THE GLOBAL 20: THE BIG TRENDS THAT ARE CHANGING THE WORLD
May 26, 2012 Leave a comment
By Eric Platt, Matthew Boesler and Max Nisen | Business Insider
While it’s easy to get caught up in this noise, investors trying to get ahead of the curve need to focus on the big trends.
We have identified these big trends in The Global 20.
The list includes the rapidly growing field of genomics, a group of emerging countries that are outpacing the BRICs, and the revolutionary new way that retailers sell goods.
#1 THE U.S. ENERGY BOOM
Commodities garnered substantial attention this year after natural gas and coal prices collapsed amid an unusually warm winter. But forecasts for future energy generation in the U.S. remain surprisingly robust.
The U.S. Energy Information Administration projects that the country could halve its reliance on total energy imports under the best scenarios, and under higher consumption scenarios could lower imports from 24 percent today to 17 percent in 2035.
FOCUS: Natural gas is one of the highest growth areas
The EIA estimates that most of the gains will come from increases in natural gas and renewable energy production as a portion of total energy generation. In fact, the EIA sees the U.S. becoming a net liquefied natural gas exporter in 2016 and an overall net exporter of natural gas in 2012.
Liquid reliance, which depends heavily on auto use and miles driven, is also seen declining as consumption needs by U.S. consumers remain below pre-2008 crisis levels.
FOCUS: The green movement has become unstable
On the green front, state rules impacting electricity generation and federal laws on ethanol blending will have the greatest impact on the country’s shift to renewable resources.
However, the recent investment by the federal government in a number of green technologies has fallen under scrutiny; the failure at Solyndra and continued difficulty at First Solar have put the survivability of the U.S. solar industry into question.
First Solar is now betting its future on the move by American and foreign utilities to large scale solar generation prompted by state regulations. By 2016 First Solar is targeting some 3 gigawatts in sales through these solar fields.
#2 THE END OF THE BIG BOX RETAILER
Retailers are finally emerging from the doldrums of the 2008 recession, which radically changed the makeup of malls and big box stores. Luxury department stores like Saks, electronics retailers like Best Buy, and mass specialty chains like Abercrombie and Fitch are shuttering stores as consumers begin to shift to new channels as they open up their purse strings again.
But this time, some of those channels are not controlled by the retailer, including the shift to flash sale sites and online distributors.
FOCUS: The move online
Retailers have mostly embraced the digital shift, rolling out online and mobile sales sites. Consumer pickup has been noticeable, with Urban Outfitters, American Eagle Outfitters, and J.Crew all reporting more than 10 percent of sales driven through direct-to-consumer channels.
“With managements typically commenting that company websites achieve the dual benefit of contributing to sales and also promoting and fostering brand equity, we expect this channel to represent one of the greatest avenues for growth and management focus going forward,” Bank of America’s Brian Tunick says.
FOCUS: Flash sales!
This shift is exacerbating issues with physical storefronts—where retailers employ the majority of their workforce. Many stores, like the Gap, are retooling with smaller storefronts to bolster margins, while others, like Best Buy, are conceding defeat and shifting product mix.
While Circuit City and Borders fell to online behemoth Amazon, clothiers generally went unscathed. The flash sale is the first real threat to luxury specialty shops and department stores like Macy’s, Bloomingdales brand, Neiman Marcus, Saks, and Nordstrom.
Business Insider Intelligence projects flash sales could hit $6 billion by 2015, fueled by HauteLook, Rue La La, and Gilt Groupe.
#3 A LIMITED FOOD SUPPLY
Just last year we saw the geopolitical and market impact of food scarcity and rising prices. There were many causes of the “Arab Spring” but one catalyst was a ramp up in food prices beginning in 2009, part of larger trend interrupted only by 2008’s global recession. The U.N.’s FAO Food Price Index reached its highest ever level in 2011.
The Middle East and North Africa import more than 50 percent of their food, leaving them particularly sensitive to food price shocks. Global trends in food supply and demand mean that food scarcity will be a greater problem in the future.
