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I love projecting myself into the next decade: to extrapolate possible secular growth and investment ideas which can be translated into feasible action. After all, this is part of my job; evaluating not only immediate investment opportunities, but also, and more importantly, identifying and understanding longer-term trends, broader developments and transformations. Some are clearly visible right now, while others need a little more time to surface. For instance, who would have thought 10 years ago that the Chinese authorities would actively participate in a search for a lost plane in the southern part of the Indian Ocean? Below, we consider 3 areas where powerful trends are at work and are likely to influence global investment choices in the years to come: demographic changes, the Internet of Things (IoT) in the banking industry, and the impact of the rapid increase in the availability of shale gas resources. Demographic changes For the last 18 months, emerging market equities have been lagging behind the developed markets on a number of indicators, but with recent events – the situation in Ukraine, unilateral and unequivocal actions by some states, the ever increasing electronic surveillance of citizens, and the increasingly likely depolarization of the EU-parliamentary composition – the center of gravity of the geopolitical world could change from the West to the East. This is a longer-term process, and in the past such processes have often gone unnoticed in their early phases. However, these changes matter. On the one hand we have well-established countries with governments in place that have little aspiration for change, and on the other, we have countries which apply a forward thinking strategy and well-trained people voluntarily stand-up for lead functions. This is particularly true in smaller countries. It is a fact that many of these smaller places have limited natural resources, so they rely mostly on intellectual abilities which act as artificial economy triggers, potentially making them attractive for investments in the long run – definitely worth keeping an eye on. To put the future reality into context, by about 2025 more than 600 million people will be lifted out of poverty as a result of
Today, about half of the world’s economic growth is created in and around 600 mega metropolises, containing more than 750 million households. At present, these are equally distributed across the globe, but by 2030, almost two thirds of global growth will be generated in today’s emerging market regions. Although economic growth in the emerging markets Asia (EMA) region is no longer expected to grow beyond the 10% threshold annually, it’s likely to grow in a more sustainable manner and be of a higher quality than in the past. This will help to accommodate the demographic changes ahead. The developed markets (DM) on the other hand, will sporadically show high global growth figures, but due to their demographics, their growth expectations are capped. In 2025, just 28% of the world’s population will live in the Western world and more importantly, a high number of these people will be close to or in retirement age. One positive outcome is that due to the smaller workforces in the Western world, the unemployment rate will ultimately drop to sustainable levels; however, overall consumption, excepting healthcare services, will stagnate in developed regions. The opposite will apply in emerging markets. Access related articles here: - Biotechnology - Dementia The Internet of Things and banking IoT (Internet of Things) refers to the concept of uniquely identifiable everyday devices (e.g. home appliances, automobiles, industrial machines, power grids, traffic control systems and healthcare services) equipped with sensors, micro-controllers and wireless modules that enable them to interact with their internal and external environment and make smart decisions by collecting and analyzing real-time data. The internet, which evolved nearly 25 years ago, is now prevalent in almost all aspects of our day-to-day life, including entertainment, communication, business, education, innovation and governance. It is undoubtedly one of the most powerful innovations in human history. Over the years, internet use has evolved from transmitting static information to e-commerce and social networking. The next phase in the evolution involves integrating physical objects (cars, home appliances, or just about anything you can think of) with the internet, providing them with intelligence and enabling humans to be more proactive and less reactive. This phenomenon is known as the Internet of Things (IoT). In today’s world, technology and connectivity are seen to be the drivers of a new economic cycle. This stems from the fact that connectivity is a unique “value add” to presently available products and services. Various applications aim to enhance and maximize the way we use existing resources. These improvements can then be distributed among the wider population who are able to benefit, and in turn further enhance economic activity. This is not only true for general products and services, but also, and in particular, for the banking sector. Up until now, the financial industry thought that the industrialization of its services would never happen and that a “business as usual” approach would do the trick. This attitude is somewhat surprising as a business that doesn't adopt new technologies will be forced, in one way or another, to restructure and adapt. Yet, admittedly the