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