FOCUS: Blame it on emerging markets
A principal driver of food scarcity will be global population growth, particularly in the developing world. The global population has doubled since 1970, and is projected to reach 9 billion.
As populations in developing nations are lifted out of poverty they consume a higher calorie diet with more meat and dairy. A 10 percent rise in a Chinese family’s income is associated with an 11.5 percent increase in spending on meat. It takes 3 kilograms of grain and 16,000 liters of water to produce just 1 kilogram of meat.
Water scarcity will be increasingly problematic as agriculture accounts for 70 percent of water consumption worldwide. Demand pressures in China and India have led to increasing over-pumping of aquifers, significantly reducing their water tables. Soil depletion from unsustainable agricultural practices is estimated to have reduced productivity in one third of the world’s croplands. Finally, it is estimated that 85 percent of fish stocks are under pressure or depleted.
FOCUS: Prices are going higher and higher
One thing investors have been looking towards is the price of oil, which is closely correlated with food prices. That results from the energy and fertilizer costs associated with modern agriculture, and increasing demand for biofuels as oil prices rise.
On the supply side, increasing global temperatures have the potential to create drought and reduce crop yields. One example: the 2010 heat wave in Russia reduced crop yields by 40 percent, causing a global price spike.
#4 THE GROWTH OF BIG DATA
Big Data has arrived. The McKinsey Global Institute, in a report on the subject authored in 2011, wrote, “Data have swept into every industry and business function and are now an important factor of production, alongside labor and capital.” The New York Times recently heralded our time as “the Age of Big Data.” Clearly, it has become all the buzz.
So what is Big Data, exactly? Danah Boyd and Kate Crawford, researchers at the University of New South Wales who wrote the popular essay entitled “Six Provocations for Big Data,” describe it as “information from Twitter, Google, Verizon, 23andMe, Facebook, Wikipedia, and every space where large groups of people leave digital traces and deposit data.” IBM has noted that at present, the amount of such data produced every two days on the web is more than all of the data available prior to 2004.
FOCUS: A $16.9 billion industry by 2015
To address all of this emergent size and complexity in modern data sets, new technologies are rising to the occasion to manage and analyze this data for various uses. Market intelligence firm IDC sees Big Data as a $16.9bn market in 2015—that’s up from $3.2 billion in 2010 (which represents a 40 percent compounded annual growth rate—a near doubling in market size every two years).
Relational database management is a key component of the Big Data market. Bank of America estimates it to be 27 percent of the total market, by far the largest share of any single sub-sector. Who are the key players? Many easily accessible publicly traded names like Oracle, IBM, and Microsoft lead the way.
The explosive growth in data usage and the outstanding demand for new technologies to address this growth make this industry an investment one is wise not to ignore in the coming decade.
#5 THE CENTRAL BANK HANGOVER
Central banks have flooded markets with liquidity through QE 1, QE 2, QE 3, and LTRO. What’s going to happen when they stop?
Given the current state of the recovery in the States, another round of quantitative easing is uncertain, but if we believe the Fed’s forward guidance, we can’t expect tightening until 2014. Europe’s recovery may take even longer, and if Greece exits, further recapitalization of banks may be required. The rampant inflation that some expected after large balance sheet expansion hasn’t occurred, a consequence of a lower money multiplier and the “liquidity trap.” But how central banks exit will be very important.
FOCUS: They’re out of bullets
One consequence of continued low interest rates and easing is an inability to respond to further shocks. The second round of quantitative easing was less effective than the first, and less effective in general due to intense demand for liquidity and treasury bonds. It is unlikely there will be much room for rates to move downward for years to come.
This, coupled with debt concerns and government unwillingness to act, suggests that both monetary and fiscal response to future crises will be constrained. The other consequence is inflation. Expectations for inflation are still very low, but any rise would constrain central banks, especially those like the Bank of England with a single mandate to maintain price stability.
