How many man hours to turn on a lightbulb and why should investors care?

Technological progress can have surprising consequences. Take the cost of producing light, for example.

The environmental economists Roger Fouquet and Peter Pearson have retraced this development in England. One hour of light (referred to as the quantity of light shed by a 100-watt bulb in one hour) cost 3,200 times as much in 1800 in England as it does today, amounting to just over 150 of today’s US dollars. In 1900, it still cost around 5 dollars. By 2000 the cost was 5 US cents.

This technological advance can also be thought of in terms of the amount of time an average worker needed to labour in order to earn enough for the 100-watt bulb to glow for an hour. In 1750 BC, the people of Babylon used sesame oil to light the lamps, and had to work for 400 hours to produce the said amount of light. In around 1800, using tallow  candles, 50 hours of work was required. Using a gas lamp in the late 19th century, three hours were necessary. Using an energy-saving bulb today, you will have to work for the blink of an eye – a second. This amounts to a phenomenal advance in productivity and thus prosperity.

Over recent decades, the combination of a larger pool of global labour, transformative technologies and the expansion of global value chains has led to a massive supply shock that has generated a wave of ‘good’ disinflation which advances prosperity for the world’s population as a whole.

Brendan Mulhern – Newton, a BNY Mellon company

Technological progress can have surprising consequences. Take the cost of producing light, for example. The environmental economists Roger Fouquet and Peter Pearson have retraced this development in England. One hour of light (referred to as the quantity of light shed by a 100-watt bulb in one hour) cost 3,200 times as much in 1800 in England as it does today, … read more

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Total Recall: the memory chip supply/demand sweet spot

Over the past 20 years, overcapacity has created wildly cyclical pricing for both DRAM and NAND devices[1], which in turn has led to fewer manufacturers. For DRAM devices, just three global players now account for 95% of supply[2]; for NAND devices there are just five companies producing 92% of global supply.[3]

In consequence, supply discipline has improved – even as demand has surged thanks to developments in artificial intelligence and ‘cloud’ computing. Pricing has soared as a result – with spot prices for NAND chips up 50% and DRAM spot prices up 115% over the past year.[4]

While we recognise that the industry is a cyclical one, we believe the current/supply dynamic is good news for companies involved in the sector, particularly those that have committed to shareholder rights.

Caroline Keen – Newton, a BNY Mellon company

[1] Dynamic Random Access Memory (DRAM) and NAND Flash memory chips are commonly used to store data in computers, smartphones and digital cameras.

[2] The Register: ‘Guess who’s getting fat off DRAM shortages? Yep, the DRAM makers’, 18 May 2017

[3] IHS Markit: ‘NAND Memory Market Tracker’, Q2 2017

[4] Dow Jones: ‘Samsung Topples Intel as World’s Biggest Chip Maker’, 30 July 2017. Data from DRAMeXchange, a publication that tracks memory chip sales and prices.

Over the past 20 years, overcapacity has created wildly cyclical pricing for both DRAM and NAND devices[1], which in turn has led to fewer manufacturers. For DRAM devices, just three global players now account for 95% of supply[2]; for NAND devices there are just five companies producing 92% of global supply.[3] In consequence, supply discipline has improved – even as … read more

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In Rude Health

“Nobody knew that healthcare could be so complicated”. So wrote an exasperated President Donald Trump in February 2017 as he struggled to get to grips with a replacement for the Affordable Care Act, the Obama-era law that expanded affordable medical cover to low-income Americans.

Perhaps without meaning to, Trump stumbled across one of the universal truths about healthcare investing: It can be really, really complex. There are hundreds of healthcare companies we could invest in. At most, we target between 10 and 12 of those. To get from that wider opportunity set to just a handful of investable ideas is where the real hard work comes in.

One strategy is to focus on innovation. Beyond the list of top-ten pharmaceutical companies. there’s a long tail of smaller, incredibly innovative businesses that are creating the drugs and therapies of the future. By focusing on them, we think we can uncover strong, investable ideas which are not only profitable but which could also help shape the future of medicine.

Stephen Rowntree – Newton, a BNY Mellon company

“Nobody knew that healthcare could be so complicated”. So wrote an exasperated President Donald Trump in February 2017 as he struggled to get to grips with a replacement for the Affordable Care Act, the Obama-era law that expanded affordable medical cover to low-income Americans. Perhaps without meaning to, Trump stumbled across one of the universal truths about healthcare investing: It … read more

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Asset allocation: Why less is sometimes more

The image above shows a grid of horizontal, vertical and diagonal lines with 12 black dots at various intersections. Most people are only able to see one or two of the black dots at any one time. Named Ninio’s Extinction Illusion after Jacques Ninio, the French scientist who first published it in 2000 – it speaks to the weakness of peripheral vision in humans but also to the brain’s tendency to fabricate patterns when confronted with uncertainty.

