Big, Long Term Investment Themes?

[Halebop]

Probably a topic to bore the socks off the average trader working on a 5 day cycle but here goes...

What themes are driving investment in the longer term (5+ Years)? What sectors should I park my money in? I have a few macro ideas but would love to hear alternate views or smaller themes within the macro context:

One of the biggest Western / OECD themes are Baby Boomers. They are mostly all working and as a group earnings are at their peak now: They've got that small business, management job, consultancy or maybe just the experience to earn a little better. The richest of them are just now starting to retire but the retirement groundswell won't begin for another 5 years or so, then its 20 years of declining economics for them. But they will still need some services which will bode well for some industries like reverse annuities, retirement homes, medical care etc.

Stemming from the Baby Boomers is conspicuous consumption. Retailers have had an amazing decade. There is still probably a few years of puff left in this before they need a replacement source of demographics. Also on the conspicuous consumption side is Government. They've grown a fat purse on the boomers' demand driven bounty. This has led to a gradual loosening of purse strings. Now Capital Works and Infrastructure is getting some resource. The irony is, at a time when Western Governments should have the most money to spend (New Zealand at least has got this part right) they are relying upon the promotion of the so called Private-Public Partnerships.

In order to keep the economic and taxation ball running what will we do to replace Boomer productivity and consumption? Immigration seems the most likely course although some blue rinse and shaven head xenophobes seems to object.

China and Resources also figure large and is perhaps New Zealand’s likely saviour in the shortish term. China (and maybe a few others like Vietnam) seems likely to transform into the Japan of the 21st Century. Luckily for New Zealand they are water poor at a time when industrial output is putting pressure on this most basic resource. That in turn impacts food production. Its no accident nor "pity date" that they have chosen New Zealand for a free trade pact.

The industrial output growth in China in turn is leading to rising consumerism (which is still quite tiny on per capita and income basis). Both impact the need for various basic and complex metals and minerals. Notwithstanding the inevitable short term gyrations up and down, this implies good demand for primary resources into China for the foreseeable future and maybe several decades. Some commentators have opined that we are entering the 60s and 70s again in this regard.

What else? Oil? Property? Inflation? Views? Abuse?

Edit: Poor Typing/Spelling.

[stephen]

Ooh, speculation! Can I try?

Inflation? Try deflation on for size.

Manufactured goods in general are getting cheaper and cheaper (staggeringly so if one compares their capabilities with their predecessors). Food is getting cheaper. Higher local labour costs will be countered by offshore outsourcing and automation (and eventually, wage decline in a self-sustaining deflationary cycle). Oil, I think, will stay where it is for some decades - there are still big untapped reserves to come on stream in Alberta etc, and the Saudis et al can open the taps any time they like. Only land is going up...

... how lovely to be an investor in a deflationary environment, where the modest returns are amplified in buying power each year. Bring it on, I say.

Trade wars will be fought over copyright and patent law. Eventually, information hoarders will lose, but not before pissing off all their customers and imposing heavy financial burdens on them as they struggle to stay afloat. Long term, owners of so-called intellectual property will find their "property" was a legal fiction that society can legislate for or against, not a real thing. (Example: who has a better future long term, Sony the manufacturer, or Sony the entertainment company? Historically, do legislated monopolies like this persist?)

In New Zealand, the age of child bearing will rise under the pressure of student loans etc. Some will choose to remain childless to retain their consumerist lifestyle. So we will see increasing labour shortages in jobs done by young people, and increasing markets for "cheap hedonism", ie luxury food and drink, personal services etc. We will continue importing doctors and dentists and other professionals from the 3rd world, thus using their education systems to subsidise our own, while we export our own clever people elsewhere (hope they send money back to mum and dad!)

Now for the abuse.

Does this really make any difference for the value investor? I think not. The worst sectors may still have fantastic bargains, while the best will be crowded with competition with no obvious winners. The canny will be snooping around for value and they won't care where they find it.

[Capitalist]

Good thread Halebop . I am getting a bit cautious about our GCL investment BTW. Don't know how much upside is left there.

Anyhoo...in regard to Baby Boomers, property is the thing. Lots of boomers have invested in property for their retirement. When they start needing the cash we will obviously see a lot of selling pressure. You have to know what U R doing to invest in property at the moment. The effect on shares will be minimal, as they are much more liquid, in spite of doomsayers and Kiyosaki's handwringing.

Interesting times.