FOCUS: An intense demand for safe assets
These policies, coupled with increased regulation, have had a profound effect on the financial system. Central Banks have traditionally expanded the monetary supply by making open market purchases of government bonds. Intense demand for liquidity and safe assets has pushed rates to historic lows, but they are increasingly scarce, and it is more difficult for banks to comply with new risk requirements.
This chart of the rate on 10-year treasury bonds reveals how intense the demand for “safe assets” is. Those requirements may constrain growth in the future if banks must divert so many resources to safe assets. If central banks start to end their provision of liquidity, it is unclear how banks will effectively respond to shocks.
#6 UNMANNED WAR
“On the battlefield of the future, enemy forces will be located, tracked, and targeted almost instantaneously through the use of data-links, computer-assisted intelligence evaluation, and automated fire control. With first-round kill probabilities approaching certainty, and with surveillance devices that can continuously track the enemy, the need for large forces to fix the opposition physically will be less important.”
That was U.S. Army General William C. Westmoreland in 1969, and his words turned out to be quite prophetic. Unfortunately, in 2012, the world is still embroiled in several major armed conflicts. Nations like the U.S. are increasingly turning to drones to carry out surveillance and strike operations in the Middle East—the U.S. military now possesses more than 7,000 units, and you can count on other militaries following suit to adapt to the ever-changing theatre of war.
FOCUS: Drone use could increase by 90%
How large is the U.S. military’s commitment to this new form of combat? Digging down into the defense budget produces telling results. The chart below originally appeared in the Department of Defense’s long-term Aircraft Procurement Plan that was submitted with the FY2012 budget. It shows a 90 percent increase in investments in unmanned aircraft over the next decade.
The MQ-9 Reaper, with a sticker price of $30.3 million per aircraft, represents a sizable portion of the increase. The Reaper is manufactured by General Atomics, a private defense contractor in California. The RQ-4 Global Hawk, manufactured by the publicly traded defense contractor Northrop Grumman, will be a significant addition to the U.S. arsenal as well.
This sort of investment should leave no question with regard to where the future of defense spending is headed, and the companies that can adapt and innovate in the unmanned, electronic warfare space will be poised to win big when other countries upgrade their forces in size as well.
#7 CHINA AGES
Harvard Initiative For Global Health
Bolstered by strong demographic shifts, a young population, and little regulation, China was able to grow its manufacturing base into a powerhouse.
But that young population is now rapidly aging—by 2030 the median age is expected to increase to 42.5, up from 34.5 today—and is forecast to peak in 2025, nearing 1.4 billion. This will lead to a steadily declining workforce beginning in 2015. Starting that year, China will lose some 36 million people from its workforce over the next decade and a half.
FOCUS: Blame it on low fertility rates
Compounding issues include China’s controversial one-child policy and low female fertility rate of 1.56—below the 2.0 replacement rate necessary to keep a country steady. All together, this will put a massive strain on the already burdened social security system, particularly as the 4-2-1 support network is challenged (four grandparents, two parents, one child).
The insurance and healthcare industries are set for substantial growth as chronic conditions become more prevalent and the growing middle class can afford to pay for more treatment.
FOCUS: This is great for the healthcare industry
The $300 billion healthcare industry in China could accelerate by more than 20 percent per year this decade alone. The pharmaceutical industry is just one of the healthcare sub-sectors poised for growth.
In 2001, China represented the 10th largest pharma market. By 2020 it is expected to be the second largest. And U.S. and European companies will not be shut out of this rapid ascent. A snapshot of sales in 2008 showed Siemens, Philips, GE, and Toshiba all winning orders for medical equipment.
#8 FOR-PROFIT EDUCATION
Between 1986 and 2008, enrollment in for-profit educational institutions swelled from little more than 300,000 to almost 1.8 million. Market share of for-profits in the higher education industry over the same time period rose from 2.4 percent to 9.2 percent.
Now the industry is seeing volatile times. Recent allegations of fraud perpetrated by individuals taking advantage of federal aid money through the for-profit education system have raised worries about somewhat overstated enrollment numbers. As higher education undergoes a sea change, however, for-profit education is poised to continue gaining share in the market.
