Investment Trusts  

Investment spotlight: Patient capital

Investment spotlight: Patient capital

Today, the world differs from the one we imagine it to be. The wealth, technology and economic growth that for the last two centuries benefitted the West over the rest has now gone, and divergence has become convergence. We must hope that Chinese savings will play a similar part over the coming decades to the role of US capital during the 20th century.

Decline in real income

The world economy is not deglobalising, although the rapid growth of trade, relative to output, has slowed. Emerging and developing countries have not only become important in world output, they have become increasingly important in population. Change in relative economic power, and shifts in the comparative size of populations shape our world.

Article continues after advert

By 2050, the UN reckons that sub-Saharan Africa’s share of the global population will be almost as large as that of all the high-income countries in 1950, but much poorer. The immigration crisis of the EU will not end any time soon. These economic convergence and shifts in population are central elements in the big economic picture. 

Change and the US

Technological change brought about the internet. This merging of data processing and communication became the most important technology of our era aided by the collapse of the relative cost of semiconductors. But the sources of dynamism – technological change, productivity growth and global trade – are slowing and no one knows why. 

This global technological frontier has been driven by the US ever since the late 19th century. But Robert Gordon, a professor of social sciences at Northwestern University, argues that the US economy has never matched the outstanding productivity it achieved between 1920 and 1970. 

One result, which has been powerfully reinforced by the 2007/08 collapses of banking systems, has been real income stagnation in Western high-income countries. 

Rising populist pressure across these economies makes managing these shifts far more difficult. 

The McKinsey Global Institute calculates that up to two-thirds of the populations of many rich countries suffered flat or falling real incomes between 2005 and 2014, so it is little wonder then that so many voters are grumpy. They are neither used to this, nor wish to become used to it.

Politics and safety

This is not an attractive business environment in which to invest, either for growth or productivity. Then factor in the politics of President Trump and Brexit, and the desire of most investors is to take no risk. 

But as Jeremy Grantham, founder of GMO, recently wrote: “Contrary to theory, the market price-earnings level does not primarily reflect future prospects, but current conditions. The variables it weights heavily are not academically or economically correct, but those that make investors feel comfortable. 

“High profit margins and stable, low inflation dominate this feel-good list, with stability of GDP growth (as opposed to actual growth) coming a distant third. 

“Investors’ extreme preference for comfort – as with human nature – has never changed. 

“The ebb and flow of these variables explains previous market peaks and troughs. These comfort factors, for example, have been at an extremely high average level for 20 years (as have price-earnings ratios) and remain so today, so today’s high-priced market is the completely usual response from investors.