The new global investment reality

The outlook for global economic growth over the next five years is the weakest it has been since 1990, the International Monetary Fund has warned.

This means that growth for the next five years will be the weakest it has been over the past three decades, Kyle Hulett, the co-head of investments at Sygnia, told the recent Meet the Managers conference held in Cape Town and Johannesburg.

There are four broad factors behind this expected low growth environment and resultant volatility in the markets, he said. But the good news is that each of those problems offers an investment solution for asset managers, he added.

Hulett echoed the sentiments of Ninety One, the home-grown global investment manager, that recently held a Global Investment Summit. At that event Clyde Rossouw, head of the quality strategy, said it is easy to get pessimistic about markets, but “there is a lot going on under the surface” presenting opportunities for investors.

Both Sygnia and Ninety One identified what Hulett called the four D’s - debt, deglobalisation, demographics and decarbonisation - as creating the confusing times in global markets.

1. Debt

The US government’s debt relative to the measure of its economic activity or gross domestic product (GDP) has reached 100%. At levels of more than 90%, economic growth falls dramatically as spending has to slow, Hulett said.

Rising interest rates are also increasing the debt burden dramatically and leading to a drain of government spending on projects and research and development.

The low interest rates have also destroyed productivity over the past decade and allowed so-called Zombie companies, which only repay the interest on their debt or need bailouts to survive, Hulett said.

Lower productivity has increased inequality and created a skills mismatch, and will also keep future growth lower, he said.

High debt levels lead to more market volatility as the shrinking spending pie creates political instability and a short-term focus in governments, Hulett said.

Volatility is here to stay and will probably increase with time, he said.

The investment opportunity

Rossouw said the rising interest rates have changed the cost of capital (borrowing or raising money) and in order to identify opportunities investors – or their fund managers - need to look for companies with balance sheets that facilitate investment.  Their valuations also need to make sense, he said.

Iain Cunningham, the co-head of multi-asset growth at Ninety One, said some companies have come to believe low interest rates are the norm and have based their business plans on it. But, Cunningham said, quoting one of the world’s most successful investors, Warren Buffet: as the tide goes out (rates go up), we will find out who's been swimming naked (the businesses in trouble).

2. Deglobalisation

Many companies are sourcing new supply chains at home or in regions they regard as more secure following the Covid-19 pandemic and Russian invasion of the Ukraine. This trend has been dubbed deglobalisation.

Unfortunately, this means supply chains will be less efficient and will pass costs on to consumers, which will result in higher inflation and lower growth, Hulett said.

The US has become more inward looking, but global trade has not reduced and there is more trade between other countries, like Europe, Asia and South Africa, and especially with China, Hulett said.

The investment opportunity:

Hulett said as the world is becoming less US-centric, investors should turn their focus to markets outside of the US.

US consumption at 70% of global GDP is likely to be eclipsed by the rise of consumers in China and India. Already its GDP is much lower relative to world GDP than the percentage of the US share markets relative to the rest of the world’s markets in the MSCI World Index, Hulett said.

Phillip Saunders, the director of Ninety One’s investment institute told the manager’s Global Investment Summit, that China is incredibly important in the area of renewal. It is the workshop of the world and recently became the world’s largest exporter of cars.

The world economy is becoming more multipolar, which is potentially more balanced, he said. Significant differences between Chinese and US economic cycles are becoming apparent which adds complexity, but also offers greater diversification than the US-dominated world of the past, he added.

There are four strong growth areas in China, Wenchang Ma, portfolio manager of the 4Factor China fund at Ninety One, said at the Ninety One event.

The first is in consumption by China’s growing middle class. Chinese consumption spending is expected to match the US’s by 2030 and Chinese companies are winning in the race to feed that demand, Ma said.

The second theme is innovation and self-sufficiency that Chinese companies are also leading. They are filing a quarter of global patents annually, she said.

The third area is energy transition and the growth of renewable energy as China also faces energy shortages and even loadshedding.

The fourth area is the reform of “sleepy” state companies, Ma said.

3. Demographics

The world’s population is ageing, with fewer people entering the workforce and reducing potential GDP growth.

This will be a significant headwind for the global economy, Saunders said.

More people retiring increases the ratio of people who depend on the state and taxes earned from the economically active, Hulett explained.

The investment opportunity

The generation that is retiring, or has recently retired, are those born after World War 2 and known as the Baby Boomers. Hulett said they are a large generation controlling a dominant amount of the world’s wealth and will be spending large amounts of money on health care.

Healthcare spending will significantly outpace GDP growth, and healthcare stocks are already posting strong returns, he said.

4. Decarbonisation

Awareness of climate change and the increased cost for companies being made to pay for the damage they are doing through carbon taxes, carbon credits or rehabilitation of mines has led to a focus on decarbonisation, Hulett said.

But this comes at an extra cost which will reduce their earnings and reduce growth, he said.

The investment opportunity

The new industry that has arisen to bring about decarbonisation is booming right now. Having investment exposure to companies in the renewable energy and sustainable economy sector is vital, Hulett said. Read more: How do asset managers use ESG to invest sustainably?

Diedre Cooper, Global Environment portfolio manager at Ninety One, said the International Energy Agency (IEA) is tracking investment for climate change globally. In 2022 this investment was at about $1.4 trillion, “a smidgeon” more than the investment in the generation of fossil fuels at $1.375 trillion. It is the first year in history that this has happened and a pivotal moment, she said. 

Hulett said the IEA forecasts that renewable energy will increase by 50% by 2026.

Cooper said the US has passed the Inflation Reduction Act giving companies there 10 years of tax credits for investments in renewable energy, electric cars, the hydrogen economy and carbon efficiencies.

This has led the European Union to consider replicating this legislation, but it has yet to get its 27 member countries to agree, she said. She therefore expects there will be significant domestic policy to ensure global companies do not relocate to the US to take advantage of the tax credits there.

Energy security is a great theme in many countries - in Europe because of the Russian Ukraine war, in the US because of climate change legislation and in South Africa because of loadshedding, Hulett said.

The growth of companies involved in renewable energy is good and the valuations are still reasonable which offers fantastic potential for good returns, he said.

What investors should do

Hulett said investors who want to reap the benefits of these good investment cases need to invest with managers who can manage the volatility and find opportunities in a low growth, low return world.

Well diversified multi-asset funds that have exposure to diversified sources of return and include these themes, are a good place to start, he said. Read more: Why are there different kinds of multi-asset funds?

Once you are invested, you must not panic when markets fall or sell when markets are rise over shorter terms, Hulett said. Instead, let your carefully chosen fund manager manage the bumpy ride with the aim of delivering good returns over long terms.