How to Profit in a Slower Growth World
How to Make Money as the World Slows
The global economy has been growing more slowly ever since the 2008 financial crisis. As the world's population ages, developed countries are struggling to replace the so-called baby boomer generation as they retire. Slowing productivity growth hasn’t helped the problem as workers aren’t becoming as productive as economists hoped. These dynamics have made it increasingly difficult for international investors to realize historical rates of return.
In this article, we will look at how international investors can profit in a slower growth world by capitalizing on areas of the global economy that are prime for above-average growth.
Catalysts Behind a Slowdown
The global economy has been struggling to adjust to a number of different underlying long-term trends, including both demographic and productivity related changes.
The slowing and aging population is a key long-term headwind for economic growth throughout the developed and developing world including countries like Japan. In addition to fewer workers, older people have very different spending habits compared to younger people. These shifting spending habits have affected different industries in different ways and have been responsible for a slowdown in many key areas of the U.S. economy that are reliant on consumer spending.
The slowdown in productivity is another important long-term headwind for the global economy. In simple terms, productivity helps consumers get more goods and services at lower costs, which helps offsets slower underlying growth rates. Technology has played an important role in enhancing productivity growth, but most innovation these days are in industries that don’t really impact productivity, such as entertainment and healthcare.
Negative interest rates following the 2008 financial crisis have also led to concerns over deflationary spirals in some developed economies. When this happens, falling prices lead the consumer to put off purchases, which accelerates the decline in prices. Interest rates in negative territory leave few monetary policy options on the table for combatting these trends by making loans more affordable or encouraging consumers to spend money.
The most obvious solution for international investors is to seek out opportunities in higher growth regions of the world. For instance, the so-called ASEAN economies continue to see strong population growth and subsequent economic growth, despite the slowdown witnessed across the developed world and emerging markets reliant on commodities. Companies in these countries could, therefore, benefit from above-average growth rates.
Some popular exchange-traded funds (ETFs) in this area include:
- Global X FTSE ASEAN 40 Index ETF (ASEA)
- iShares MSCI Philippines ETF (EPHE)
- iShares MSCI Indonesia ETF (EIDO)
International investors may also want to consider positioning themselves in sectors that are benefiting from changes in spending habits. For instance, brick-and-mortar retail has experienced a consistent slowdown over the past several years as shoppers have increased spending on travel, restaurants, and online retailers like Amazon.com. Technology and biotech companies may also have an advantage in scaling their revenue more quickly.
It’s worth noting that these trends are unlikely to occur overnight and take place over years and decades rather than days or months. That said, assets are often valued based on expectations for the future, which means that asset values could come down as expectations move lower. The combination of slower growth and slower expectations could lead to deleveraging in countries that are hardest hit by these trends.
Moreover, new technologies also have the potential to significantly accelerate these trends and could even reverse them in the future. For instance, the development of artificial intelligence would increase productivity by commoditizing knowledge-based work in the same way that physical labor was commoditized by robotics. And, automated vehicles could replace the largest employer in the U.S. and many parts of the world – the transportation sector.
The Bottom Line
Global growth has slowed since the 2008 financial crisis, which means international investors may want to adjust their strategy moving forward. To combat the aging population and falling productivity growth, investors may want to consider increasing their exposure to faster growing areas of the market, as well as areas of the economy that could experience faster growth as spending habits show signs of changing over time.