portfolio construction quickly. “You need a different framework for thinking about risk and trying to balance risks in a portfolio,” he added.