transition is probably very difficult for the financial sector, which is so locked into the idea that it provides services, and they can’t be packaged and sold like products. In the future, the driver for new business will be how much value add an application can bring to a corporation. In other words, how much of our services so far provided personally can be substituted by modern technology to enable the end-user to leverage our knowledge and expertise for further use. Last year Cisco published a fascinating white paper outlining what it calls the Internet of Everything (IoE) index. It calculates that businesses are already generating USD 613 billion in additional profit annually by connecting devices to the internet (mostly through connecting computers and mobile devices). Cisco calculates that this represents only 50% of the internet’s potential to drive profits, with USD 14.4 trillion of net profit likely to be generated by corporations over the next decade if the IoT is embraced. In essence, it has taken 15 years or so for companies to harness about 50% of the productivity potential of the internet, and the next 50% of productivity gain will likely require connecting “things”. The additional profits gained from connecting products and services to the internet are roughly equally distributed between better infrastructure utilization, increased employee productivity, improved work-flow administration, better customer experiences, and increased R&D productivity. Cisco anticipates that a large part of industrial and service activities will be impacted by the availability of artificial intelligence and advanced robotics. Cisco’s analyses were based on historic results such as gains achieved in the automotive industry or in the retailing industry, it’s uncertain whether these estimates are conservative or whether a few trends were extrapolated. Nonetheless, all of a sudden we’re noticing that something has changed and no sector will escape untouched. The implementation of the IoT in the banking and asset management industry will shift trends and interest not only to new markets, but to new enhancers and enablers. The fact that Pudong, Shanghai’s first free-trade zone, which didn't exist some 20 years ago, will become one of the world’s most important financial districts within the next 5 years is clear evidence that things are moving, faster … than one could imagine. In the past mega-institutions were the only actors involved in cross-border asset management activities, but tomorrow’s digital technologies will enable even the smallest independent asset manager to be a “micro-multinational” serving clients from 5 different continents. This new era is broadening and deepening market opportunities and allowing everybody to compete at the same arms-length; there are, however, a few prerequisites for ultimate success: a) willingness to change, b) perfect handling of the transition period, c) securing ongoing data quality, and d) safeguarding of privacy and security issues. In this rapidly changing world, traditional providers will need to decide how to position themselves: to either make their services available in an industrialized manner to the mass market, or attempt to upgrade their services to become ultra-high class providers, similar to a Gucci-style company. However, we note that across the globe there are 50 millions of people who can claim access to a Gucci-style shopping experience once or twice a year, while only about 100’000 individuals participate in the UNHW asset management market. Consequently, the IoT market related transformation is going to be interesting and competitive. Only companies that act with a real sense of innovation, adapt new technologies, share real information transparently and quickly, and adequately consider and focus on their clients’ needs, can assert that there is a place for them in this brave new world. Is the asset management industry close to squaring the circle? Access related articles here: - Advanced robotics - Technology ubiquity The meaning of the shale gas opportunity First impressions deceive. The rapidly increasing availability of shale gas will not improve the world’s social and economic stability, in fact, we estimate, that over the long term the opposite will be true! With the fast growing availability of shale gas, the energy sector is going through a never before seen reshuffle, the impact of which cannot yet be fully estimated, whether it be on industrial and economic development, or the geopolitical order. The question which we are presently unable to answer is: Are we moving from a crisis to an opportunity or from an opportunity to a crisis? A redistribution of power is in the making and during such phases everything is possible! What’s happened so far? The rapid development of the US shale gas industry and its worldwide economic impact is astonishing. Although this phenomenon has mainly been US specific, and should remain so, its impact is visible worldwide. Up to now, the US was a marginal exporter of coal, but from 2016/2017 on-wards it will also become a marginal exporter of LNG. The extent to which the US will be able to increase its LNG exports is highly controversial and uncertain right now due to the presence of strong lobby groups favoring other projects. But ultimately, one can expect that increased exports will happen due rapid innovations in horizontal drilling and hydraulic fracturing, which will make extraction safer and more ecological. According to an Energy Information Agency (EIA) report, technically recoverable