‘As whence the sun ’gins his reflection
Shipwracking storms and direful thunders break,
So from the spring, whence comfort seemed to come,
By the time it reaches adult maturity a human embryo will have grown to about one thousand billion times its weight at conception. Throughout the whole of nature living organisms show an unmatchable capacity to increase themselves, and the seeds of growth lie deeply buried in the origins of the universe.
In its conscious state no less than in its genetic make-up human nature contains a powerful growth stimulus in the constant struggle of men and women to improve their living standards. Adam Smith called it “the natural effort of every individual to better his own condition”. This effort is the fuel for the engine of the world economy.
In addition to the stimulus provided by human instinct and genetic make-up, economic growth generates its own momentum. Rising living standards have raised the ambition of many among the poorer nations who, in previous generations, lived at subsistence level without any expectation that their condition could be improved. Television has brought millions within sight if not reach of a quantum change of status, given the effort to achieve it. It is not surprising that for the average family in the consumer societies of Europe, America and Japan, to say nothing of those in less advanced nations, an ever-growing world economy and endlessly rising living standards have become not so much a target as a presumption.
Despite the deep-seated human impulses which have kept the world economy moving, other powerful forces are now working to slow it down and some of the dynamics of world economic growth are being profoundly and enduringly altered. World securities markets, which reflect the dreams and disappointments of millions, are finding it hard to come to terms with the new situation.
For a start the very supposition of an economic growth dividend for all is open to increasing challenge on at least two fronts. When more of the Earth’s children than in any previous generation live in chronic poverty, despite the rise in Western living standards and the advance of technology, many must be asking when the benefits of growth elsewhere will arrive for them. Secondly, concern about the damage done to the Earth’s environment by careless exploitation is raising large questions about the true cost of past growth.
As to the present, the advanced nations are already losing economic horsepower. For example, the collapse in the communist bloc has shoved the defence industries down the international political agenda and thousands of jobs have been lost at British Aerospace, GEC and the giant American contractors. Other big industries in Europe and America, such as banking, insurance, and parts of retailing are discovering, in the pains of disinflation, that they have expanded far beyond the spending capacity of their customers. In 1981, during the last UK recession, these industries were growing fast and cushioned the impact of the downturn in manufacturing on employment and incomes. Now they are retrenching and sectors which provided a large stimulus will be a drag for years. Likewise the huge international consumer electronics industry seems finally to have saturated demand for family ‘entertainment’ and has run out of new blockbuster products to bring shoppers back.
On a wider stage, Western governments are powerless, for a variety of reasons, to add any growth impetus by spending more themselves. Europe is being choked to death by the stranglehold of the Exchange Rate Mechanism and it has been estimated that the conditions of the Maastricht Agreement will alone reduce the growth of the European signatories by 1% a year. The Bush administration in the United States has reached, and possibly exceeded, the limits at which government borrowing can be financed without draining the capital markets dry.
A few lights still shine here and there. Emerging nations in the Pacific rim are managing to grow despite the slowdown in Japan and Europe. Productivity improvements in the West are helping to maintain sales even when demand is flat. Huge new potential reservoirs of spending remain to be tapped in Eastern Europe and China.
But in Europe, America and Japan, which between them account for 80% of the world’s output, investors must face the possibility that the traditional growth cycle is exhausted and that after this stop there may be precious little go.
If the world order is changing, investors will have to change their habits with it. Post-war growth cycles and the great inflation of the 1970s and ’80s spawned the cult of the equity. In Britain today about 55% of the assets in financial institutions is invested in ordinary shares. In Germany by contrast, where inflation has not been allowed to get much hold, equities make up only 20% of institutional funds.
UK dividends have grown extraordinarily rapidly over the past 12 years and tended to boost equity prices. In today’s conditions profits can barely support the dividends being paid by many companies, still less provide for increases.
Some but not many financial institutions in the UK have reduced the equity content in their portfolios. As others do so there will be a continuing supply of equity stock and few natural buyers.
At times of recession investors are like spectators at a test match on a wet August morning, looking at rain but hoping for sunshine. After this recession however, normal play may not be resumed because there is a further cloud looming over the Western horizon. That is the possibility that the 90% or so of the workforce who have jobs may start to question whether their satisfaction will be met by spending more and more on houses, and on household and other durable consumer goods. Millions in the UK and the USA must in any case be regretting borrowings taken out in the booming 1980s to finance expenditure in these areas. Spending patterns may shift as part of what seems to be a growing concern for the quality of life rather than the quantity of its embellishments.
Already there are signs that a new priority is being attached to spending on personal education, culture and travel. Look at the book-shelves stacked with ‘New Age’ offerings, and the growth of alternative lifestyle cultures in the fields of medicine, religion, ecology and others. They are gaining ground as substitutes for post-war consumerism. This shift in priorities, if extended, spells the end of the conventional consumer-led growth cycle and all the investment assumptions rooted in it.
In market terms one can expect a growing concern with quality, security, stability and balance to be reflected in investor preferences. That will add to the attraction of bonds, national savings, and cash, and the most boring investments may continue, as they have been over the past five years, to be the best.
This is not the end of the road for equity investors, but it is the beginning of a different one. Companies, hooked on price rises, which cannot do without a periodic fix from inflation will continue to disappear in droves. Those which can raise unit sales in flat conditions, whilst containing costs, are tomorrow’s winners. Plenty exist but few are the names of yesterday.
For guidance, investors could do worse than turn to the shelves of the ‘New Age’ bookshops and get a glimpse of the changing priorities. At least there are a few publishers left in Britain who might benefit as they do so!
28 August 1992