FOCUS: Blame it on the jobs crisis
When people can’t find work, they head back to school.
The burst of the housing bubble and the subsequent recession that led to the financial crisis of 2008 had a profound and lasting impact on unemployment in the United States. The unemployment rate bottomed out in May 2007 at 4.4 percent. It rose as high as 10 percent in October 2009 before beginning its descent to 8.1 percent, where the official number stands today.
However, in the past two years, the labor participation rate has plummeted, which somewhat understates the headline figure. A recent estimate from an economist at National Bank put the number at 3.4 million people who could potentially re-enter the labor force when the labor market improves.
FOCUS: Blame it on the new job market
Sustained high unemployment rate is not merely cyclical, but structural. Many who were employed in various capacities before the crisis, like those in jobs related to the housing boom, will not be able to find work in their former professions going forward.
For-profit education is poised to address this issue. A report by the Center for College Affordability and Productivity pointed out that the majority of students over the age of 25 usually utilize for-profit educational institutions as opposed to private non-profit or public institutions (see graph). As people go back to school and re-educate themselves in order to re-join the labor force in new capacities, the for-profit education sector will benefit in a big way.
#9 THE MOBILE REVOLUTION
Mobile phones have become the most ubiquitous personal-computing technology in the world —surpassing the personal computer—as cellular devices have penetrated previously unreachable landline geographies.
And the “dumbphone conversion cycle”–the replacement of regular cell phones with smartphones–is only about one-fifth of the way done.
Internet-connected smartphones are rapidly becoming the most important computing platform. This is disrupting the traditional PC and technology industries and creating a huge new opportunity for global entrepreneurs.
FOCUS: The trade up to smartphones
In 2011 there were some 5.6 billion traditional mobile phone users to the 835 million people who had switched to a smartphone device. In the U.S., the conversion of “dumb-phone” users to smartphones is about halfway done. But the replacement cycle is only just beginning globally.
Across all demographics, smartphones have been most rapidly picked up by the youngest members of households, and in homes where incomes are greater than $125,000. However, adoption rates among lower income families and older members of the population are accelerating.
FOCUS: Apple competes with Google
Internationally, it is a two-horse race between Apple’s iOS and Google’s Android operating systems, with the two commanding 74.7 percent of the global OS pie—that’s up from 46.3 percent just one year earlier.
Manufacturers remain in a tight race, however. Samsung and Nokia remain neck-and-neck, with Samsung taking the lead during the first quarter of 2012 (although Nokia easily won in total yearly sales in 2011).
For carriers, the move to smartphones has meant building up networks to support the increasing amount of data users consume. The shift has built an entire mobile app industry that now generates some $8 billion a year—and it’s growing at 100 percent per annum.
#10 THE COMMODITY RUSH
The past several years have been characterized by a general increase in the price of commodities, including oil and gold. One of the driving forces has been ever-rising demand from emerging markets, particularly China, and a fear that we’re beginning to run out of fossil fuels.
Global tightening of oil supplies could have an outsize effect on the global economy. In years past, Saudi Arabia could start pumping at just about any time to meet shortfalls. Spare capacity has been declining for years, and demand has outpaced discovery of new reserves. Techniques for extracting “tight oil” from shales and sands will help, but we’re still looking at a future of increasing volatility in oil prices. Energy price shocks have historically had large effects on equities and the U.S. economy.
FOCUS: Watch out for China
China has been aggressive with commodities investments, from copper mines in Zambia, to oil in Sudan, and gold and uranium in South Africa. It has also been actively building infrastructure required to fully exploit resources. This could signal a growing geopolitical trend of countries attempting to secure commodity supplies. We are seeing this with agricultural land as well, as China and Gulf States have made significant land purchases in Africa and elsewhere to secure food supplies.
Watch out especially for rare earth metals. China controls 95 percent of the world’s supply which are used primarily to manufacture electronics. Other sources are beginning to be exploited, but China will still maintain an outsized share. They maintain strict export quotas, which have been challenged at the World Trade Organization. China has also been accused of using its near-monopoly to pressure other governments, notably with Japan in 2010.