In our view, this optical illusion serves to illustrate another point. It demonstrates a wider truth in investing: that the more expansive a portfolio is, the harder it is to maintain oversight of all the underlying holdings. Far better, we believe, to define your universe, allocate capital with conviction and zone in on what’s important to you as an investor.

Nick Clay – Newton, a BNY Mellon company

The image above shows a grid of horizontal, vertical and diagonal lines with 12 black dots at various intersections. Most people are only able to see one or two of the black dots at any one time. Named Ninio’s Extinction Illusion after Jacques Ninio, the French scientist who first published it in 2000 – it speaks to the weakness of … read more

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On the road to an EV future

At Newton, we are predicting the end of the road for the internal combustion engine as electric vehicles gain traction.

First there is the environmental angle. The European Commission has laid out plans not only to tighten emissions testing for automakers but also to leverage far higher penalties on companies that fail to make the grade. As of 2019, this levy will take the form of a €95 fine per CO2 g/km above the limit for each vehicle produced if the average fleet emission breaches targets. For a company like Volkswagen with 3.65 million units sold in Europe in 2016, even just being three grams above the EC’s emissions target would translate into a €1bn fine.

We also think electric vehicles offer numerous benefits over petrol or diesel engine cars. For one thing, they have fewer moving parts which makes them far more reliable and cheaper to maintain. They are also potentially safer and, as anyone who has test driven a Tesla can testify, they can offer a fun driving experience with 100% of torque available at 0rpm.

In our view, it’s not a question of if but when EVs overtake their fossil fuel counterparts.

Mathieu Poitrat Rachmaninoff, Newton

At Newton, we are predicting the end of the road for the internal combustion engine as electric vehicles gain traction. First there is the environmental angle. The European Commission has laid out plans not only to tighten emissions testing for automakers but also to leverage far higher penalties on companies that fail to make the grade. As of 2019, this … read more

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Shielding from inflation

If you are looking to invest for the long term, we believe you should look to protect your assets against the potential ravages of inflation. Unlike cash and most conventional bonds, assets with inflation-linked contracts, such as renewables and infrastructure, are very attractive for long-term investors/savers because they offer a degree of in-built inflation protection. A large proportion of the revenue streams of these assets are backed by government subsidies making them a generally robust and stable proposition.

Renewables can provide stable long-term cash flows, with a good line of sight. Yet it is an asset class that tends to get overlooked despite being less affected by quantitative easing and zero interest-rate policies compared to other financial assets.

As long as the sun comes up every day, you’re going to sell power for something. In some senses, investing in renewables is like investing in bonds, except with some sensitivity to the price for generating power.

Paul Flood – Newton, a BNY Mellon company

If you are looking to invest for the long term, we believe you should look to protect your assets against the potential ravages of inflation. Unlike cash and most conventional bonds, assets with inflation-linked contracts, such as renewables and infrastructure, are very attractive for long-term investors/savers because they offer a degree of in-built inflation protection. A large proportion of the … read more

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Is this a sure sign of a Chinese slowdown?

Infrastructure investment has been a great source of interest for investors in the wake of Donald Trump’s election as US president, with his campaign pledge to spend US$1 trillion on US infrastructure projects clearly playing on their minds. Away from President Trump’s Twitter feed and speeches, China is a more pressing concern.

While the country is trying to rebalance to become a more consumption-driven economy, overcapacity in the construction industry remains a big issue. The country is considerably overbuilt in relation to GDP. Worryingly, if a slowdown in GDP growth occurs, we expect the Chinese government to try to plug the gap with further building. As such, with overcapacity remaining a problem and rebalancing of the economy continuing, we believe it is best to avoid businesses related to Chinese construction, including materials and building companies.

Nick Moss – Newton, a BNY Mellon company

Infrastructure investment has been a great source of interest for investors in the wake of Donald Trump’s election as US president, with his campaign pledge to spend US$1 trillion on US infrastructure projects clearly playing on their minds. Away from President Trump’s Twitter feed and speeches, China is a more pressing concern. While the country is trying to rebalance to … read more

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European elections: where moderation wins?

