Newsletters 2008 Newsletters Revisiting Secular Engines (6/08)
Sunday, 15 June 2008 00:00
This newsletter often references the fundamental characteristics we are looking for in selecting core positions for the equity portion of Osher portfolios:
· wide-moat business with elongated product cycle
· long record of predictable, double-digit earnings growth
· consistent dividend increases
· strong balance sheet with little, if any, debt
· well-defined prospects in foreign markets
These fundamentals help define the parameters of what we consider to be a high-quality, growth stock and suitable as a core holding. We further demand that companies meeting this quality-growth criteria also sell at an attractive valuation, measured against each company’s own historical value range, relative to the market and relative to its peers. Quality, growth and value are the pillars of the fundamental, bottom-up analysis employed for our equity investment strategy.
We also employ top-down analysis and find tremendous comfort in owning companies that participate in secular themes that are likely to drive earnings growth for the intermediate and very long term. These durable themes or “secular engines” provide a significant catalyst, like having the wind at our company’s backs, and increase our confidence that companies can work through temporary setbacks. We thought it would be of great interest to revisit these secular engines and review how each theme affects our preference for certain economic sectors over others.
Demographics: World Population Aging
World population aging is unprecedented, without parallel in the history of humanity. With “older” persons defined as over age 60 and “young” persons defined as under age 15, the number of older persons in the world will surpass the number of young for the first time in history by the year 2050. According to a recent study by the United Nations, this trend is “pervasive, enduring and largely irreversible, with the young populations of the past unlikely to occur again”.
In 1950, only 8% of the world’s population was over age 60. By the year 2000, 10% of the world’s population was considered older. By the year 2050, the world’s population over age 60 is expected to reach 21%. In developed regions, where aging trends are more profound, the population over age 60 is expected to reach 33% by the year 2050.
Population trends in the United States are greatly affected by the aging of the post WWII “baby boom” generation, the approximate 75 million born between 1946 and 1964. As the baby boomers age, their sheer mass will have profound impact on companies and industries that develop products and services geared to their needs and interests. Consider that a baby boomer will turn 55 years old every second for the next 20 years! The number of Americans over age 65 is expected to double by 2030 to 65 million people, while 9 million Americans will be over age 85, compared with just 4 million today. And by 2050, it is estimated there will be as many as 1 million Americans over age 100, up from just 70,000 today, making centenarians the fastest growing segment of our population.
To participate in this important secular engine, we favor companies within the health care, consumer staples and industrial sectors that sell products and services that help the world’s older population live longer, healthier and more satisfied lives. Additionally, we favor companies within the financial sector that offer products and services geared to sustain wealth and income for baby boomers as they reach retirement.
Global Infrastructure Build
In emerging markets such as China, India, Latin America, Eastern Europe, Russia, Africa and Mexico, we are in the midst of a once-in-a-lifetime process of industrialization, resulting in a global race to modernize infrastructure in communications, transportation, distribution, power, energy, health care, defense, housing, information, public works and water. It is estimated that there will be a projected cumulative expenditure of $41 trillion on national infrastructure development alone between now and 2030.
Companies within the industrial, technology and telecommunications sectors are especially well-positioned to participate in this entrenched trend to build global infrastructure.
Rising Global Wealth and Middle Class
The middle class in emerging markets is the fastest growing socio-economic segment of the world’s population. While the world’s total population will increase by approximately 1 billion people in the next 12 years, the middle class will see its ranks swell by as many as 1.8 billion people, with 600 million alone in China! The Brookings Institution estimates that the world’s middle class will grow from 30% of global population today to 52% by the year 2020. And Goldman Sachs estimates that there will be more than 800 million people in China, India, Russia and Brazil that qualify as middle class within the next decade. Most estimates peg the amount spent by the emerging middle class at more than $1 trillion per year.
We favor companies and industries in the consumer staples, technology, telecommunications and financial sectors that sell products and services once considered a luxury, but are now more affordable for the emerging middle class.
Convergence of Mobility and Broadband
Today, mobile networks cover 90% of the global population, with global mobile penetration having reached 50%. This astonishing adoption rate is attributed to the fact that penetration in Western Europe and other developed markets already surpass 100%. In fact, over 60 countries worldwide have mobile penetration over 100%, while approximately 27 countries have penetration less than 10%. Approximately 40% of the world’s 6.6 billion people have access to a network, but have yet to connect. The total number of global mobile subscribers is expected to grow 6% per year, with much higher growth coming from emerging markets such as China where mobile penetration has only reached 35%.
There are more than 1.1 billion of the world’s approximate 6.6 billion people that have online access. About 300 million of these online users are accessing the internet through high-speed lines. The United States and China are neck and neck with each having approximately 60 million broadband users, but China’s broadband penetration rate is much lower than that in the U.S. The emergence of high-speed mobile internet service is allowing developing markets to leapfrog fixed-line technology and encouraging rapid adoption of mobile broadband as a primary means of communications infrastructure.
High speed access to the internet over a mobile device is driving a panoply of mobile services such as e-mail, instant messaging, internet browsing, mobile gaming, mobile TV, video on demand, music, social networking, content messaging, mobile data networking and mobile commerce including gambling. With these new, data-rich features, mobile users spend more time on their cell phones and more money on their monthly service. The average per capita spent on mobile service is $500 per year in developed markets versus only $150 in emerging markets. As penetration for mobile broadband accelerates, the average per capita spent will grow exponentially.
The dramatic rise in mobile telephony in emerging markets and mobile broadband in both emerging and developed markets will fuel predictable growth for companies in the telecommunications, technology and industrial sectors that sell service, equipment and infrastructure for the mobile market.
Every company owned in the core equity portion of Osher portfolios is touched by at least one of these four mega-secular engines, with the vast majority participating in at least two of these super trends. The final page of this newsletter offers an illustration of how our core equity holdings intersect with these secular engines. Investing in companies well entrenched in these macro themes offers predictable long-term earnings growth and additional peace of mind.
Please contact us with any questions and remember to advise us of any changes that might impact the management of your portfolio.
| < Prev | Next > |
|---|