We live in a challenging and changing world. At Redwood, we strive to continually question what we do and how we can do things better to help guide our clients as the custodians of their capital. Our recent visit to the United States was extremely valuable as an opportunity to absorb more new information and expand our mindset.
As the jet lag subsides, we reflect on the many thought-provoking discussions and ideas generated.
Highlights of the trip included:
- Discussions with leading business and finance industry players
- Insight from former Federal Reserve Board member and Chair candidate, Kevin Warsh
- Knowledge from prominent geopolitical commentator Ian Bremmer and best-selling author Malcolm Gladwell
- One-on-one meetings with top investment management professionals
- Wit and wisdom from Warren Buffett's Berkshire Hathaway shareholder meeting in Omaha, and
- Hearing from some of the world's leading minds on technology disruption and what this means from an investment perspective.
Over two weeks, we were spoilt for information, ideas and perspectives which put our position in the world into context. Here are some key leanings from the trip:
A global perspective
Following decades of globalisation, we have seen the continued rise of nationalistic movements across the world. This has resulted in policy posturing with trade and immigration policies receiving considerable attention. While this cannot be ignored, we firmly believe technology and innovation, and resulting disruption, will prove a more significant driver for investment markets over the medium to longer-term.
"43: the number of experiments Google conducts on you each time you enter a search in their search engine"
Neil Barrett (Senior Vice President, Data & Robotics at Royal Bank of Canada)
Considering the narrow focus of the Australian marketplace against the opportunities abroad, we will likely continue directing greater resources to global investment markets over the coming years.
Financial Services Industry
Australia is streets ahead
While the Banking Royal Commission at home continues to highlight a number of advisers and institutions operating below the expected standard, the quality of advice now required in Australia is in many regards streets ahead of the US. Our US peers consider the provision of independent and holistic advice to clients as a relatively new concept. While there is room for further improvement in Australia, the strength of our regulatory framework and the fiduciary responsibility we have to our clients clearly surprised our American counterparts.
We are a world leader
We received consistent feedback that Australia is viewed as a world leader in our retirement savings framework (superannuation). We heard first-hand the debate underway in America regarding a potential shift in their current retirement savings structure to a framework more akin to Australia's or the UK's. Unfortunately, it's clear that lobbyists are dictating the debate, potentially to the detriment of the nation's citizens. We were reminded that Australia has the fourth largest retirement savings pool in the world, thanks to our superannuation structure.
Our investors are sophisticated
Our investment industry also received accolades with many leading international portfolio managers commenting on the high level of sophistication evident in Australian investors. Considering the size of our retirement savings pool, Australia is a critical market. Consequently, we expect to gain access to a wider range of investment opportunities from around the world.
The Economy and Investment Markets
Cheap money will impact returns
Markets today have experienced a decade of cheap money. As the money supply is being wound back, major US pension investors have lowered their return expectations. This follows the lead of the Australian Future Fund.
Conditions in America are positive
Much debate centred around how much longer the US economy can continue its current growth trajectory. While it's generally accepted the country is in the later stages of its economic cycle, a downturn isn't expected for at least another few years.
US banks are finally starting to lend and confidence is returning for businesses to invest. We note that R&D spending as a percentage of GDP is the highest it's ever been in the US and new patent applications are currently at their highest levels since the GFC. This investment combined with Trump's tax cuts, should see conditions in America remain positive. Strangely, fiscal and monetary policy settings in the country remain accommodative at a time when growth is strong. We must remain wary of the potential for this to lead to inflationary issues down the track.
“Recessions require overcapacity. This cannot occur when you don’t have investment. Only now are we seeing this investment, so it will likely take at least 2-3 years to reach a point of overcapacity”
Dr Michael Hasenstab (Chief Investment Officer at Templeton Global Macro)
Market volatility is expected
Despite positive economic fundamentals, market volatility is expected to return to more normal levels following an extraordinarily subdued experience over 2017. Markets are having to balance geopolitical issues (such as North Korea and US/China trade discussions) with expectations of rising interest rates, accelerating inflation and the growing prospect of innovation-led disruption across a variety of industries.
While we have seen a flood of money over recent times into passive investment strategies, we expect volatile markets to provide active managers with better opportunities to add value.
The future of technology and innovation
Discussion raged around technology and innovation and how the ensuing disruption may impact the global economy over the coming decade.
While already economic super powers, America (via Google, Facebook, Apple and Amazon) and China (through Alibaba, Baidu and Tencent) have also become the world's technology super powers: both racing to develop the first successful iteration of artificial intelligence (AI). As there is little doubt that AI will disrupt, we must consider how economies, workforces and businesses will adjust.
We explored additional potentially disruptive investment thematics and the far-reaching consequences they may have on our societies. These included:
- Genomics and DNA sequencing
- Energy storage
- Next generation internet
"Amazon drones should be able to deliver a 5lb package in 30 minutes for $1, profitably (over 15 miles)"
Catherine Wood (Chief Executive Officer & Chief Investment Officer at ARK Invest)
The message was clear: we cannot be complacent. We must continue to search for suitable investment opportunities that will benefit from the innovation-led shifts underway. We must also continue to consider where existing investments are at risk. We expect the discussions and learnings from this visit will continue to shape our portfolio's asset allocation and investment selection over the near to medium-term.