Increasing competition for commodities could be a source of conflict, or a driver of more sustainable energy policy. China is betting on both outcomes, investing heavily in both renewable technology and commodity projects. Given how much oil prices alone affect economies and equities, this will be an area of long term concern.
#11 STATE CAPITALISM
State capitalism is on the rise. The model of state-owned enterprises that has been successful for China in recent years is popping up in emerging economies around the world like India, South Africa, and several countries in Latin America, including Brazil. As the developed world falters, and with high unemployment and stagnating growth in the U.S. and the unraveling of the eurozone, many are looking to this model as a possible solution to the crisis of capitalism.
As an investor navigating the markets of emerging economies, the landscape of industry as it relates to state-controlled companies will perhaps be one of the most important factors to take into consideration in the coming years. Notes The Economist:
Some may be taking a punt on governments as much as companies. State-capitalist governments can be capricious, with scant regard for minority shareholders. Others may find their subsidiaries or joint ventures in emerging markets pitted against state-backed favorites.
FOCUS: States love investing in energy
Typically the sectors in which natural monopolies are prevalent are ones with many state-owned enterprises in the countries that engage in public ownership and governance, like utilities and telecoms. Oil is also a major state-controlled industry in many emerging economies (see graph). Keep these things in mind when investing in emerging economies and it could help you avoid a costly stumble.
#12 THE AFRICAN FRONTIER
Frontier and emerging markets are some of the few bright spots of growth in the world, and there is a growing consensus that the BRICs will be surpassed by a new region: sub-Saharan Africa.
The eight countries that make up the specific area expected to grow at a breakneck pace include Angola, Ghana, Kenya, Nigeria, Senegal, Tanzania, Uganda, and Zambia.
The eight nations represent 45 percent of sub-Saharan Africa and 61 percent of its economic output. Combined, their GDP is roughly equivalent to that of Poland. Over the last ten years, real-GDP growth has increased from 3.0 to 6.6 percent, rivaling BRIC expansion at 6.6 percent, and topping the 4.9 percent growth seen in emerging Asia.
FOCUS: Political risks have abated
Deutsche Bank’s Robert Burgess says that traditional hurdles remain for the African Frontier, particularly “low incomes, rapidly growing urban populations, ethnic divisions, pervasive corruption, and long histories of armed conflict.”
That said, elections in Nigeria, Uganda and Zambia passed smoothly in 2011, while Ghana is expected to complete its election in 2012 with relative ease. But elections in Kenya will prove a compelling indicator on the country’s ability to remain stable amid mounting political unrest.
FOCUS: Growth potential is huge
Capital markets in sub-Saharan Africa are relatively small, with the largest—the Johannesburg Stock Exchange—eight times larger than the other indices in the region. The JSE has a market cap of $665 billion.
However, chief economist Burgess believes that “capital market development and economic growth tend to go hand-in-hand, and the prospects for the latter look relatively bright.” More so, the region’s revival seems poised to continue, Burgess says.
Robotics and automation will be in greater demand over the next several decades. As populations age, standards of living and wages rise, and technology improves, demand will dramatically increase. The benefits are obvious; robots can work 24 hours a day, seven days a week, are incredibly consistent, and can take over dangerous work.
The sort of robots that already exist are industrial robots. The potential growth in this sector is enormous. They allow manufacturers to have high productivity factories with much lower wage and other overhead. This could potentially mean the end of trends that have seen companies move overseas for cheap labor.
FOCUS: Sales are surging
Sales were 118,337 in 2010, and around 1 million total units were in operation. Those numbers are expected to rise to 166,700 and 1.3 million in 2014. So far the automobile and electronics industries have been the principle buyers, accounting for 60 percent of demand. There is significant room for growth in the chemical, machinery, and food and beverage sectors.
