Coronavirus and black swan events
Article by Nick Matthews, [email protected]
The Pandemic effects felt far beyond the health issues.
I do not know much about epidemiology or virology and can only watch and learn about the spread of the Coronavirus as the news comes in. Clearly, it is something that we are taking very seriously in terms of investing money. It is something we would not want you to think otherwise, consequently I wanted to take this opportunity to comment.
If there is a lesson from history of such contagions, it is that we are following a similar path to others that would suggest a rapid expansion, constraint and action to get on top of contagion followed by normalisation, if not actual eradication.
A pandemic is going to have a real impact perhaps over the rest of the year with transport, economic activity and trade disrupted. What will come of the Olympics in Tokyo later in the year, given people must be planning now as to where and when to travel and the threat is that up to 60% of people could catch the virus. Even if the worst is over by the summer, the impact will have happened, income disrupted and profits lost.
As a result, it is difficult to think anything other than that it is certain the virus will have an impact on global economics. Potentially, much of this will be simply delayed as pent up demand comes surging through the system. That is the hope anyway and, again looking to history, is the story of disease outbreaks over the past twenty years and ties in with the principle that fear leads to more extreme reactions than are warranted.
On the other hand and what has the potential to be much more important in the long-term, is the further impetus that this gives us (at a time when the Attenborough effect is in full swing) to continue to change our behaviour.
Donald Trump is already making inroads in bringing manufacturing back to the US; disruption to global production lines may well prove to be the wind in his sails. Look at the problems of Samsung, Land Rover and Apple – all of whom have part of their manufacturing in China and all of whom are taking drastic action to mitigate disruption in China. Perhaps we will start to see shorter, more national supply lines much to the pleasure of US manufacturers but look out for higher prices feeding through to inflation.
Likewise, an outbreak from a live meat market will lead to a crackdown by the Chinese authorities to be sure, but well beyond those shores the connection to meat and disease will not go unnoticed by the more vocal commentators: the likes of PETA (People for the Ethical Treatment of Animals) advocating a vegan diet as a way of avoiding such outbreaks in the future. As in so many things, it probably will not persuade many people to change, but there are always a minority on the cusp who may view this as one more reason to cut down further on meat consumption. And who knows, the final straw in the move towards a meat free diet altogether.
Let us see if anything like this occurs, potentially helping us to become healthier and less polluting in the process; not by design but by developing the current feeling within society.
To sum up, it is difficult to know what course the virus will take, and how Governments and private companies will respond to human behaviour.
At this time, to reduce risk of the economic impact to equities we are reducing equity exposure in the discretionary portfolios we manage. The virus is pushing along the environmental agenda that is so dominant at the current time. We will keep a close eye on what is happening, and whether we think the likelihood for a longer than expected downturn from the disruption caused means we take a different course with your investments.
If you do not have a discretionary portfolio with us and would like to discuss your investments, please contact us.
How capitalists can help save the planet
Article by Julian Jessop, Independent Economist, www.julianhjessop.com
Most scientists agree that climate change is real, and that human activity is now the main cause. But there is still little consensus on what the rest of us should do about it.
There are some activists who argue that it is worth paying almost any price to reduce carbon emissions, even at the cost of crashing the economy. A few have called for the overthrow of capitalism itself, which might amount to the same thing.
This is surely misguided. It may well be true that without capitalism we would not have had the agrarian and industrial revolutions, and all the economic and social benefits that followed, as well as the environmental costs.
However, companies are simply responding to demand for goods and services which, in some cases, happen to be polluting. That is ultimately our fault, not theirs. With better information and the right incentives, we, as consumers, can all make better choices. High street retailers are already having to compete hard to offer alternative products with a smaller environmental footprint.
Of course, the market might sometimes require a little nudge. Carbon taxes, for example, can have an important role to play in making sure that prices correctly reflect environmental harms. The risk that they are a greater burden on lower-income groups can be minimised by making offsetting adjustments elsewhere in the tax and benefit system, so that a household that rebalances its spending is no worse off. Crucially, these mechanisms are much more effective in capitalist economies, where individuals are free to make their own choices.
There is also the question of how we should respond as investors. THis is an issue of individual choice too, and there are no easy answers. Trying to select companies that will do the most to benefit the environment is harder tha it might sound. Many new businesses will fail. Indeed, the government’s own track record here is poor; it was not so long ago that we were being encouraged to buy diesel cars.
Equally, it is understandable that some people no longer want to invest in industries that depend on fossil fuels. Nonetheless, divesting completely from companies in these sectors might be counter-productive, both because the world will still need fossil fuels for many years to come, and because these businesses are often at the cutting edge of the new technologies that will replace them.
In particular, many energy giants are working hard to move away from oil towards natural gas, which is probably less damaging to the environment, and to diversify further into renewable energy.
