Horror on the high street: ‘Experiences over things’ revs up retail apocalypse

Increasingly we are seeing a trend towards consumers valuing ‘experiences over things’ and this is having an impact on the performance of certain sectors. There have been a string of high street casualties in recent weeks, with a number of household names falling into administration. Other brands have been forced to seek help through Company Voluntary Agreements – arrangements with their creditors usually to try and improve lease terms on stores.

Restaurants are not immune to the squeeze in consumer discretionary spending, so while the growth in the sector may seem counterintuitive compared with headlines seen in recent months, it is in particular mid-market chains that are shrinking. We see greater consumer appetite for healthier eating, informal and experiential dining and an increased focus on food provenance and sustainability.

These trends are not unique to the UK, in the US footwear and apparel sales are also lagging other sectors. We believe these trends will materialise at different paces in different countries but for now the ‘experiences over things’ idea remains very much a developed market phenomenon.

Anna Martinez – fixed income analyst. Newton, a BNY Mellon company

Increasingly we are seeing a trend towards consumers valuing ‘experiences over things’ and this is having an impact on the performance of certain sectors. There have been a string of high street casualties in recent weeks, with a number of household names falling into administration. Other brands have been forced to seek help through Company Voluntary Agreements – arrangements with … read more

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Who wins a trade war?

Trade wars are not won by anyone. Of course, the exporting country loses from a trade war, but so too does the importing one. The reason why there are no winners in a trade war is because it normally leads to the substitution of more expensive goods for cheaper ones. In effect, a trade war denies consumers the efficiency gains that have been realised through the expansion of global supply chains and one only has to go back as recently as 2002, the last time steel tariffs were enacted, to see the potential for damage. Following a spate of mill closures and surging imports, President Bush implemented tariffs on certain steel products. The net effect on employment in the steel industry was minimal, but the businesses that used steel products as inputs shed approximately 200,000 jobs (compared to the 180,000 employed in US steel production at the time).[1]. As a result of these tariffs, US manufacturing firms, in particular smaller companies, were subjected to higher input prices which eroded profitability. Unable to increase prices, once profitable companies were forced to cut production and with it their labour forces, so while the intention of tariffs and trade barriers is to repatriate jobs seen to have been lost overseas, the outcome is often higher prices and jobs losses at home.

Brendan Mulhern – Global Strategist. Newton, a BNY Mellon company

[1]Trade Partnership Worldwide study. The Unintended Consequences of U.S. Steel Import Tariffs: A Quantification of the Impact During 2002 07 February 2003.

Trade wars are not won by anyone. Of course, the exporting country loses from a trade war, but so too does the importing one. The reason why there are no winners in a trade war is because it normally leads to the substitution of more expensive goods for cheaper ones. In effect, a trade war denies consumers the efficiency gains … read more

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Tech stocks: Have we returned to ’99?

Over the 12 months to 31 December the FANG[1] stocks rose on average some 50% in US dollar terms, while the broader S&P 500 rose just 23%. Asia too has its own tech leaders, colloquially known as the BAT stocks (Baidu, Alibaba and Tencent) and they, like FANGs, experienced spectacular returns in 2017 (up on average c80% in US dollars over the same time frame).

Without these ‘Dracula’ stocks (the FANGs and BATs combined), markets like the S&P 500 would certainly have been less exuberant over the past year.

The last tech bubble came at the close of the millennium. In our view, investors in the current crop of technology stocks have partied like it’s 1999 all over again. While this is fine in theory we prefer to take a less short-term view. To paraphrase the immortal words of Prince Rogers Nelson: “Life is a party but parties weren’t meant to last”. [2]

Nick Clay – portfolio manager. Newton, a BNY Mellon company

[1] The term FANG stocks refers to Facebook, Amazon, Netflix and Google (subsequently renamed as alphabet)

[2] From the song 1999 by Prince, released 24 September 1982, re-released 3 November 1998

Over the 12 months to 31 December the FANG[1] stocks rose on average some 50% in US dollar terms, while the broader S&P 500 rose just 23%. Asia too has its own tech leaders, colloquially known as the BAT stocks (Baidu, Alibaba and Tencent) and they, like FANGs, experienced spectacular returns in 2017 (up on average c80% in US dollars … read more

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Chinese new year edition: China’s tourists flex their muscles

The Chinese consumer is starting to flex its muscles to spend more of its growing disposable income on travel. China is already the second-largest tourism market in the world, accounting for half of the growth in the global travel industry, but much of that tourism is domestic, and its citizens only make an average of 0.09 overseas trips per annum, compared to 0.3 and 1.2 in the US and UK respectively.

