A healthier future? How current spending patterns could point the way

Are we headed for a more health conscious future? Current spending patterns – and especially those of ‘generation Z’ consumers – appear to suggest so.

According to Morgan Stanley, spending on sports apparel rose from US$199.1m in 2009 to US$314.1m in 2017 and is projected to reach US$365.2m by 2020. However, this is just a small segment of the wellness and fitness industry, which in the UK alone is estimated to reach a value of £22.8bn by 2020, according to Statisa. Gym membership is also on the rise. Figures from The Leisure Database Company suggest one in seven of people in the UK now regularly work out.

We believe food consumption habits are another leading indicator for future health spend. Fresh foods such as salads and juices are taking the place of canned and refrigerated goods in the shopping baskets of young consumers. Data from Barclay’s suggests Generation Z consumers are buying 57% more tofu and 550% more dairy-free milk than older cohorts.

Meanwhile, pharmaceutical companies are also beginning to get in on the game: over-the-counter medication and health supplements continue to gain traction as consumers demonstrate a preference for preventative healthcare over traditional prescriptions.

Amy Chamberlain and Stephen Rowntree – global analysts. Newton, a BNY Mellon company

Are we headed for a more health conscious future? Current spending patterns – and especially those of ‘generation Z’ consumers – appear to suggest so. According to Morgan Stanley, spending on sports apparel rose from US$199.1m in 2009 to US$314.1m in 2017 and is projected to reach US$365.2m by 2020. However, this is just a small segment of the wellness … read more

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Tobacco: a slow-burn success story?

For all the challenges the industry has faced tobacco has remained attractive for investors. Now, in the face of ongoing litigation, a crack-down on advertising, smoking bans, and even plain packaging, the industry is reinventing itself through new heat-not burn and vaping products.

We continue to believe these could create an inflection point for the industry, offering a route out for smokers looking to quit harmful combustible cigarettes but also allowing tobacco companies to build new revenues with products that are less detrimental to health.

Should they succeed we see tobacco producers continuing at the apex of a market where competition is limited and where profitability consequently remains extremely robust. In our bull-case scenario, smokers will consider the risk/reward dynamics of their habit and decide to migrate en masse to next-generation products. The significantly reduced harm of these new products keeps them in the category – meaning the combined volumes of combustibles and next-generation products stabilise or even rise.

Amy Chamberlain – global analyst. Newton, a BNY Mellon company

For all the challenges the industry has faced tobacco has remained attractive for investors. Now, in the face of ongoing litigation, a crack-down on advertising, smoking bans, and even plain packaging, the industry is reinventing itself through new heat-not burn and vaping products. We continue to believe these could create an inflection point for the industry, offering a route out … read more

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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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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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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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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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Why we’re still living through extraordinary economic times

Despite all the recent discussion about rate rises and normalisation of monetary policy, the investment backdrop remains unprecedented. Through their quantitative easing programmes, for example, central banks are now the backstop for the world’s economy.

Added together, the balance sheets of the Bank of Japan, the Bank of England, the European Central Bank and the US Federal Reserve come to some US$14.4 trillion. To put this in some kind of context, the same four banks’ combined balance sheets stood at just US$2.2 trillion as of the 1 January 1999.  This means the balance sheets of central banks have ballooned by more than 650% in under two decades.

The unintended consequences of this kind of intervention by central banks in markets are legion. In fixed income, for example, a full US$8.8 trillion of the world’s bonds trade continue to trade with a negative yield. While this is below the 2016 peak where nearly 30% of the fixed income universe was on a negative yield, we still think it’s staggering to consider how many investors are willing to pay to take on risk.

The potential for rising interest rates, coupled with low and negative yields, makes it all the more important to embrace a new approach to investing.  We see the evolution of the multi-asset investment universe that looks beyond the traditional 60/40 equity/bond split as key. By broadening the investment horizon, we believe we are potentially much better placed to weather the economic vagaries of a still uncertain world.

Paul Flood – Newton, a BNY Mellon company

Despite all the recent discussion about rate rises and normalisation of monetary policy, the investment backdrop remains unprecedented. Through their quantitative easing programmes, for example, central banks are now the backstop for the world’s economy. Added together, the balance sheets of the Bank of Japan, the Bank of England, the European Central Bank and the US Federal Reserve come to … read more

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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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