Portfolio Adviser • Portfolio Adviser December 2024 • Risk

Change is a constant companion, says Abhi Chatterjee, chief investment strategist at Dynamic Planner, but if we embrace it and adapt quickly, the opportunities are boundless

Heraclitus, the famous Greek philosopher, said: “Nothing is permanent except change.” Change is everywhere around us, yet sometimes we remain oblivious to it. Change can be vehement – at other times, glacial. Yet, change requires us to anticipate, adapt or even rethink the axioms that frame our approach to reality.

Modern historians could consider the Covid outbreak as a ‘ground zero’ for the tectonic shifts of change we see permeating the world we live in. But why does it matter to an asset allocator? The primary reason is to assess impact on the portfolio, and second, to identify megatrends that will drive portfolio construction in times to come.

The most important driver of an economy is consumption, and therefore the consumer – hence the reliance of consumer confidence figures, which are a leading indicator. These figures provide an indication of future developments of households’ consumption and saving, based on answers regarding people’s expected financial situation, their sentiment about the general economic situation, unemployment and capability of savings.

Historically, market watchers have looked to consumers in developed economies to gauge the health of the global economy. Until 2000, the global consumer was predominantly western, totalling 1.7 billion people. But there has been a largely overlooked shift in consumption patterns.

According to the World Data Lab, a consumer is defined as one spending more than $12 (£9.50) a day in purchasing power parity prices. For the first time, over half of Asia’s 4.8 billion people are part of this class. Though the average Asian consumer is spending about $20 per day, this translates to $19trn, roughly 30% of global spending. Furthermore, it is estimated that Asia will add a further billion consumers during the next decade.

So, what are the implications of this? We already see the reliance of global growth on Asian economies, especially China and India. China’s recent slowdown had a detrimental effect on the European export market, especially Germany. China’s ageing population, surging to 178 million seniors by 2030, will solidify its position as the world’s largest senior consumer market, whereas India is poised to become the largest market for gen-Z consumers, with their number growing to 215 million over the same period.

Companies in the consumer discretionary sector would do well to focus on this new consumer group, as betting against demographics is not a good idea.

Another important dimension of the economy is global trade flows. Covid showed us how essential global trade was – the supply shock that started in China in February and the demand shock that followed as the global economy shut down exposed vulnerabilities in the production strategies and supply chains of firms just about everywhere.

As the global rhetoric turns to increased protectionism, there is a clear danger that global supply chains will come under stress. As modern products often incorporate critical components that require specialised technological skills to make, it becomes increasingly difficult for a single firm to possess the capabilities necessary to produce everything itself.

Increasingly, manufacturers in most industries rely on suppliers who focus on one area of the product. But this causes vulnerabilities. The reliance on global networks for manufacturing and any disruption to the supply chain causing problems. As we saw during the pandemic, disruption caused a supply-side shock, which manifested itself in runaway inflation.

The final pillar on which global economies rest is energy. Access to abundant, cheap and reliable energy has supported growth and prosperity for billions of people. Higher energy prices was one of the main triggers of the cost-of-living crisis both in the UK and Europe. Nord Stream pipeline disruptions almost threatened to plunge western Europe into darkness. Energy independence is the goal of every major economy in the world. However, much of our energy is still based on fossil fuels, which account for more than 80% of all primary energy consumed.

The world has therefore embarked on an energy transition with the aim of reducing emissions, but it is still in its nascent stage. At current levels, deployment of low-emission technologies is about 10% of what is required. To achieve the goals set out to limit global warming to 1.5C, greenhouse gas emissions would have to be reduced by 43% by 2030, and CO2 emissions by about 100% by 2050.

The immensity of this scale touches every aspect of our lives, from raw materials for new technologies, to energy efficiency in housing and mobility, and cooling and powering data centres.

Making progress requires an understanding of the challenges and innovation of available technologies. A delicate balance is required to ramp down old systems and ramp up new ones without disruption, as well as the investments needed to reduce emissions today while tackling future challenges.

We live in interesting times. George Bernard Shaw said: “There are those that look at things the way they are, and ask why? I dream of things that never were, and ask why not?” By embracing change and adapting to its evolving landscape, we open ourselves up to new opportunities.