Four mega-trends shaping markets

The first has been brewing for some time now and is perhaps the trend that we can be most certain of - the retreat of globalisation and the rise of a more regionalised, protectionist and populist world. This matters to investors because it draws a line under the past forty years or so, during which markets have prospered, albeit with some nasty air-pockets along the way. The shift in power from labour to capital over that period explains both why markets have flourished and why it’s going to be much harder work for investors as the pendulum unavoidably swings the other way.

Even if Donald Trump is not re-elected next year (which I imagine he will be), he has struck such a chord with middle America that any viable opposition will have to ape his nationalist rhetoric. The populism may come in different flavours, left or right, but it will be much the same thing. Great-power-driven geo-politics, more regionalised trade, probably the end of a unified, seamless world-wide web, less freedom of movement of people and capital. The myth that globalisation was an inevitable force of nature will be exposed - it was always a political choice and those can be reversed.

As an aside, this is why Brexit is such a rash experiment. You don’t have to believe that Britain needs to be tied into a political project to know that we will be better off closely-aligned with a continental economic bloc that can compete in an increasingly regionalised world, no longer governed by a rules-based global order. Europe and the US must work together to take on the challenge posed by Russia and China. Global Britain only makes sense in a global world order. And that is disappearing.

The second trend could be a consequence of this more compartmentalised, populist world. Inflation does not feel like an issue today. The pressure is on central banks to conjure rising prices out of the disinflationary morass in which we now feel trapped. But it always looks like this just before inflation becomes a problem again. No-one sees any risk of spiralling prices, but labour markets are tight in pretty much all developed markets. If governments finally step up to the plate and accept that fiscal stimulus needs to pick up the baton from the central banks’ exhausted monetary injections, then spending and borrowing could rise sharply in the years ahead.

Just as political barriers are being thrown up around the world, technology will tear down protective walls within economies. This disruption is the third mega-trend and it is the hardest to play as an investor. We have already seen the early stages of this process as the potential of the high-powered computers we all carry in our pockets has changed the rules of the game for a handful of specific industries such as hotels, taxis, restaurants and retail.

But this process has barely scratched the surface. Just think how our physical infrastructure has been developed to support a pre-digital world that no longer exists - our railways, high streets, bank branch networks. Much of this might end up redundant in the world we are creating. Consider too how behind the curve regulators and governments have been in policing a world in which currencies are not issued by the state but by a social media network. How will we keep our investments safe when they are traded not by financial services companies but online retailers or search engine providers?

All this assumes that the disruptors will replace incumbents and become the new establishment but increasingly we need to think about who will disrupt the disruptors. AOL and eBay were challengers once. The risk of overpaying for the next big thing is very real in a world where the business lifecycle becomes vanishingly short.

As if this investment backdrop were not challenging enough, the rules of the game are changing even more profoundly in one final arena. The admission by America’s influential Business Roundtable group that promoting shareholder interests is no longer the central purpose of companies is a revolutionary idea whose time has come. Under pressure from activists and investors alike, companies have accepted that considering environmental, social and governance (‘ESG’) factors is not just the right thing to do but good business too.

Climate change represents a huge threat and opportunity to companies around the world. We have reached a tipping point. First, because the argument has been won. Environmentalism is no longer a fringe belief but mainstream. So too is the understanding that human exploitation is unacceptable. Sustainability principles are now just another tool in a financial analyst’s kit. With greater focus on these ESG factors, more and more money will flow in this direction and sustainability will be seen as a competitive advantage because well-run, responsibly-managed companies will have access to cheaper capital than their more reckless competitors.

These mega-trends are not nailed-down certainties, but I would be amazed if all four were not key influences on the direction of markets over the next five to ten years. They won’t tell you what to invest in, or when, but it would seem rash to make any investment now without testing it against these four themes.

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