The end of growth?

Published on June 3, 2020.

Our economic and financial system is made for growth. It is addicted to ever more debt to fuel growth. As demographics turn or already have turned in all Western countries from Japan, Europe to the United States, where will growth come from? – Ever more consumption from less or older people?

It is definitely something to think about right now, as global economic activity came to a halt due to the Corona pandemic. When this crisis is over, will growth in the United States just resume or might the US catch up to Japan and Europe which have experienced no or rather low growth for quite a while? Look at the stock markets in the US, Europe and Japan below, it is remarkable.

S&P 500 (SPX), Eurostoxx 50 (SX5E) & Nikkei since 1989

In a recent podcast, Adam Robinson convincingly argued that the US may be headed towards the European and Japanese path, at least in the broader economy. For sure they still have the big tech monopolies dominating the internet and benefiting from continued growth. However, investors may may have to select more carefully for the winners and sort out the losers in the future.

Emerging markets as the last frontier?

Emerging markets, which are also among the cheapest markets globally (see for example the Global Value portfolio), still experience both population growth and growth in consumer spending, as they have a growing middle class. But they also face problems, as some markets depend on industrial commodities, not ideal in a deflationary world. Others depend heavily on exports of consumer goods to western economies or have debt denominated in foreign currency, such as US-Dollars. This could cause them trouble should the Dollar strengthen further. However, some countries especially in Southeast Asia, like Vietnam, should have a positive economic outlook at least relative to other countries around the world.

How to position yourself for low to no growth

What has worked in the past can still work in the future. But when we consider the past, most of us think about the last 10 to 20 years and not much further back. For investors, the 1970s with high inflation and low growth (Stagflation) in many parts of the world, seem very distant. Especially as the last 40 years were marked by ever lower interest rates, medium to high growth, rising asset prices and low inflation.

The “Dragon Portfolio” may work well in any environment

Chris Cole from Artemis Capital Management argues that these days most investment managers are just too young to have experienced a different investment environment like the 1970s. So in his interesting paper “The hawk and the serpent” (Link to Artemis PDF Download, you can also watch a great interview with Chris Cole on a Recession proof portfolio) he looked back 100 years with the intention to create a portfolio that will work in any investment environment. A very different approach than the classic 60/40 Equities/Bonds portfolio, which has performed extraordinary well in the last 40 years but not so well in times of high inflation or deflation, like the 1970s or 1930s. The so called Dragon portfolio worked extremely well in any environment, whether inflationary, deflationary, low growth or high growth. George Gammon did a great video on the Dragon portfolio, definitely worth watching. The construction of a Dragon-like portfolio for retail investors will be discussed in a follow-up post on this blog.

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