14th April 2021 – By Patrick McIntosh

I do not believe that China and Russia want a nuclear war, but I do believe that they want to re-establish their sphere of influence on the world.

Throughout history, great empires have been built upon pillaging from those they have conquered in a variety of diverse ways; in the British Industrial Revolution, we stole ideas, opportunities and processes to make us unbelievably wealthy. The Americans then stole our ideas, processes and opportunities in the 19^th century and the Chinese are doing the same to us in the 20^th and 21^st centuries!

Subtle action by China, Russia and America, and to a lesser extent Europe, will develop their individual civilisations over regime change and imposition of their views on others. Biden, Putin, and Xi Jing Ping acknowledged these ideas and are moving in a similar vein to achieve home grown self-reliance.

The changes that we can expect are, I believe, summarised in the following intertwined key points. These are just some of our considerations for your investment portfolio:

Climate

Global warming and climate change will become the dominant drivers of change.

The rapid move away from carbon to green, self-sustaining and home-produced energy in developed economies is advancing rapidly.

The rapid development of recycling and upcycling, and indeed the opportunities for using all forms of waste in multiple ways, such as energy or compost, is accelerating very quickly.  We have some first-hand experience of this within our client base.

Food waste will shrink, and developments in efficiency and productivity will eliminate this huge dilemma within the decade.

The amount of resource, land and energy required to feed a global population of 9 billion is likely to be significantly smaller than our wildest expectations.

Deglobalisation

The shortening of supply lines and greater self-reliance because of the pandemic seems inevitable as the world becomes more aware of its own carbon footprint but also more protectionist, insular and isolated.

Onshoring of food production in particular, made possible through artificial intelligence and other technology, is happening all over the world.

The inevitable effects of a shrinking and ageing population, combined with all the above observations, is likely to mean a smaller and more local global economy.

Human behaviour

The reliance upon national health services and the subliminal way in which we have been led to believe that the system will look after us is ending. There will be a greater partnership between personal ownership of health and national responsibility.

The perception of vaccination wars, and the unintended consequences of these, is likely to rapidly advance many of the observations made in this note. A lack of trust in democracy and politicians, let alone systems and regulation, is also likely to increase self-reliance and self-determination.

Rapidly changing dietary habits leading to plant-based diets and an increase in availability and uptake of lab grown meat and fish products is inevitable. The multi-billion-dollar industry that is building in this direction has now gone beyond a tipping point.

The reduction in the ownership of material wealth and the desire for experience over image will rapidly change the global economy.

Unemployment will not be a problem but a change in employment will be dramatic.

Old people do not fight and there will not be enough young people who will be remotely bothered to fight.  The Russians, the Chinese, the Americans, and the Europeans are rapidly discovering this.

Education & Technology

Levelling up becomes inevitable.  The collapse of the birth rate this last year, let alone the dramatic changes in demography in the developed world, are going to radically transform our education system.

Continuous education and re-training through all our lives will become ubiquitous with modern day human normal life.

A significant reduction in working-age people will automatically advance artificial intelligence and technology leading to massive productivity gains. This in turn will reshape our value system, “for the wealth of nations is on its moral sentiments” as Adam Smith observed.

The sharing of information and resources that we have observed among biomedical sciences globally in the last year has resulted in, amongst other things, acceleration of RNA vaccine technology, which in effect instructs cells in the body how to fight disease. This gives optimism for improved healthcare and a whole new range of early-stage diagnostic capabilities that could transform medicine more broadly.

Poverty

There is a great deal of evidence that the modern era of globalisation has allowed substantial numbers of people to escape poverty and improve their quality of life.  In addition, demographic issues in rich countries are causing a reduction in the relative size of working populations which will allow poorer countries to catch up more quickly.  While there are examples of increasing inequality within individual countries, overall global inequality is reducing at a promising pace.

Debt

Debt which was created by national banks to support governments but not sold in the global economy will be allowed to wither on the vine and we will quietly park the moral hazard issue, a bit like the “consols” sold to the UK public after the Napoleonic wars which were only recently redeemed. The UK debt-to-GDP ratio at the end of the 18^th century was twice what it is today, yet we still created the Industrial Revolution and took over much of the globe.

Inflation

Inflation and interest rates are key risks for the future and there are a number of factors at play which our Investment Committee are watching.  Long term we must consider the shrinking number of people at working age who may demand higher pay and growing numbers of retired people who are living longer and less likely to have generous pension provision. There is also the onslaught of new technology changing our spending habits and the workplace which has the potential to be deflationary.

What seems fairly certain is that certain sectors, such as healthcare, environmentally-friendly technology, plant-based foods and education will be subject to inflation over the long term due to increased demand.

Short term, inflation is expected to increase as a result of increased money in circulation, supply chain issues, reduced migration and increased cash balances in many businesses and households.

Investment planning

The reason that KMG has survived so well since the Second World War, the reason (I suggest) that the Financial Times decided we are one of the top financial advisors in the UK, and the reason that we have such successful fund performance and client satisfaction is because we are a microcosm of continuous education and practical application in a vocational environment, taking into consideration all the needs and requirements of everyday living.

In March, as markets started to look ahead at recovery and reflation, we trimmed back some of our growth funds and added to more cyclical/recovery areas of the market including the UK, and US small caps. This has been about creating the right balance of recovery plays against holding those long-term structural growth funds.  Value will likely continue to deliver while economies come out of lockdown, but in the long term it will be the structural growth winners such as climate change, disruptive technology and demographics that will drive performance over the long term.

Higher levels of training, experience and understanding of our individual responsibilities to look after ourselves, our neighbours, and the planet will automatically feed through to a dramatic improvement in the wealth of us all. This is the only way that climate change is going to come under control, and it is the only way for us to feed the planet and look after an ageing population in a civilised and non-confrontational way.