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Institutional Update Q1 2017

 

Investment Institute London Forum: The case for long termism

 

Investment Institute London Forum: The case for long termism


On 21 November 2016, we had the great pleasure of bringing clients and friends of the business together at Lancaster House for the Investment Institute’s third London Forum. The Forum provided a platform for leaders within the asset management industry to discuss long-term investing for a sustainable future. The day’s findings, outlined below, reveal a number of thought-provoking points.


Fragmented interests

The world today is in a more volatile state than it has been for some considerable time, with a wave of antiestablishment voter anger propelling Donald Trump to victory on the back of a similar populist surge that helped the UK vote for Brexit.

Investors like certainty and the current climate promises anything but. Elections in 2017 in France, the Netherlands and Germany could see repeat upsets. Combine that with growing economic crises in Italy and Portugal, and Europe looks like it is heading for a year of significant challenge in 2017.

While political change in Europe may follow the same template of voter revolution as in the US and UK, it is elsewhere in the world that 2017 looks genuinely dangerous.

The situation in the Middle East, particularly in Syria, remains deeply unstable, and Trump’s victory is likely to embolden President Vladimir Putin to use the situation to Russia’s advantage. At the very least, Putin’s relationship with Trump could see sanctions lifted for Russia.

Elsewhere, North Korea’s sabre-rattling is now tinged with the reality of nuclear weapons and a dictator who could have the temperament to use them. Preventing that will require co-operation and intense diplomacy from the US and China.

Global co-operation on climate change is also likely to be thrown in the air by the Trump victory, with the new administration already announcing it will withdraw from the UN Convention on Climate Change, originally signed in December 2015 at COP21.


In the US, many are asking: What does Trump really believe and how will he act as president? Both questions have huge significance for the country, global economic growth and investment opportunities.

All of this leaves a series of vacuums where power-plays can ensue. Who will benefit and how can investors see through the fog to gain long-term investment clarity? It’s a high-risk situation and one which could see China emerging as a winner, as it uses its vast capital power and investment vision to build global influence, while the US focuses on the world within its own borders.


A new globalisation

Three years ago, China’s global vision and investment ambition reached new levels when it announced its Belt and Road initiative, an infrastructure investment programme to create a modern-day Silk Road linking China to the rest of Asia, Africa and Europe by land and sea.

To date, 30 countries have signed co-operation agreements with China to participate in Belt and Road initiatives with contracts worth US$74.6 billion signed and around 160,000 new jobs created in the countries along its route.

For investors, Belt and Road is a clear signpost to China’s ongoing global growth and ambitions and also a potential opportunity.


Considering the case for long-termism

Belt and Road exemplifies a long-term approach to investment. The challenge for capital owners and managers is how, in a world of significant change and turbulence, they plan to invest in a sustainable way in businesses that will be growth-generative and beneficial to society.

Often, the financial predictions and narratives used to guide investment and commercial decisions are focused on the short term. Quarterly reporting, real-time information, access to global central bank forecasts and economist predictions reveal one common theme; they cannot be relied upon.

Nominal income growth, productivity growth and real wage growth are consistently underestimated. Equally, over a 20-year time horizon, the FTSE has fluctuated widely but delivered little real growth.

Businesses, particularly in the UK, are starved of long-term investment by a reporting structure and investment attitude that needs and rewards rapid returns.

The result is that the UK leads the world in entrepreneurial start-ups but is bad at transforming these into scale-up businesses. For investors, that means huge opportunities, if they are willing to look beyond short-term sentiment and focus on the fundamentals of the business./p>

In China and the US, the approach is very different. Long-term investing is encouraged and accelerated through access to venture capital and funding that isn’t available to many UK firms.

The US has been particularly successful at focusing investment on universities and entrepreneurial businesses started by students, some of which have grown into organisations with multi-billion dollar market caps that are among the biggest in the world.

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