Cashing In On Macroeconomic Trends

By Hans Wagner AAA

Investors that ride with global trends find excellent opportunities, while those that run against to them tend to find that the going gets very difficult. Identifying trends and identifying which companies will prevail in those trends is vital to long-term investor success. In this article, we'll take a look at three trends that may impact your investments.

Macro Trends
Global macro trends have a strong influence on economies, people, the environment and society. Identifying and rolling with these trends is important to the future of companies, governments, families and investors. These trends are not your hot idea of the month, but rather changes that span multiple decades. (To read more about trends, see Demographic Trends And The Implications For Investment.)

Many readers probably remember John Naisbitt's books on mega-trends. In the book titled "MegaTrends 2000" (1990), Naisbitt says he foresees a booming global economy, with the "Pacific Rim" of Tokyo, Seoul, Shanghai, Taipei, Hong Kong and Singapore rivaling a single-market "Europe 1992". He also forecasted that socialized industry and government welfare services would be largely replaced by private enterprise. The author envisioned epic developments and dangers in biochemical science - test-tube chickens, clones of endangered species and killer-disease vaccines. Investors who understood and followed these trends were able to take advantage of the companies that participated in the sector growth the trends spawned.

On October 3, 2006, Naisbitt released another book titled "Mind Set!" which describes how he identified all the trends described in his previous books. Naisbitt suggests that 11 mindsets helped him to identify the trends he forecasted in "Megatrends 2000". These included:

-"Don't add unless you subtract."
-"Focus on the score of the game."
-"Understand how powerful it is not to have to be right."
-"Don't get so far ahead of the parade that they don't know you are in it."

According to Naisbitt, investors must look for trends by considering many different factors. It helps to step away from your day-to-day activities and look at the big picture from different perspectives. It also helps to read a variety of materials to seek additional input.

One way to perform this analysis is to use opportunity-threat analysis. This is a technique commonly used by strategic planners to help develop long-term plans. Opportunity is where you identify the investment ideas that might be available from the trend. Threats are the risks that might come about as a result of the trend. (To read more about this topic, see Determining Risk And The Risk Pyramid.)

To help investors understand how to use macro trends, let's examine an article recently published for the The McKinsey Quarterly on "Ten Trends For The Coming Years". These trends look forward for more than 10 years, and help to demonstrate how to identify strategic investment opportunities. Only three of the 10 mentioned trends will be examined for this article.

Trend: The consumer landscape will change and expand significantly.
Almost a billion new consumers will enter the global marketplace in the next decade as economic growth in emerging markets pushes them beyond the threshold level of $5,000 in annual household income - a point when people generally begin to spend on discretionary goods, according to the "Ten Trends". By 2015, consumer's spending power in emerging economies could nearly match the spending power of Western Europe. It is estimated that 100 million Chinese households will achieve European income levels by 2020. Furthermore, the Hispanic population in the United States will have spending power equal to that of 60% of all Chinese consumers. (Read more about consumer spending in Using Consumer Spending As A Market Indicator.)

Opportunity: Look for consumer and luxury goods companies with a strong presence in Asia and other developing countries that are achieving economic success. Companies that are able to identify and target the evolving consumer market niches are likely to prevail. Also look for transportation companies that move the raw materials and finished goods at low cost and operate easily throughout the world.

Threat: Companies with local experience based in these emerging countries may have greater insight into local preferences and customs, which is a strategic advantage. Multinational companies may face a backlash from consumers in these emerging countries. Governments in these emerging markets may offer preferences to local companies to allow them to compete unfairly in the local markets.

Assessment: It may become important to monitor the actions of governments and local response to multinational companies as they try to penetrate rapidly growing local economies. Also watch how publicly traded companies enter these markets, and pay attention to how they address the local preferences and customs.

Trend: Ongoing shifts in labor and talent will be far more profound than the widely observed migration of jobs to low-wage countries.
The shift to knowledge-intensive industries highlights the importance and scarcity of well-trained talent. The increasing integration of global labor markets, however, is opening up vast new talent sources. The 33 million university-educated young professionals in developing countries is more than double the number in developed ones. For many companies and governments, global labor and talent strategies are likely to become as important as global sourcing and manufacturing strategies. (Find out more about labor markets in Surveying The Employment Report.)

Opportunity: Look for outsourcing of all types of professional talent, not just low-wage workers, to India, China and other places with an educated talent pool. For example, people will seek healthcare services and treatments that are available at a lower cost than in their own country.

Threats: Knowing the consumers of these services will still be critical. Providing services from another country will have to overcome the presence that local service providers can offer. Countries with educated pools of skilled workers will compete to offer specialized services such as healthcare, information technology, financial services and advertising.

Assessment: We will likely see hybrid services that blend offshore talent with local talent to deliver quality service at a lower cost. Cost will continue to be an important factor for goods and services.

Trend: Demand for natural resources will grow, as will the strain on the environment.
As economic growth accelerates - particularly in emerging markets - people are using natural resources at unprecedented rates. Oil demand is projected to grow by as much as 50% in the next two decades, according to the International Energy Outlook 2006 report by the U.S. Energy Information Administration. Without large new discoveries or radical innovations, supply is unlikely to keep up. We are seeing similar surges in demand across a broad range of commodities, which could place the world's resources under increasing strain. Water shortages will be the key constraint to growth in many countries. Furthermore, one of our scarcest natural resources - the atmosphere - will require dramatic shifts in human behavior to keep it from being depleted further. Innovation in technology, regulation and the use of resources could be central to creating a world that can both drive robust economic growth and sustain environmental demands.

Opportunity: Look for water filtration, pollution control and energy companies, especially those that offer new forms of clean energy. Also, expect new technologies to enter the market as the cost of natural resources outpace the market's ability to accept the increased expense. Some countries will find alternatives - for example, Brazil has begun using sugar cane to produce ethanol in an attempt to offset the demand for gasoline.

Threat: Balancing economic growth with environmental concerns will cause imbalances that could be difficult to overcome. This could also present substantive risks to governments as they wrestle with the problems. Health problems could also continue to grow in those areas that are unable to correct the environmental problems.

Assessment: Growing demand for natural resources could create new opportunities to substitute new materials and technologies to offset the rising costs. For example, China recently began using aluminum to replace copper in its air conditioning systems, which lowers costs. Be on the look out for similar new ideas that address the imbalance between economics and the environment.

Conclusion
Investors need to understand the implication of global trends as they relate to companies and their customers. Aligning your investing strategy with these trends and the companies that are in position to win should provide the best returns. One way to analyze trends is to use opportunity-threat analysis. When doing so, keep in mind that these trends often result in substantial changes in the way products are created and services are delivered. It is also important to look for the trend's downside, as what is obvious may not turn out to be true. Following global macro trends offers excellent opportunities to investors if they perform a rationale assessment process. Assuming you can correctly identify long-term global macro trends, your longer term investment decisions can be made with that much more safety.

For related reading, see Where Top Down Meets Bottom Up and A Top-Down Approach To Investing.

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