[Placebo]

Population change will be one factor, economic change will be another, brought about by evolution within both NZ's economy and others which we now consider "developing" economies (Indonesia, China, India).

NZ has an ageing population, and in addition to this the age profile of our workforce is changing. Contrary to demographers predicting doom as the pool of workers shrinks and retirees grows, I see people continuing to work well past retirement age and this being a trend that will continue. Our natural population growth (birth rate) is in negative territory, so the only way to grow the population is through migration. If this doesn't fill the needs of a growing economy, then older workers will continue to be wanted.

In a strictly NZ environment, I can see opportunities in some of the policies that are currently being implemented, such as govt-subsidised superannuation (at least for public servants) and the Cullen Fund. Even if it doesn't provide all our needs for retirement, the fund will help sharemarket investors get there by boosting the demand for NZ shares (even with a small percentage of the fund invested in NZ, it is still a significant player in the local market). The trick is to pick what they will buy into -- most likely low risk stocks with a decent yield, TEL, CEN, AIA.

I think the offer of subsidised super schemes will help mitigate the impact of student debt on new workers' willingness to invest in the market. The pool of investors will continue to grow, and in any case, the impact of retail investment on the market is very small so will have negligible effect. What is more important is confidence in managed funds and their ability to draw new customers and continue investing.

Changes in the housing market is another interesting area. Fewer people own, but the number of houses is growing at a faster rate than the population. More people in single occupant dwellings. This more than anything is driving demand for new buildings, it's a trend I don't see an end to any time soon.

As far as a strategy goes I have concentrated so far on sectors where I feel there are dominant players or natural monopolies (at least in NZ), or where there is constant demand such as in utilities (CEN and AIA). I do see further opportunities in energy and resources, but picking which company will be a winner is more speculative. I have dabbled in retail, but despite a happy experience I consider it cyclical and difficult to pick, so probably won't go there again. The other growth area is in health care (FPH, Wakefield Hospital) and in rest homes (MET, RYM).

Then again, property market will probably prove us all wrong by continuing to grow and grow.

[Halebop]

Interesting indeed Cap.

If you're worried about GCL just go to Hotcopper. Some keen fanboy over there is predicting a PE of 10 and has conveniently forgotten they aren't paying any tax to boot. $10 here we come! (Um, for the record and those without a sense of humour, I'm just kidding, I don't think they are worth $10)

[limegreen]

quote:Lots of boomers have invested in property for their retirement.

I'm not meaning to raise an argument here, but I hear this statement a lot, and just would like to probe it a little, so please indulge me. (DISC: Recent first home buyer).

My first question is does this mean that their retirement is their freehold property (ie, obsession with paying off mortgage rather than owning shares and to hell with capital repayments), or that many of them are rental property owners? If the former is true, then some sale and downsizing seems likely (but will capital eating mortgages become less expensive/more the norm?). If the latter is true, will they necessarily sell the properties or merely employ property managers? And assuming there is still some demand for rentals, will that side of the equation keep prices up?

[stephen]

Another thing to throw into the mix is that in New Zealand, fewer and fewer people are inheriting more and more, as family size decreases between generations.

Human nature being what it is, some people will hang on to it - but most will spend it.

[Halebop]

Who knows?

I imagine it could make relatively illiquid property holding less attractive to retirees. However, finance and life insurance providers will also move to fill the void by offering more flexible finance options as well.

Assuming we sucessfully use Immigration to meet labour and taxpaying needs, this should also provide a continued source of real estate demand.

The only thing I do know though is that without population growth - regardless if from increased birth rate or immigration - then simple demographics results in less demand for both investment and primary dwellings. This would mean lower rental earnings and capital values.

[Placebo]

Fastest growing housing type is 1 and 2 bed apartments and townhouses. 3 bed and larger family homes will still be around but not a growth market.

Halebop I thought you were trying to bore our socks off...

[Cooper]

Nice topic Halebop...
For NZ I'm taking comparative advantage literally in an era of agricultural trade reductions (Free trade with China, US Ag tariff reductions, WTO focus on reduction of ag trade barriers). Have been eyeing up the odd farming co. in NZ... the criteria being "who would adapt most readily to open foreign markets".

RYM, ABA, and other "elderly care" companies... as suggested, certainly worth casting an eye over. Also, as Placebo has said investment in smaller housing is a wise idea.

As you say... financing co's (perhaps offering reverse mortgages) and financial management for retirees (especially if the govt comes through with the steps it has signalled it might in regards to capital gains tax in the housing market) look good.