Looking to the future, service robots will become increasingly common. Consumer, cleaning, and surgical robots already exist. These range from relatively simple consumer robots like the Roomba to increasingly sophisticated tools for heart surgeons. Scientists have also begun to develop robots that can improve the lives of those who are paralyzed or have lost limbs.
FOCUS: Industrial demand is high
Demand is expected to double to 4 million by 2014. The abilities and market availability of most of these robots is quite limited, but as they improve they will become more common. Military robots—primarily drones—already see significant use by the United States. As countries look to reduce military cost, the use of robotics is an appealing option.
It is currently rare to encounter robots in day-to-day life, that will change over the next 20 years. The industry represents a possibility of a cheaper, more energy efficient, and safer work force. There’s a balance to be struck by those attempting to enter or profit from the industry.
There are still high entry and technology barriers, and those who adopt inferior technology too early will end up having to replace it. When it is not just industry giants that produce and use this technology, but small firms and consumers, the global economy will transform.
#14 RECONSTRUCTING THE MEDIA
The media business is slowly reconstructing itself after a painful collapse over the last several years. Let’s rephrase that: Print-dependent businesses are finally restructuring themselves.
Total U.S. advertising spending has declined from more than $205 billion in 2007 to about $180 billion this year (graph at right breaks down the largest 20-company share of that advertising picture).
Television remains the dominant force in the U.S., with penetration rates remaining strong across both traditional viewing and newer offerings (streaming online, DVR, on-demand). Cable and broadcast television are also buffeted from the stresses other categories face because of lucrative transmission fees generated from distributors.
FOCUS: The fast decline in traditional revenue platforms
The news business in particular is strained, with revenue declining in television and print. Large gains tallied online are still tiny compared to the advertising market once generated by print powerhouses like McClatchy, Gannett, and The New York Times Co.
And those companies are not paid nearly as much per reader online as they are in print. The Times, for instance, earned 288 times as much money per print subscriber than it did per online reader in 2011. But that may be changing …
FOCUS: Tablets are saving industries that were left for dead
The good news for many of these businesses is that the uptick in mobile is starting to pay off. Unlike the mostly free news and magazine sites online, many publishers are finding sizable markets in the tablet business. That’s also true in most of Europe, developed Asia, and Latin America. In Nielsen’s most recent State of the Media survey, the company found 12 percent of consumers polled in 56 countries owned a tablet—and that that figure would continue to increase.
Both Conde Nast and Hearst have aggressively pushed their publications onto the iPad and are finding substantive success. More than 40 percent of American tablet owners paid for a magazine in the fourth quarter of 2011. The New York Times reported a 50 percent surge in subscribers for its Sunday edition thanks to its paywall, and now the number of digital subscribers top print subscribers on weekdays.
And the shift isn’t simply having an impact on traditional television providers. HBO Go, an online, on-demand offering from HBO, is part of its strategy to increase the value consumers get from a monthly subscription—and the company is betting that will help increase its overall subscriber base.
#15 AMERICA GETS OLDER
The U.S. is getting older and a sea of baby boomers are setting their sights on retirement. That is presenting a host of problems that the country will have to face over the next decade, including the ever-increasing life expectancy rates’ impact on healthcare costs and social security funding.
In a report out at the end of last year, the U.S. Census Bureau announced that “people 90 and older now comprise 4.7 percent of the older population (age 65 and older), as compared with only 2.8 percent in 1980. By 2050, this share is likely to reach 10 percent.”
FOCUS: Consumer spending will change
Starting in 2009, the cohort of Americans between 45 and 49 years old has been in decline, and is expected to continue that fall through 2022. That age group happens to occupy what demographer Harry Dent finds as the peak spending group—the age when U.S. consumers spend the most.
That bubble of Americans are now heading towards retirement, where they will exit the workforce (a drag on payroll tax revenue) and begin to collect social security. Already, estimates call for the social security fund to cover just 75 percent of benefits by 2033.
“In 2033, incoming revenue and trust fund resources will be insufficient to maintain payment of full benefits,” Treasury Secretary Tim Geithner says. “At that point there will only be enough money to cover about three-fourths of full benefits.”
