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“Predicting is very difficult, especially if it’s about the future.”
- Niels Bohr
“There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”
- John Kenneth Galbraith
“The old rule of forecasting was to make as many forecasts as possible and publicise the ones you got right. The new rule is to forecast so far in the future, no one will know you got it wrong.”
- Ruchir Sharma
The above quotes highlight the difficulties of making predictions. Economists are not much better at forecasting growth now than they were a decade or two before – the clouds obscuring the outlook for the future remain as opaque as ever. With this caveat in mind, it’s nonetheless a worthwhile exercise to consider what key themes will likely affect markets over the next decade, even if we do so on the proviso that we will need to review these in the not too distant future.
In this article, we detail what we consider to be five key themes that will shape markets over the coming decade, namely: demographics, the energy transition, ‘using less stuff’, working from home and deglobalisation.
Demographics
The UN expects the global population to peak at 10.9 billion around the year 2100. At that point, based on its forecasts, the African population will be at 4.3 billion, up from the current 1.26 billion. In other words, the long-term future is African. However, the level at which the UN expects global and African populations to peak has been steadily revised downward over the past seven years.
In 2020, academics at the University of Washington published a paper in The Lancet forecasting the global population to peak at 9.73 billion in 2064, with 23 countries seeing their populations halve by 2100. It’s quite something to think that we are roughly 40 years away from the peak of the human population. Over the coming decade, we should see enough evidence to see which of the forecasts is more likely and if The Lancet publication proves to be prescient, it will likely be a major theme for markets over the coming decade.
A flat or declining global population means we need to see a sustained increase in productivity to sustain GDP growth. We will see fewer consumers, although they may consume more per capita. Populations will age across the globe and older people save and spend in different ways from young people. There will be new avenues for growth in sectors catering to the care of the elderly but there will also be reduced housing demand. Changing demographics will likely gradually but meaningfully influence markets over the coming decade(s).
The energy transition
According to BloombergNEF internal combustion engine (ICE), vehicle sales peaked in 2017 at 87 million vehicles. In 2020 ICE vehicle sales were at 70 million and it seems unlikely ICE vehicle sales will ever get back to 2017, so the slack will have to be picked up by electric vehicle (EVs) sales. At the same time, commitments by a broad array of countries to get to net zero emissions by 2050 have led to a switch to electricity generated by renewables from electricity generated from hydrocarbons. The difficulty is that renewables/EVs are very metal intensive and we can pencil in a surge in demand for commodities such as copper and cobalt over the coming 30 years. According to the IMF, copper production will need to increase by two-thirds over the coming 30 years, while nickel production will need to triple.
At the same time mining companies are showing an unusual level of supply discipline – unlike previous commodity cycles, global mining capital expenditure (capex) has not ramped up post the rally in commodity prices. Part of this may be due to ESG considerations. Mining companies find it increasingly difficult to get access to capital on favourable terms.
The net result is that, in our view, we are likely to see sustained support for commodities over the foreseeable future. This will have several knock-on consequences – tailwinds for mining companies and resource-producing countries as an example. It may also provide some upward pressure on global CPI inflation.
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Using less stuff
Slowing population growth and continuing efficiency gains mean we are now reaching the point when humans consume less of certain goods for the first time. As an example, water usage in the US peaked in the 1980s. Land dedicated to agricultural purposes across the globe peaked in the early 2000s. These trends ease pressure on the environment but could also have large unintended consequences – for example, what happens to rural land values when wheat and corn are grown in factories close to CBDs instead of in rural heartlands? At what point do we start using less oil and steel and what impact will that have on planned capex in those sectors? We probably don’t have too long to wait to find out and it will likely be significant for markets.
Work from home
Evidence from entry turnstiles in buildings across the US shows that people have been very slow to completely return to working in the office. Working from home, should it stick, will have some clear and immediate consequences. Workers will spend less on transit, and gasoline and diesel in particular, reducing the influence of the oil price on economic growth.
The trend to shop from home, rather than head to a brick-and-mortar store will likely accelerate too. Office vacancy rates will remain elevated putting sustained downward pressure on office prices. There will also be some longer-term consequences. If people can work from home, they may well choose to work from another country. The technology that allows for working from home may also allow for improving education across the globe. Rockstar lecturers with vast virtual audiences may mean that the gates of high-quality tertiary education are opened to emerging markets. Increasingly people will work and be entertained at home – not great for social activity but there will be companies positioned to take advantage of the theme.
Deglobalisation
According to World Bank data, global trade as a percentage of GDP peaked at 60% in 2008. In 2020 it was 52%, the lowest number since 2003. Covid has accelerated the push for reshoring and making supply chains more robust. The deglobalisation of the global economy will have many consequences – globalisation has been a disinflationary force for decades, but this is the first meaningful reversal in 50 years. In addition, trade has been a way for poorer countries to lift themselves out of poverty. Imposing trade barriers may well lead to a combination of both lower growth and higher inflation across the globe but there will be domestic producers that will take advantage of this scenario should it play out.
The above list is not exhaustive and, if history is anything to go by, the themes that markets will end up mostly concerning themselves with over the next decade will come out of leftfield. Perhaps that’s the key theme – the future will still be as unpredictable as ever.
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