4 Major Events Are Changing The World

Published in Investing on 25 October 2011

What to think about when investing for the long term.

It seems as if great changes are happening in the world right now. Politics and economics are in a state of flux from Europe to the US to China to the Middle East. That matters if, like me, you buy shares that you might hold for ten years or more.

We naturally tend to anchor our decision-making in the past, assuming that the future will evolve gradually from the present. But if there is going to be abrupt change, then we need to force ourselves to overcome that anchoring bias. We need to think explicitly about what the world will look like when we cash in our ten- or twenty-year-old holdings to hopefully finance our luxurious retirement and buy a yacht or two.

That's why I've been thinking about these large global themes lately. Of course there's the risk of reading too much into current affairs and exaggerating their long-term impact. But it feels to me as if four major events are combining to change the world as we know it: the global financial crisis, the euro debacle, growing eastern wealth and the Arab Spring.

Austerity

Fundamentally, the global financial crisis is the result of the West having lived beyond its means for too long. Bringing western economies back into kilter will not only mean a prolonged period of austerity but also economic power will shift away from the West, and with it geo-political influence.

The eurozone crisis adds another dimension. It is not just that some European nations have been the worst over-spenders. It is the consequence of creating a currency union without combining policy making. The strategy of muddling through looks increasingly unsustainable, so there will have to be either some form of break up or the creation of a centralised European political and economic bloc. Both alternatives have dubious historical precedent.

Meanwhile China, India and the East grow in economic size and prosperity. I wrote recently about the rise of the East, but even so I was taken aback by Channel 4's interview last week with Lin Liqun, chairman of the Chinese Investment Corporation, in which he blamed eurozone debts on "the overburdened welfare system built up since the Second World War in Europe -- the sloth- inducing, indolence-inducing labour laws".

"People need to work a bit harder, they need to work a bit longer, and they should be more innovative" he declared.

Strong stuff. It's telling that he felt confident to lecture European society, and a chilling message from one of the world's largest creditor nations.

Arab Spring

Finally, the Arab Spring has seen the downfall of autocrats such as Mubarak to Gaddafi. Their demise has been first abetted and then applauded by western leaders with the same enthusiasm they showed for the downfall of Saddam Hussein, and with about as much forethought as to the consequences. 

It is early days to predict how events will pan out, but it is safe to assume that the Islamic world will increase in geo-political and economic importance, led by governments that may be more benevolent to their people but not necessarily more friendly towards the West.

On top of these four big events there is the huge rise in global population and migration (with the ensuing pressure on natural resources), the demographics of ageing populations in much of the developed world (and China), the growth of emerging markets, and climate change.

And when thinking about investment, there are a couple of additional factors: the likelihood that printing money will give us a decade or so of inflation and, positively, historic low stock-market valuations.

Investment

How does all this impact on today's investment decisions? I've written about positioning my portfolio for a blow up of the euro. But generally I think it colours investment analysis rather than pointing to specific buys or sells. But it does matter. Let's take the banking sector as an example.

Lloyds Banking (LSE: LLOY) may be a recovery candidate, but with 90% of its revenues coming from the UK, the best it can recover to is a reduced share in a market where austerity is the order of the day. Similarly, Royal Bank of Scotland (LSE: RBS) gets 96% of its revenues from the West and well over half from the UK.

By contrast, Standard Chartered (LSE: STAN) relies on the West for under 10% of revenues, while revenues at HSBC (LSE: HSBA) are roughly split equally between West and East. They are both long-term holds for me (despite my portfolio showing losses on both!), precisely because they are in markets that will thrive over the next decade or two.

More from Tony Reading:

> Interested in emerging markets? Why not request our special report -- 4 Shares To Profit From The Rise Of The Chinese Consumer -- it's free!

> Tony owns shares in HSBC and Standard Chartered. The Motley Fool owns shares in Standard Chartered.

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Comments

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diddyda 25 Oct 2011 , 11:21am

Mr. Lin Liqun is spot-on in his assessment of the Western Economies and social structure. We need to get our act together and stop believing the world owes us a living.

Businesses on the whole appear to have got the message, in that they need to spend less, save more and be more productive. Not sure if the message has gotten through to governments and individuals yet.

Not sure about the Middle East. It is peopled by mainly those who refuse to accept that the world has moved on since the 600's. Oil is always going to be a factor unless the civilised world can come up with an alternative.

DIYIncome 25 Oct 2011 , 2:55pm

Yes, Lin Liqun is right - but this is the government that brought you (or rather them) mobile execution vans.

On the Middle East, I have no confidence that anything good is going to come from it. Cue civil war, fundamentalism and disrupted oil supplies.

So, maybe BP looks good...

jadeplant 25 Oct 2011 , 5:52pm

If you're looking at trends over the coming decades, you might want to add in increasing costs of fossil fuels as easily accessible supplies dwindle. This will go along (hopefully) with a shift in energy technologies and probably a corresponding shift in power to the countries that position themselves to make best use of them.

Climate change, which you mention, will certainly disrupt familiar patterns, eg of food supply and distribution.

ANuvver 26 Oct 2011 , 3:29am

Trends in global food supply are the most disturbing to me.

I'm not sentimental as an investor. If people want to smoke, fine. They have the choice. But people don't have the choice to starve or not.

To profit from that is a step I will not take. If you don't feel the same way, then off you go. Rice is the new gold.

UncleEbenezer 26 Oct 2011 , 10:44am

People may not have the choice over starving, but to a great extent societies do. And guess what? Not only do we accelerate progress towards global famine, but most of the chattering classes condemn China for making a valiant effort to avoid it!

How can you avoid investing in it? No intensive/unsustainable agriculture, and that includes commercial so-called organic farming. Nothing in the associated distribution chains, like supermarkets and logistics. And above all, nothing anywhere in medicine that has killed off natural population limiters in the third world where rampant growth is now centered.

jadeplant 26 Oct 2011 , 1:30pm

"And above all, nothing anywhere in medicine that has killed off natural population limiters in the third world where rampant growth is now centered."

Rather harsh. Especially when resource use and waste/pollution per head in the developed world is many times higher.

sippquixote 26 Oct 2011 , 2:13pm

All this discussion about the Euro and various nations leaving it. Why not read below what a director of Deutsche Bank says:


So... by now everyone realizes that the Euro is in major trouble and will no longer exist in its current form for much longer. However, the common view is that it is Greece and possibly other PIIGS countries who will be forced out if the Eurozone is broken up.

But few are talking about another possibility... GERMANY leaving the EU.

One who is talking about this is Dr Pippa Malmgren, a former economic advisor to George W. Bush and a Director for Deutsche Bank. According to Malmgren, Germany has already ordered the printing of Deutsche Marks in anticipation of a possible withdrawal from the EU.

Malmgren states, "the social contract between Germany's citizens and its leaders preclude debt monetization given their history." She adds that, "Germany has already begun to emphasize the need for a new EU Treaty that would compel fiscal harmonization, penalties for those that break the Maastricht Treaty rules and other undertakings that would harden Europe's defenses against economic default risks going forward."

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