Given the relatively low overseas-trip frequency in China compared to many of its Western peers the rise of global Chinese tourism is a structural growth story with huge long-term potential. Moreover, in 2016, just 6.3% of China’s 1.3 bn population had passports, but that number is expected to double within five years, with growth expected to stay well over 10% on an annualised basis.

It has been estimated Chinese tourism will become a RMB 7.5 trillion (US$ 1.1 trillion) market by 2020,[1] with the sector expected to produce a compound annual growth rate (CAGR) of 13% over the next five years. Given the explosion in online travel booking in the country, Chinese online travel booking will grow could at an even faster rate – an estimated 30% CAGR[2] – over the same time frame.

Nick Moss – portfolio manager. Newton, a BNY Mellon company

[1]CLSA China online travel sector outlook, May 2016.

[2]Ibid.

The Chinese consumer is starting to flex its muscles to spend more of its growing disposable income on travel. China is already the second-largest tourism market in the world, accounting for half of the growth in the global travel industry, but much of that tourism is domestic, and its citizens only make an average of 0.09 overseas trips per annum, … read more

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Against the grain: Which emerging market’s fund industry grew 50% in a year?

Historically, some 30% of Indian GDP has been in savings – typically gold and property – but demonetisation in November 2016 and the Aadhaar scheme are, together, encouraging these savings into the financial system. Moreover, this environment of plentiful liquidity is driving down funding costs for lenders and spurring the fees of businesses related to asset management.

Around 60,000 mutual fund accounts are being opened every day in India, and Indian mutual funds have almost doubled their assets under management (AUM) in just over three years.

The Indian mutual funds market has gone through three distinct phases over the past 13 years, with compound annual growth rates (CAGR) improving markedly over the past three years, on the back of higher market returns and stronger flows following demonetisation last November.

Given that the penetration of mutual funds in India as a proportion of GDP is less than a quarter of the global average, and below that of many other emerging markets, we believe there is a long ‘runway’ for growth in this area.

Sophia Whitbread – portfolio manager on the Newton Emerging and Asian Equities team. Newton, a BNY Mellon company.

Historically, some 30% of Indian GDP has been in savings – typically gold and property – but demonetisation in November 2016 and the Aadhaar scheme are, together, encouraging these savings into the financial system. Moreover, this environment of plentiful liquidity is driving down funding costs for lenders and spurring the fees of businesses related to asset management. Around 60,000 mutual … read more

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New Year, clean slate? Why 2018 will be the year of investing in renewables

The transition to green energy is accelerating, with 2018 expected to deliver new investment opportunities as technological innovation and falling costs drive further momentum for change.

What started as a government-subsidised process to decarbonise the power sector is now shifting to a process driven by expenditure and economics. Over the next 12 months, as the cost of clean technology continues to fall, we expect to see an acceleration in investment, in both developed economies and fast-growing industrialising nations.

Against this backdrop, the ability of renewables to deliver what we think are stable and sustainable income streams, means they are likely to remain an attractive source of dividends and total returns.

For a full article on the renewables revolution, visit our Markets 2018 website.

Paul Flood – fund manager and strategist. Newton, a BNY Mellon company

The transition to green energy is accelerating, with 2018 expected to deliver new investment opportunities as technological innovation and falling costs drive further momentum for change. What started as a government-subsidised process to decarbonise the power sector is now shifting to a process driven by expenditure and economics. Over the next 12 months, as the cost of clean technology continues … read more

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Bitcoin gains new ground

Despite initial controversy, more and more major companies and payments systems are starting to accept Bitcoin as a valid currency. The advantage of Bitcoin is that it is seen as being a currency that is finite in nature which cannot be manipulated by central bank policy politics. With Bitcoin you can’t just print money out of nowhere – it is tethered to a finite resource, as the ability to ‘mine’ it is designed to resemble a precious metal such as gold. In this regard it seeks to replicate the approach to currency typified by the gold standard.

Paul Markham – global equities manager. Newton, a BNY Mellon company

Despite initial controversy, more and more major companies and payments systems are starting to accept Bitcoin as a valid currency. The advantage of Bitcoin is that it is seen as being a currency that is finite in nature which cannot be manipulated by central bank policy politics. With Bitcoin you can’t just print money out of nowhere – it is … read more

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Could the globalisation elephant begin a stampede to protectionism?

