The American economist Hyman Minsky once said that "stability is destabilising". Minsky's 'financial instability hypothesis', which we witnessed between 2007 and 2009, saw the collapse of the US housing and credit boom and, due to the subsequent policy response, a recovery by banks, markets and economic activity.
This period of economic repair has now been overtaken by secular trends which are overwhelming or obfuscating cyclical trends.
Take for example the global automotive industry. As investors we should ask: how will cars be propelled in the future? Who will drive them? Who will own them? This is an industry already going through great change.
It's not the only one, of course. The high street is being disrupted by online shopping, casual dining by delivery services and hotels by the sharing economy.
In terms of market share, the UK is the global leader when it comes to online clothing purchases, at 24% of total sales. This compares with 15% for France and 6% for Spain. These percentages are lower than more commoditised categories - led by Amazon - in books at 33% penetration and electronics at 48% penetration1.
It is the nature of clothing - size, feel, colours - that accounts for the lower penetration, but has also led to a new burgeoning industry called the ‘reverse supply chain'.
The reverse supply chain - UK retail
Many people now order their clothes in different sizes and colours, then keep one and return the rest. ASOS, one of the pioneers of fast fashion online, estimates that 40% of the products they deliver to customers are returned (a global average with regional variations). This has led to the growth of reverse logistics companies to handle these volumes.
However it is not just about having lorries, vans and distribution centres. Clothing retailers need the returns sorted, dispatched to a dedicated steam room, re-hung and bagged, and returned to the retailer's warehouse. In April we invested in this theme through the initial public offering of Eddie Stobart Logistics.
The other crucial part of fulfilling the online customer experience is around the payment process. We have witnessed significant improvements in online transaction security as well as growth in credit payment options, with companies such as Worldpay and Experian (both current holdings in the AXA Framlington UK Select Opportunities Fund) benefiting from the growth of payments online.
Is global growth underrated?
To return to our opening observations, the globe is experiencing significant structural, industrial and economic change brought about by technological change. Melissa Kidd at Redburn has conducted an analysis on this and has come up with some interesting conclusions:
"Traditional measures of GDP based on output, income and expenditure cannot cope with over-the-internet, weightless, zero-marginal-cost digital products and apps which are beneficial to the public good. The unmeasured deflation associated with the new economy means real GDP growth is likely to be meaningfully stronger than official statistics suggest."
This feels right. Take the photographic industry. Back in 2000, there were 80 billion photographs taken, compared to 1.6 trillion in 2015. Over this period the price per photo dropped from 50 cents to zero due to smartphones; these instant digital photos eliminated most monetary transactions concerning processing photos2.
This also begs the question: why does the UK compare unfavourably when productivity data is compared and analysed? It is because we have embraced ecommerce as a nation. We have the second highest business-to-consumer ecommerce activity in the world at 6.1% (China has the highest at 7.0%) and we have the highest internet penetration of over 15-year olds in the world at 93% (second are Japan at 91%).
Brexit reassurance
Through all the fluff and flannel of Brexit commentary, the European Central Bank released a reassuring report on the future of euro currency trading post 2019. The report acknowledged the City's inbuilt advantage which are the submarine fibre-optic cables - laid in the 1980s - that carry the majority of internet traffic.
Financial centres located next to oceans have an advantage "because they are directly connected to the internet backbone, at the expense of landlocked cities like Zurich," the report said. Because electronic trading has transformed the forex market, the report continued that "by one estimate, cable connections have boosted the share of global turnover in London, the world's largest trading venue, by as much as one-third".
Other advantages include London's favourable time zone and the fact that majority of Europe's critical infrastructure for trading forex, as well as shares and derivatives, is clustered in a 30-mile radius of the City of London!3
Whatever economic and/or political change that is thrown at markets, it is the long-term financial returns that count. The UK is on track to post record dividend payments this year after hitting an all-time high in the second quarter of 20174. According to data from Capita Asset Services, dividends in the second quarter were up 15% from the previous year. This was boosted by strong underlying growth, but also due to those dividends paid in US dollars and euros, which were magnified due to sterling weakness.
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1 Thinking ,Fast and Slow -Why Online Retail is Taking Share by Emily Want of Redburn - June 2017
2 The Brookings Institution, "WHY IS U.S. PRODUCTIVITY GROWTH SO SLOW? POSSIBLE EXPLANATIONS AND POLICY RESPONSES" September 2016
3 Financial Times, 5 July 2017
4 Capita Asset Services - Dividend Monitor Q2 2017
Fund Key Risks
Concentration Risk: as this Fund may, from time to time, hold relatively few investments, it may be subject to greater ‑ fluctuations in value than a fund holding a larger number of investments.
The value of investments, and the income from them, may go down as well as up and you may not receive back the full amount invested.
Liquidity Risk: some investments may trade infrequently and in small volumes. As a result the Fund Manager may not be able to sell at a preferred time or volume or at a price close to the last quoted valuation. The Fund Manager may be forced to sell a number of such investments as a result of a large redemption of units in the Fund. Depending on market conditions, this could lead to a significant drop in the Fund's value and in extreme circumstances lead the Fund to be unable to meet its redemptions.
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