Kondi Nkosi, Country Head for Schroders in South Africa
Decarbonisation, Demographics and Deglobalisation are changing the investing landscape and presenting South African global investors with a new set of investment opportunities.
Never believing that ‘this time it’s different’ can be a dangerous mindset for investors. Things can and do change, as global investors are now experiencing with the 3Ds.
The 3Ds are a reversal of some of the trends that have dominated the investment landscape for the last three and a bit decades. We believe this 3D reset will reshape global investing.
The 3Ds are decarbonisation, demographics, and deglobalisation.
Decarbonisation is gaining momentum
Decarbonisation and the transition to greener energy is gaining momentum, in part due to geopolitical tensions and environmental concerns.
Tension between the West and China, and the Russia-Ukraine conflict have sped up the transition to greener energy as countries look for alternatives to traditional sources of energy. Economies and countries are also facing greater physical damage from traditional fossil fuels, making the transition more necessary and urgent.
Giving further impetus are the various legislative requirements, subsidies and tax incentives for cleaner energy sources.
Achieving the 2050 net zero emission scenario will mean some companies have to cut emissions by more than 40% in the next seven years alone.
There will be investments in new technology and innovation as decarbonisation intensifies, which is good news for investors. However, they will need to actively evaluate and manage investments in this sector to find the best opportunities for growth.
Smaller labour pools and scarce talent drive development in robotics and automation
Demographics are also changing global investing. South African investors are well aware of the aging populations in developed economies, despite not experiencing a similar trend.
Advanced economies have high numbers of retiring baby boomers, and an additional number of early retirees following Covid-19, some through illness and others from a re-evaluation of their lives. The net effect of this and lower population growth for business is a smaller labour force and skills’ scarcity.
There is competition for talent, which pushes up costs. The smaller labour pool also means workers are in a better position to demand higher salaries, especially as they face higher costs of living.
To counter the profit margin squeeze from higher labour costs, companies are turning to technology, including automation and robotics, to lower costs and boost productivity.
These growing industries are investment opportunities global investors need to take advantage of.
Deglobalisation, back to the old, old normal
The final of the 3Ds is deglobalisation. The world is getting just a bit smaller as multinational companies reshore to ensure supply chain certainty.
A direct and immediate effect of Covid-19 and geopolitical tensions has been supply chain disruptions. Global trade, that once crossed borders and oceans quickly and efficiently, was and is still disrupted and delayed. Companies are opting to reshore, move locations, to where there is more supply chain certainty, either in friendly territories or closer to home.
Reshoring is a direct consequence of deglobalisation. Some countries and economies and sectors will benefit. For example, manufacturing sectors in countries multinationals favour will get a boost.
Good news for investors, not for inflation or interest rates
The 3D reset presents many new opportunities for investors, but there are a few words of caution.
The 3Ds may have inflationary effects, pushing up costs and ultimately keeping interest rates higher for longer.
One example is decarbonisation.
Fossil fuels are cheap and abundant, much more so than some of the elements used in greener energy sources such as cobalt, nickel and graphite. More competition for these elements means higher prices, which may fuel inflation.
Deglobalisation may also lead to higher inflation as companies have to invest more to reshore, and may lose cheaper sources of labour when they move locations.
We have come from an era of low inflation and low interest rates, which meant cheap, easy money. That isn’t part of the investment landscape anymore. Now, we are seeing rapid decarbonisation, changing demographics, and deglobalisation, along with higher inflation and interest rates – a reversal of the trends we all got used to. The era of cheap and easy money is over, and although the 3Ds are offering growth and investment opportunities, they may also mean higher inflation and higher interest rates for longer.
This environment favours active investors.
Investors need to be discerning, analytical and valuation focused. They also need to adapt quickly to changes.
Key to growth will be diversification to hedge inflation and interest rate changes. Investors will also need to take advantage of the opportunities the 3D reset offers.
Investors should consider gaining exposure to productivity-enabling technology, the near-shoring or re-shoring theme, and finding yield opportunities throughout the cycle.
It might be the end of easy money, but it is also a time when active global investors can thrive.