Creative disruption: a shifting investment backdrop

29/06/2016

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​Arjun Bhandari, Analyst within Henderson's Strategic Fixed Income Team, looks at several disruptive trends in the economy and how their interaction may be contributing to the current low growth, low inflation environment.

 

​It has been eight years since the financial crisis and the global economic engine is still struggling to get out of first gear. Growth and inflation both remain low, in spite of rock bottom interest rates and massive coordinated global quantitative easing programmes. Why is this the case and what are the implications for investors?

Debt trauma
Many have subscribed to the 'balance sheet recession' school of thought, a thesis developed by Japanese economist Richard Koo, which suggests consumers retrench and try to shore up their balance sheets by paying down debt and spending less following periods of excessive borrowing. This “debt trauma” description has a proven history, not only in Japan but also in the US proceeding the great depression. The chart below shows the savings rate in the US; the proportion consumers save of their income. With each percentage point change in the rate potentially equivalent to $100bn in consumer spending1, the general rise since 2005 signifies a reversal of the tailwind that has been driving the economy since the 1970’s.
 
US savings rate - trend reversal?
savin
Source: Bloomberg, December 1949 to December 2015.
 
Millennial headwinds
One particular demographic group, so-called “millennials” (those born between 1980 and 2000), have borne the brunt of the crisis. Youth unemployment rocketed to its highest level ever in the US (peaking in 2010 at 19.5%)2 and remains stubbornly high in Southern Europe. Millennials typically completed their education saddled with high levels of student debt and found themselves in a job market that was anaemic at best.  This coincided with central bankers attempting to stimulate global growth and creating extraordinary asset price inflation. As a result, many millennials have tempered, or at least delayed, their desires of home ownership and pared back traditional durable goods spending in favour of saving for short term goals like trips abroad.
 
Millennials represent the largest demographic group in the US and are forecast to be the biggest spenders by 2030. With US consumers responsible for more than three quarters of US GDP growth since 2001, the challenges faced by millennials and the subsequent stagnation of retail sales have been a significant headwind on the path to a rejuvenated economy. While partly attributable to this widespread deleveraging, there are also other drivers at work. 
 
Digital natives
One advantage millennials have over their parents’ generation is being at the forefront of the rapid technological advancement and industrial disruption facilitated by the internet age. They not only have access to more information and choice than ever before, but they also stand to reap the most benefits from the 'sharing' or 'gig' economies heralded by this increased connectivity. New platforms have made it easy for anyone to exchange capital and labour and this is already wreaking havoc upon a number of traditional business models.
This well informed “smarter consumer” has again been in the spotlight following the poor results of retailers Gap, Macy’s and Nordstrom in the US. The new generation of consumers are forsaking traditional department stores in favour of fast fashion retailers, which are able to quickly supply the latest trends, manufactured cheaply and offer convenience through strong online channels and smart logistics. This fact is not lost on Amazon; the retail giant can claim a large responsibility for the continued disinflationary trend of durable goods (see chart below) - the vast economies of scale it enjoys allows it to sell goods at razor thin margins.
 
Disinflationary trends in durable goods
disinflation
Source: Bloomberg, January 2002 to May 2016
 
Amazon’s apparel sector is among its fastest-growing categories and in 2017 it is expected to debut its own fast fashion line, supported by a 46,000ft2 photography studio in Shoreditch, London. As Amazon takes aim at another industry saddled with overcapacity, today’s shop assistants may soon find themselves tomorrow’s stock pickers.
 
Service sectors and the sharing economy
It is not only the apparel and durable goods industries that are under threat. Segments of the service sector have also felt the impact of the sharing economy, which we have published on previously. Given that users of services such as Uber and Airbnb typically belong to the higher income strata (see chart below), the rise of these services is disproportionately hitting spending on higher cost alternatives.
 
Moreover, when focusing on the supply side of these labour platforms (such as Uber) it is apparent that the lack of strong employer contracts enables an almost endless supply of jobs with no fixed hours. This may serve as a great tool for people to supplement their income, or as some would argue, may only serve to continue to suppress wages in their respective sectors as cheaper foreign workers are able to meet the increasing demand at lower prices.
 
US adults (at different income ranges) using the sharing economy
sharing
Source: Pew Research Center, survey conducted 24 November to 21 December 2015, May 2016
 
Creative disruption
Given all of the above, it is difficult to forecast a meaningful pickup in inflation sufficient to stimulate wage growth. The economies of scale enjoyed by firms such as Amazon and Alibaba mean traditional retailers with their costly overheads are unlikely to be able to wrest back market share. Technological disruption is threatening to change the face of more and more industries, from banking to telecoms to manufacturing, mostly to make them cheaper and more accessible. To add further pressure, the rise of autonomous vehicles and 3D printing are also projected to threaten jobs in other sectors. And this importantly comes at a time when consumers are increasing their savings for the longest sustained period in four decades.
 
