< Return to Bulls pageLong Term Secular Trend is Powerful
Will Malthus be denied --- yet again?
“I think I may fairly make two postulata. First, That food is necessary to the existence of man. Secondly, That the passion between the sexes is necessary and will remain nearly in its present state. These two laws, ever since we have had any knowledge of mankind, appear to have been fixed laws of our nature, and, as we have not hitherto seen any alteration in them, we have no right to conclude that they will ever cease to be what they now are, without an immediate act of power in that Being who first arranged the system of the universe, and for the advantage of his creatures, still executes, according to fixed laws, all its various operations.
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Assuming then my postulata as granted, I say, that the power of population is indefinitely greater than the power in the earth to produce subsistence for man. Population, when unchecked, increases in a geometrical ratio.”
Because population grows at geometric progression while production grows at arithmetic progression; as population outstrips food production, natural disasters, famines, wars shall occur to restore the balance between mankind and nature.
What went right for the world? For one, productivity grew exponentially. On the other part, population growth, while exponential, is showing clear signs of defying the laws of nature - as economies mature, there is increasing evidence of falling fertility which arrests population growth. This together with forced and education based birth control, has somewhat slowed population growth from what it could have been. While population growth is restrained from a peak growth rate, increasing longevity does mean a larger standing army and thus a permanent increase in demand.
On the demand side, while resources are finite, the voracious capacity to consume is not; both manual intervention and a Darwinian response by humanity may help delay the Malthusian correction; in the mean time science shall answer the challenge of increasing productivity to sustain the masses. On the supply side, energy is the fuel which fires the engine of industrial growth. Food is the fuel which fires people; without food there are no people; no demand. On health care, I personally find the Biotech industry utterly fascinating; of course I know nothing about the technical side of things, but I do follow the industry and its pipeline drugs closely from an investor perspective. Humans have such a desire to live in perpetuity, be it through life extensions or reincarnations; an industry which tries to satisfy the human quest for immortality must succeed. That aside, I have always wondered whether an answer to the age old Indian epics lies in Biotech; as in is immortality or reincarnation simply a genetic legacy explained; did Rama truly live for an epoch through advanced medicine or is it simply living through passage of a genetic legacy (with death being the consequence of the maternal line being ultimately extinguished); or hybrid beings (mythological beings like Garuda) a genetic possibility. Ultimately science will provide energy alternatives; science will also provide new technology which shall usher in the next green revolution; so too it shall provide drugs which shall continue to increase longevity.
In terms of global demographics, India’s population shall not plateau until 2050. In China, population growth remains on an uptrend through 2030, at which stage it is expected to plateau. In terms of comparison, the opportunities for growth now are unrivalled, perhaps the closest comparable being the rebuilding of Germany, Japan and much of Europe after World War II. This time round, the growth drivers shall be the building of the under-developed world generally and China and India in particular.
Fundamentally, the era of low inflation is over. China as the factory of the world served as a catalyst to usher in an era of low multi decade inflation levels. While the story of China remains untold, the inflation impact has been played out. This does not mean we now usher in an era of hyper inflation; but it does mean that the world needs to adjust to a higher long term inflation rate of 4% (which is really a simple mean reversion rate in a historic context) compared with targeted rates of 2%. In addition to sound business and demographic fundamentals, this expectation is in itself supportive to energy, commodities, health care and staples (agricultural commodities), which are historic beneficiaries during times of rising inflation. Of the four, energy & commodities carry the highest degree of cyclical risk - my view is that we are approaching a cyclical peak within a strong secular bull. Health care carries new drug development risk coupled with patent expiry & generic competition and for this reason while long term fundamentals remain sound, health care has not displayed the typical defensive characteristics as financial markets run past a cyclical peak; yet health care services remains a source of growth and opportunity. Staples remain my favorite; a traditionally defensive sector, with immense growth potential and a natural tendency to profit during periods of higher inflation. Within Staples, food as the fuel of humanity deserves most attention. While there is a degree of cyclical risk associated with fertilizers (agricultural chemicals such as nitrogen and potassium); alternative areas such as seeds, warehousing, food storage and distribution etc. remain solid; seeds remain my favorite - it is my belief that the marriage of biotechnology & agriculture shall produce the next denier of Malthus.
In terms of growth, much of it stems from emerging markets and this shall continue. On a long term basis, the case for investment in health care, energy and staples (food) is compelling; we are in a secular bull which will run to at least 2030. Where we stand today, is at a pause point; emerging markets have grown at a furious pace. There is a need to pause and build capacity before the next phase of growth commences; thus a period of earnings regression while industry invests in increasing capacity while sustaining present business must be expected.
