Your Investments in the Next 30 Years

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jun 16, 2015 12:31:00 PM

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investmentsAs we discussed yesterday, the next 30 years are likely to be very different from the last 30 as interest rates start to rise again. But beyond interest rates, what other large-scale changes can we expect, and how might they affect our investments?

Here are four areas where I see significant change on the horizon.

1. Demographics

I’ll lead with the item that may be most controversial: countries will be fighting to attract immigrants in the next 30 years. At the same time that the demand for labor grows and the workforce ages, slowing population growth and rising economic growth rates could make people less likely to leave home. A front-page story in today’s Wall Street Journal reports that a shortage of Mexican workers is threatening the summer harvest. Today, it’s the result of a problem issuing agricultural visas, but the article highlights how dependent we are on immigrant labor.

What to expect: A shrinking labor supply means higher labor prices, to the detriment of corporate profit margins. Thanks to the rise of the Echo Boomers, the U.S. is well positioned for this change, but we will likely still feel the effects. Other countries stand to be hit much harder.

2. Globalization

For the past 30 years, China has provided a limitless pool of cheap labor. The “China price” sucked jobs out of the U.S., held inflation in check, and allowed consumers to buy vast amounts of cheap stuff. Now, with China’s labor force shrinking as the population ages, wage costs are rising and industry is on the hunt for even cheaper labor. It can be found in Indonesia, the Philippines, and Africa, but not in such quantities or with such manageable politics.

What to expect: Consumers will likely have to get used to higher prices, and inflation may not be as easily controlled. Long-term bond owners should pay attention.

3. Geopolitics

We lived through the end of history—and its restart. Russia is back as a troublemaker, the Middle East continues to burn, and China is now a major power. The U.S. has benefited from a dominance largely unmatched over the past decades, but that is changing.

What to expect: As far as I know, history records no examples of a rising power coexisting peacefully with an existing hegemon, suggesting that the confrontation with China is likely to get worse rather than better. Defense stocks might be worth a look, and world trade may fall victim to rising tensions (see point #2).

4. Energy

The past decades have seen not one but two energy transformations. The first is the rise of economic energy alternatives, including solar, wind, and others, which have started to move the curve on energy investment. The second is the rebirth of U.S. oil and gas production. This gives us a sustainable advantage over the next couple of decades, while providing more insulation against troubles in the rest of the world.

What to expect: Given rising domestic energy production and a shift to alternatives, the U.S. is likely to be more stable, safer, and more insular than it has been in recent decades.

Potential for a very different future

Clearly, this is a U.S.-centric analysis; I haven’t mentioned the future of major players like Europe or China. Both will be critical to the world as a whole but may have less effect on the U.S. than you might think. For different reasons, Europe and China are at inflection points, moving into slower, more complicated times that will adversely affect their growth and power. Meanwhile, the U.S. is actually moving out of such an inflection point.

To forecast the future, we need to keep an eye out for trends that may be changing, especially large, long-term ones. The four above are the biggest I see, and any one of them could make for a future that looks very different from what is generally expected today.

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