#16 A U.S. MANUFACTURING RENAISSANCE
For years as China rose and U.S. manufacturing declined, people said those jobs were gone for good. The U.S. had a competitive disadvantage; developing nations had lower wages and looser regulation. It has surprised many that one of the most positive forces during the recovery has been a resurgence in U.S. manufacturing—growing payrolls, increased exports, and improving productivity.
FOCUS: 489,000 new manufacturing jobs already
U.S. manufacturers have added some 489,000 jobs since 2010. Gains are coming from improved competitiveness, which could bring as many as two to three million jobs back to the United States, touted by President Obama as “reshoring.” U.S. manufacturing unit labor costs declined 10.8 percent between 2002 and 2010, an decrease matched only by Taiwan.
Auto manufacturing has been an area of strength, accounting for 1.12 percent of GDP growth last quarter, about half of total growth. Other strong areas in U.S. manufacturing are computer and electronic products, food and beverages, and chemicals.
FOCUS: Counting on emerging market demand
Increased productivity, historically low natural gas prices, and natural advantages in chemical and IT manufacturing help as well. A weaker U.S. dollar and rising wages in the developing world are central. China is the perfect example for both; the renminbi has appreciated 30 percent against the dollar since 2005 and wages are increasing 15 to 20 percent each year. All of this, and easy access to the world’s largest market, make the U.S. substantively more appealing for manufacturers.
Emerging market demand is boosting U.S. exports as well, up 17 percent last year—61 percent of those exports are manufactured goods. If costs in the U.S. remain at present levels, emerging market relationships are maintained, and the U.S. continues to produce the sort of workers needed, this sector will be one to drive the economy forward.
#17 THE EUROPEAN CRISIS CONTINUES
Nearly all of the common actions taken in Europe recently have been bailouts, building of firewalls, and imposition of austerity: call it crisis management. That has deeply hampered needed growth. Germany’s preferred strategy of internal devaluation/lowering labor costs to promote exports took 10 years to bear fruit. Much of Germany’s success can be attributed to building trade surpluses against the Eurozone where consumers and governments built up debt.
That same strategy has proved disastrous in depressed economies. The only remaining options are significant political and financial reform, orderly exit, or disorderly breakup.
FOCUS: Borrowing costs have soared
A eurozone breakup would require aggressive recapitalization of banks exposed to bad debt, and a plan for re-denominating loans and assets currently in euros. This second part will be particularly difficult; the adoption of the euro was supposed to be irrevocable. Greece is the most likely candidate for departure, but others may follow.
Interest rates in Italy and Spain have rapidly increased to pre-LTRO levels with headlines turning worse. The flash of liquidity in the system was expected to tame debt markets and allow borrowing institutions to shore up balance sheets — but with 10 year yields over 5 percent, investors still place a substantially higher risk premium on periphery states.
FOCUS: What happens if Greece defaults?
The nightmare scenario: a small country’s default causes other, larger defaults that sends the entire eurozone into recession. If Greece is forced out suddenly, periphery countries like Italy and Portugal would suddenly be in focus.
If it happens unexpectedly or quickly, the impact would be profoundly negative. Markets have only recently started to take into account the growing probability that a default could happen in a periphery state, particularly as dept-to-GDP in most countries remains untenable.
#18 RISING DEMAND FOR WATER
Water. It’s the most basic need for every form of life on our planet. It permeates every aspect of daily life. We drink it when we are thirsty. We use it to cook and clean. It’s used to generate energy to power industrial processes and to grow foods that feed the human race.
The world’s population is growing rapidly. Indeed, this theme is integral to many of the G20 investment ideas that will shape the next decade. In developed nations, most water demand is derived from non-agricultural sectors. As the global population swells and developing economies urbanize, they too will spur massive water demand for municipal and industrial uses.
FOCUS: Innovative solutions
While much of the earth is covered in water, only 2.5 percent of this is usable fresh water (as opposed to saltwater, which comprises the world’s oceans), and only 0.26 percent of that 2.5 percent is easily accessible above ground. These supply and demand factors present a clear challenge to the global water market.