It is not, however, all bad news. As wider engagement with these new connected platforms takes hold, spending on them should continue to increase. This should provide more primary and secondary job opportunities for society, albeit at lower wages for now. These opportunities have mostly presented themselves at the lower end of the skill spectrum, but  we may see them proliferate in other areas as people try and leverage their skillsets to maximize their earnings (or convenience), such as doctors providing ad-hoc online consultations.
Another factor to consider is the rapidly growing “experience economy”. 78% of all millennials would rather spend money on a desirable experience or event rather than a “thing”3. Perhaps this is why the services price level has remained robust as this group of consumers favours spending money on these rather than durable goods. Travel among this demographic has also increased at more than twice the rate of retail sales, as these consumers are travelling further and spending more than their predecessors.
 
All of these trends might persist and become permanent structural changes and attitudinal shifts. Or, in conjunction with advances in healthcare and longer life expectancies, millennials may simply be responding to the current uncertain economic climate by shifting consumption to later in life.
 
In our view, the result is likely to be somewhere in the middle. The trend of increasing disruption is not a new phenomenon; the average age of a firm in the S&P has fallen from over 60 years in 1958 to just 12 years in 20154. Creative destruction is truly alive but the difficulty lies in anticipating these changes while remaining cognisant of timing and the surrounding regulatory environment. Our approach to these structural uncertainties is to remain cautious if a firm is exposed to a pro-consumer cycle, preferring to invest in sensible large cap companies with a reason to exist and reliable revenue streams.

 
1Source: McKinsey, 2009, “The economic impact of increased US savings”
2 Source: Bloomberg data, US Bureau of Labour Statistics
3Source: FT.com, 12 February 2016, Eventbrite 2014 Survey
4AEI & Credit Suisse Research, "The Sharing Economy", 18 September 2015

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Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from Janus Henderson Investors registered office: 201 Bishopsgate, London EC2M 3AE.

Issued by Janus Henderson Investors. Janus Henderson Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Investment Management Limited (reg. no. 1795354), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), Gartmore Investment Limited (reg. no. 1508030), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. Telephone calls may be recorded and monitored.

Copies of the Fund’s prospectus are available in English, French, Spanish German and Dutch. Key investor information documents are available in English, Danish, German, Finnish, French, Italian, Norwegian, Spanish, Swedish and Dutch. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Henderson Global Investors (Singapore) Limited, 138 Market Street, #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent.

Information on this document is on Henderson's best endeavours.

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Risk rating

Henderson Preference & Bond Fund

Please read all scheme documents before investing. Before entering into an investment agreement in respect of an investment referred to in this document, you should consult your own professional and/or investment adviser.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from Janus Henderson Investors registered office: 201 Bishopsgate, London EC2M 3AE.

Issued by Janus Henderson Investors. Janus Henderson Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Investment Management Limited (reg. no. 1795354), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), Gartmore Investment Limited (reg. no. 1508030), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. Telephone calls may be recorded and monitored.

Copies of the Fund’s prospectus are available in English, French, Spanish German and Dutch. Key investor information documents are available in English, Danish, German, Finnish, French, Italian, Norwegian, Spanish, Swedish and Dutch. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Henderson Global Investors (Singapore) Limited, 138 Market Street, #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent.

Information on this document is on Henderson's best endeavours.

Specific risks

  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.

Risk rating

Henderson Strategic Bond Fund

Please read all scheme documents before investing. Before entering into an investment agreement in respect of an investment referred to in this document, you should consult your own professional and/or investment adviser.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from Janus Henderson Investors registered office: 201 Bishopsgate, London EC2M 3AE.

Issued by Janus Henderson Investors. Janus Henderson Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Investment Management Limited (reg. no. 1795354), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), Gartmore Investment Limited (reg. no. 1508030), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. Telephone calls may be recorded and monitored.

Copies of the Fund’s prospectus are available in English, French, Spanish German and Dutch. Key investor information documents are available in English, Danish, German, Finnish, French, Italian, Norwegian, Spanish, Swedish and Dutch. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Henderson Global Investors (Singapore) Limited, 138 Market Street, #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent.

Information on this document is on Henderson's best endeavours.

Specific risks

  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.

Risk rating

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