With over 66% of the vote, Emmanuel Macron’s recent election win in France was a decisive result. Clearly it was a case of the electorate wanting the country to avoid the extremism we’ve seen with Marine Le Pen. The next step is for Macron to name a prime minister ahead of the legislative elections in June.

We think the French presidential election should be seen against a broader move away from populism across Europe. We witnessed this in the Austrian elections in December 2016 and in Bulgaria in February this year. The same thing was apparent in the Dutch elections in March and in the Finnish municipal elections in April. All of these elections had the potential to bring populist politicians into power but instead resulted in more orthodox centre-ground candidates winning the vote – often, as in the Netherlands, with a large, and largely unexpected, majority. The same trend is now apparent in Germany where Chancellor Angela Merkel gained ground in the German state elections, which boosts the prospects for her Christian Democratic Union (CDU) party in the all-important Federal election in September.

Suzanne Hutchins – Newton, a BNY Mellon company

With over 66% of the vote, Emmanuel Macron’s recent election win in France was a decisive result. Clearly it was a case of the electorate wanting the country to avoid the extremism we’ve seen with Marine Le Pen. The next step is for Macron to name a prime minister ahead of the legislative elections in June. We think the French … read more

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How to avoid FOMO through dividend investing

Returns have been eroded by the ongoing spate of asset support conducted by central banks since the financial crisis. The idea of the global economy weaning itself off measures such as quantitative easing looks ridiculous, with central bankers willing to step in the moment something goes wrong. Investors also expect it. The result of these actions has been to push up valuations of assets. There is a cost to that support and that is lower returns and increased volatility.

One thing you can do is to try and trade that volatility – but good luck. These days unexpected events, like snap elections, make it difficult to build a repeatable process around such an approach. Instead, the nature of sustainable income over time, the power of compounding dividends, could provide a resilient and significant impact to one’s total return, which in the long run, leads to greater asymmetry in returns.  Stability of returns is important to clients and in a world of risk and high valuations, it is ever more important.

However, many growth-oriented managers are still seeking the big story – the next Amazon or Apple. They have a fear of missing out (FOMO). But the ability to pick one particular fish out of the sea is difficult.

I see investing more like Michelangelo who famously, when asked about his art, said it’s what you take away that matters. We take a similar view: take away the statistically unattractive stocks. That’s what the discipline of income does – it narrows down the bucket and forces us to be patient.

Nick Clay – Newton, a BNY Mellon company

Returns have been eroded by the ongoing spate of asset support conducted by central banks since the financial crisis. The idea of the global economy weaning itself off measures such as quantitative easing looks ridiculous, with central bankers willing to step in the moment something goes wrong. Investors also expect it. The result of these actions has been to push … read more

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The Pearl River Delta: the Achilles Heel of US protectionism

The Pearl River Delta region in China’s Guangdong province remains the manufacturing hub of the world; even if low-end labour-intensive processes are outsourced to Vietnam and Bangladesh, the goods often come through the area for logistical reasons. The densely urbanised region is a vast and highly efficient ecosystem for designing, prototyping, customising, manufacturing and shipping almost anything at dramatically lower cost and faster speed than anywhere else: it is cheaper to ship to Los Angeles from the city of Shenzhen than from San Francisco!

In our view, President Trump would need to introduce very stiff tariffs for any of this production to shift to the US, but the majority would probably still remain in China, leading to a rise in the end price instead.
Interestingly, end-assembly is the most labour-intensive part of the production process, so bringing this part back to the US is where the labour cost differential would be most apparent. There is also the question of whether the US really wants manufacturing – it is a messy business, as can be seen from the smog and the waste-management trucks on Guangdong’s highways.

While 3D printing has reduced dramatically in cost, it is far from threatening mass production, which has also seen big falls in cost, particularly for items such as printed circuit boards and computer chips. Chinese companies are increasingly investing in innovation, and while one leading white goods factory that I recently visited was 20% automated some pilot lines now have 60-70% automation and this is clearly the direction of travel.

Rob Marshall-Lee, Newton, a BNY Mellon Company

The Pearl River Delta region in China’s Guangdong province remains the manufacturing hub of the world; even if low-end labour-intensive processes are outsourced to Vietnam and Bangladesh, the goods often come through the area for logistical reasons. The densely urbanised region is a vast and highly efficient ecosystem for designing, prototyping, customising, manufacturing and shipping almost anything at dramatically lower … read more

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