gas reserves are at 7.3 trillion cubic feet; however, a large part of these reserves won’t be physically accessible due to the absence of water, the prevalence of environmental concerns, and the absence of high-technology infrastructure to support the refining process. Overall it’s estimated that only about 1/3 of the presently available reserves can be accessed. More importantly, more than 60% of these reserves are found in developed market countries. According to a study by the Exxon Mobil Group, by 2040 the global oil dependency ratio will fall from 40% in the year 2000 to less than 33% by 2040, while the gas dependency ratio will increase from 22% to close to 30% during the same period. Supply composition will be the game changer! Energy resources are found across the globe from Africa, Asia, Europe, the Middle East, Russia, to South and North America. The supply/demand configuration was, up until now, well balanced between developing countries on the supply side and developed countries on the demand side. But tomorrow’s supply and demand function is moving from the international to the local level. With this in mind, let’s look at the key regions in terms of shale gas resources. Europe: Shale gas development in Europe is much more complex than in the US. Firstly, the population density in Europe is higher and the basins containing shale gas are also home to millions of people. Secondly, ecological concerns generally rate as high as or higher than the desire for economic success. From a geological point of view, European shale gas reserves lie in much more complex formations compared with those in the US. Therefore, the cost of exploiting shale gas in Europe will be higher than in most other regions and almost impossible. Furthermore, with the future non-availability of nuclear energy and in the absence of performing alternative energy sources, the old continent is confronted with a major challenge. Gazophile regions with infrastructure that can transform and distribute gas will have an absolute advantage. US: Efforts to eliminate water pollution, worries around increases in seismic activity and the need to rehabilitate surface area destruction will lead to higher compliance costs. But as the production of shale gas in the US increases, the increase in compliance and rehabilitation costs could be diluted over an ever increasing revenue base; thereby making the US one of the world’s key producers of shale gas. With this development, it’s also likely that the US will monopolize and impose the direction of global energy policy. Middle-East: Exploration and the development of a meaningful shale gas industry require access to substantial fresh water reserves, something that is not readily available in most of the OPEC countries. While fossil resources are available, this equation poses a real problem to these nations, who currently require petro-dollars to balance their ever-increasing social spending costs. High oil prices (while production decreases) will increase the speed of shale gas developments elsewhere which will eventually jeopardize the fragile stability in the OPEC region. Russia: This continent probably has the most important shale gas reserves. The problem, however, is that Russia needs to become a reliable player in the energy game. Its basins are central and more or less equal distance from its key customers: Europe and Asia. As a number of its LNG facilities come on-line by 2016/2017, it will become the key player in this market. China: Chinese energy consumption is still mainly coal based; however, this is changing. By 2020, Chinese gas consumption will increase to about 25% of global consumption. This demand will mainly be covered by external supplies as the exploitation of its own substantial basins is unlikely, due to the absence of key technology and a lack of water reserves. Japan: After the Fukushima disaster, Japan started to change its energy consumption pattern. Today, about 1/3 of global LNG demand comes from Japan. As the country is restarting its nuclear program, the short-term influence on the LNG price should not be underestimated. This will impact suppliers such as Canada, Australia and the US. Is there an observable trend? While today things are more or less balanced between producers and consumers, tomorrow’s energy commodity markets will be much closer to the end-user; therefore, the price of energy will not only be a function of supply and demand, but also a function of national attitudes and habits. In this winners/losers game, regions like the Middle East and North Africa are expected to be negatively affected, while the US, Japan and Italy will potentially become winners. In the case of the US, the rapidly changing supply and demand function should impact the economy positively, while Italy and Japan should benefit primarily in the form of lower gas prices for their high level of domestic consumption. Access related articles here: Investment theme: Energy The challenges in the energy sector Changes in perspective Global opportunities are shaping tomorrow’s world. The new flow is changing both the way people trade and invest and also the way companies manage and develop their organizations. New global interconnections are creating new opportunities for wealth creation. For many of us the transition will lead to greater understanding and huge business opportunities, while for some, regrettably, change will bring stress. You are most welcome to comment on this piece and share it with your community.
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