Popularly known as the globalisation elephant thanks to its shape, the chart above describes how, between 1988 and 2008 the real incomes of both the world’s richest and poorest people soared. In contrast, lower earners in developed countries saw their real incomes fall. Since then, the global financial crisis and its aftermath have seen average worker real incomes in much of the developed world stagnate. In the UK, average weekly earnings are still significantly (7.7%) below their 2008 peak in inflation-adjusted terms.

We think the chart helps explain why populist politics have taken root in developed markets. If you’re part of that ‘squeezed middle’, globalisation is likely to have been less a force for good and more a source of anxiety over the past three decades. No surprise, then, if people have turned to new political voices in search of solutions. Certainly in the US, President Trump has made clear his desire to put America first – but in other countries too, a shift in grass-roots opinion suggests the developed world’s middle classes are questioning whether free trade is in their best interest.

Yet this kind of rhetoric ignores a fundamental problem, namely the much higher cost of labour in developed markets. If more tariffs were put in place in the US, for example, this would just increase the cost of these goods for US consumers. And even if some manufacturing production were re-shored, this would likely be automated to a very high degree with few additional jobs created. Finally, given the potential for retaliatory measures from other countries, we think any rise in protectionism would be a lose/lose situation, with a very real possibility of higher inflation and lower GDP growth.

Douglas Reed – Newton, a BNY Mellon company

Popularly known as the globalisation elephant thanks to its shape, the chart above describes how, between 1988 and 2008 the real incomes of both the world’s richest and poorest people soared. In contrast, lower earners in developed countries saw their real incomes fall. Since then, the global financial crisis and its aftermath have seen average worker real incomes in much … read more

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Can China maintain its role as an engine of global growth?

Since its accession to the WTO in December 2001 China has accounted for an increasing share of the global economy. Helped by fast export and investment growth it remains an engine of trade and is expected to generate some 35% of global growth over the next two years, according to the World Bank’s latest forecast.

The country is also plagued by structural challenges however, most notably the uncomfortable legacy of a massive state-inspired credit expansion in the wake of the global financial crisis. As such, it’s attempting a tricky transition from a credit-fuelled growth model that is overly reliant on investment to one more driven by private consumption and services. It remains unclear how the dynamic between cooling credit growth and supporting GDP growth will ultimately unfold.

The good news is that China’s economy has been gradually but demonstrably rebalancing towards a growth model that is less reliant on investment, with new industries coming to the fore. Our base case is therefore for China to continue to slow down structurally, with growth being supported as necessary by the authorities as they manoeuvre policy settings to bring this about gradually.

We believe this provides an opportunity for investors to gain exposure to companies benefitting from China’s rapidly expanding services industry and fast-growing middle class. We remain cautious on banks given the probability that asset quality becomes more problematic as the cycle continues.

Douglas Reed – Newton, a BNY Mellon company

Since its accession to the WTO in December 2001 China has accounted for an increasing share of the global economy. Helped by fast export and investment growth it remains an engine of trade and is expected to generate some 35% of global growth over the next two years, according to the World Bank’s latest forecast. The country is also plagued … read more

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Emerging Markets: busting the myths

The introduction of India’s first infrastructure investment trust, called IRB, in May underscores the expectation infrastructure spend will be a key driver of the country’s growth over the next few years.

The IRB trust, which holds six toll roads, features a 10-12% yield and it is likely to be the first of many such listings. To put this in context, just 10% of the Indian market’s large cap stocks yield more than 3%.

The government has plans for some US$20bn infrastructure spend on roads but we think trusts like IRB may benefit from more than just increased government spending.

Aviation, for example, is another key focus for the government. In 2016 there were some 150 million domestic flight journeys in India, compared to c900 million in the US and around 500 million in China. Air travel may cost more but it takes around 1/6th the time. As such we expect to see the number of airports increase and they are likely to go private (as public-private partnerships).

Naomi Waistell – Newton, a BNY Mellon company

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The introduction of India’s first infrastructure investment trust, called IRB, in May underscores the expectation infrastructure spend will be a key driver of the country’s growth over the next few years. The IRB trust, which holds six toll roads, features a 10-12% yield and it is likely to be the first of many such listings. To put this in context, … read more

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