What are the technologies on the forefront of this water revolution? Think desalination—converting our abundant salt-water resources into usable fresh water. Think filtration—converting that fresh water into a liquid safe for drinking and other home use. Companies will also need to meet demand for industrial treatment, automation and irrigation, and valves, pumps, meters, and pipes, among other things. The industry is large and will only grow larger.
The first Human Genome Project cost $3.8 billion and took 15 years. It’s one of the best investments the U.S. government has ever made. The project and the industries it has spawned have had an estimated $796 billion worth of economic impact. Sequencing a human genome will soon cost $1,000 dollars—unthinkable just a few years ago.
The principal impact of genetics is in the pharmaceutical and healthcare industries. Beyond sequencing, genetic engineering has allowed for commercial production of insulin in modified bacteria and other bio-pharmaceuticals. One of the real frontiers will be personalized medicine, targeting the right treatments at the right people.
Genetic differences make certain drugs more effective for certain people. Knowing what diseases people are susceptible to will allow doctors to practice preventative medicine and treat things earlier. The implications for development are myriad. Finding genetic causes of diseases is the first step towards finding targets to attack a disease, and genetically modified animal models allow for study of diseases and treatments.
FOCUS: Cancer research is taking a new turn
Cancer is one of the real frontiers for genomics as the disease is caused by genetic anomalies. Tumors are genetically unstable, and their differences from healthy DNA, from patient to patient, and between different cancers provide a rich source of information on potential treatments. That’s the reason that targeted therapies for particular cancers are already on the market, with more in development.
On the negative side, not every promise of genomics has been realized. The exciting idea of curing diseases by removing or replacing fragments of DNA has yet to be realized in any meaningful way. Genetic sequencing will produce an incredible amount of data which will be very useful to scientists and governments. However, there are ethical concerns. Could people be denied insurance because they’re genetically susceptible to disease?
FOCUS: The need for funding
All of this requires the same sort of leap and faith and investment that the Human Genome Project took. Despite the promise of this new technology and science, Pharmaceutical companies are cutting research budgets and retrenching into consumer healthcare after years of poor return on research, high attrition rates, and patent expiration.
Public science spending is down throughout the world. Smaller biotechs were supposed to pick up the slack. There has been a recent flurry of acquisitions by big Pharmaceutical companies, but the return on such deals has been mixed. Venture capital is loathe to invest in the sector because it is so risky, many startups fail to make IPOs. Venture investment fell 43 percent last quarter.
Costs for genetic sequencing have dropped exponentially. Hopefully more of those benefits can carry through to medicine.
#20 DRIVERLESS CARS
Imagine roads unencumbered by the dangers of intoxicated, sleepy, or distracted drivers. Imagine being truly free to spend your time in the car as you please—perhaps watching a program or reading a book on your way to work. Or what if you never had to worry about parking again? What if your car dropped you off, went and parked itself at the nearest space, then drove back to pick you up?
Believe it or not, the driverless car is not only very real but is also making some serious progress at the moment. The Google driverless car, a project spearheaded by a team of engineers and researchers at Stanford, was just approved in Nevada earlier this month for the first ever drivers license for an autonomous vehicle. Legislation is currently in the works in California and other states to regulate these new technologies as well.
FOCUS: China could be a huge market
Dunne & Co.
Large auto manufacturers like GM, BMW, and Audi are also working on semi and fully autonomous vehicles as well. Alan Taub, the R&D head at GM who retired last month, expects that driverless cars will be available for purchase en masse by the end of this decade.
What will the market for automated vehicles be like? A recent J.D. Power and Associates survey asked respondents whether this is something they would want to buy. The results; 37 percent said they were interested. Those are the first adopters: one can imagine how this number might rise in the next 10 years, especially when the neighbors pull up in a nice, new, driverless car. And given the size of the market for vehicles in the U.S. as well as in developing nations like China, automated vehicles seem like a pretty good bet.