Similarly, who else but car companies are going to make electric vehicles? Indeed, free-market capitalism is good at rewarding entrepreneurs that do make a success of responding environmental challenges – as shown in the soaring share price of the US trailblazer, Tesla.
What we can say with confidence is that it is vital to think about these issues. Climate change is a truly global threat that none of us can avoid, and all of us have some part to play in tackling it.
Julian Jessop is an independent economist
Article by Gemma Barker, [email protected]
Adult nappies are outselling baby nappies in Japan!
I recently attended an investment seminar during which the speaker told us that that the market for adult nappies in Japan is bigger than the market for baby nappies – if that doesn’t bring home the reality of demographic change then I don’t know what does!
We at KMG have been talking about demographic change as a key investment theme for some time, but why don’t we hear about it more in the media? Fewer and fewer babies are being born around the world, and, through improvements in healthcare and attitudes to healthy living, humans are now able to live longer than ever. These slow and subtle changes do not make for a snappy newspaper headline, but they do raise questions about how a shrinking working population is going to sustain global growth and how the health and care needs of a growing retired population will be met. Whether or not technology will help us meet these needs is a focus for our Investment Committee; but that is a question for a whole separate article.
Recently our investment committee have been pleased to find a few articles which refer to the demographics story and I would like to share with you some of the statistics.
An FT article named “Europe’s demographic time bomb” by Valentina Romei highlights the severity of the shift in Europe. Using data published by the United Nations, Romei writes that the overall population of Europe will begin to shrink from 2021 while the number of working age Europeans has been shrinking since 2010. Working age is defined as age 20-64, although of course retirement ages are constantly evolving. Eastern Europe is experiencing the most pronounced change due to people moving to work in more affluent countries, and Southern Europe is a close second due to especially low birth rates which are reportedly due to “poor job prospects and low wage expectations”.
Looking further afield, the website “Visual Capitalist” have created an animated graph which shows the change in demographics in India compared with China over the last 70 years and projected forward to 2100. The effect of China’s one child policy is striking and highlights the real challenge that China is facing; the Chinese “fertility rate”, or total births per woman, was reported by the world bank to be 1.03 in 2017 while a rate of 2.1 is needed to replace the population. This is exacerbated by the relatively low numbers of young women in China due to family planning that began in 1980 and preferred young boys to young girls. Conversely, India’s population is continuing to grow, and this will of course influence India’s relative future investment potential.
The article makes no mention of the effect of migration on China or India, but I suspect that migration will have a huge impact especially as countries like Japan will need working age migrants to fill gaps in their population. China and Japan may find themselves in competition to attract working age migrants from India and Sub-Saharan Africa in order to keep their economies progressing.
I recommend you visit https://bit.ly/38qKRjr, where you can view the animated map for yourself.
Demographic change will continue to be one of the themes within KMG’s investment portfolios for many years to come, perhaps even via the adult nappy market.
Put this in your calendar!
We are busy planning for this year’s autumn seminars and can advise that the dates will be:
- Thursday, 15th October, in Surrey
- Friday, 16th October, in London
Keep an eye out for further information and invitations which will be sent to you in the spring.
How we issue your valuation reports is changing!
KMG has always had a passion for environmental issues and to add to our green credentials and our ISO 14001 certificate, we have launched a “Client portal” on our Papercloud system – which is our paperless filing system. Did you know we have been paperless for over ten years?
The client portal is available to all our clients and means that we can provide you with documents online, such as your valuation reports. This negates the need to send you these reports in the post, thus reducing the need for printing and using paper. This also replaces emailing the report to you as the client portal is a secure method of electronic communication, as required under the General Data Protection Act (GDPR).
We hope, over the next six months, to have most of our clients up and running on the portal. In the meantime, we are now using eco-friendly recyclable covers for valuation reports which are sent out by post. These can be recycled in the same way as paper and can be put in your normal paper recycling bin. We hope you like them as much as we do!
If you would like us to stop sending hard copies of your valuation to you, please let us know and we will be pleased to set you up on the paperless system.
Being a Productivity Ninja!
Article by Christine Norcross
We recently took part in an office-wide training day to teach all at KMG how to free-up headspace in order to do our ‘Boss thinking’ and decide where to direct our capacity, energy and attention.
Having spoken to friends and family about our approach to work, this training really struck a chord as so many are buried in their emails, not able to free themselves from the minutiae to focus on the bigger picture. KMG really do practice what we preach. We want to create opportunity and space for us to put all our qualifications to good use by allowing ourselves ‘thinking’ time. It is in this way that we can look at whatever conundrum is facing us, turn it around and come up with a great solution; thus achieving the best outcomes for our clients and a happy brain to boot!
As we head into the spring can we encourage you to take charge of the barrage of things vying for your time and make a note of what really matters to you, so that you can achieve what YOU want out of this year – corporately and professionally and personally.