InvestmentsMay 31 2013

Economic growth comes from higher spending

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Economic growth in America averaged 2.5 per cent a year between 1960 and 2000 but, excluding oil producers and such like, there were some 20 countries that grew faster than that, by an additional 1.5 percentage points a year.

Failure of emerging market investment

What this means is that the world has become more equal and richer and, even more importantly, that ordinary people in their billions can now envisage a life for themselves far from the misery of bare subsistence. Given this, it may seem strange that investors in emerging market economies have done badly in recent years, but this is exactly what has happened.

There are explanations for why this is the case. Investment enthusiasm for the new is always overdone and, counter-intuitively, there is no correlation between gross domestic product (GDP) growth and stock market performance. Investors need to concentrate on basic markets, rather than on economies; not on hard commodities, such as metals, that are necessary to industrialisation, but soft ones like food grains or necessary elements for life like water.

More people, less tillage

By 2050, the world’s population is expected to have grown from the current 7bn to 9bn, mostly in the emerging world. Demand for the basic necessities of food, water and housing will all rise sharply, but supply will lag.

Furthermore, as a Sarasin & Partners quarterly report pointed out, as populations grow, so does land degradation, urbanisation and pollution. These three factors reduce the available arable farmland, with hectares of farmland per capita falling from 0.38 per person in 1970 to an estimated 0.13 per person today.

One hectare of tillage [land suitable for growing food] will feed 19 to 22 people with vegetables; if used for cattle, it will barely feed two people. Yet prosperity – and the industrialisation of the food industry through companies such as McDonald’s and KFC – means that meat eating becomes ever more enticing and affordable.

People need food that titillates their taste buds as well as nourishes them. Do-gooders who assure the poor that if the money is not there they can subsist on beans for steak do not understand this. From basic staples to vegetables and fruit to protein and patisseries there is a human hierarchy of food needs.

Investing in food

Chart 1 shows chicken consumption in different countries of the world, and the US figures come in addition to similar quantities of beef hamburgers, soda pops and sugared doughnuts.