Absolute Return Partners October 2019 Letter

London-based investment advisory firm Absolute Return Partners recently published the Part 1 of its October 2019 Letter. Founded in 2002, ARP is known for being an established company that provides alternative investment solutions to institutional investors.

Chief Investment Officer Niels Clemen Jensen founded ARP. This University of Copenhagen alumni holds a Masters Degree in Economics and has over 30 years of experience in investment banking and management. His financial career started in Copenhagen in 1984. He moved to London in 1986 to work for Shearson Lehman, an investment banking company. Jensen then joined Goldman Sachs in 1989. In 1992, he co-headed the company’s Europe-based U.S. equity business. After holding the position for about 4 years, Jensen left GS and started working at Oppenheimer in 1996 where he became the manager of its European business. Three years later, he rejoined Lehman Brothers and headed its European Wealth Management department. After about 7 years, Jensen was appointed as Director of Trafalgar House Trustees Limited where he worked on the investment strategy of one of UK’s leading corporate pension funds.

In the first part of ARP’s 2-part letter published this month, Jensen discussed the topic of “investing in a low growth world”. In the beginning of the letter, he mentioned that “adverse demographics” is the reason why he doesn’t expect the GDP to grow significantly in the years to come.

As long-term readers of my work will be aware, I don’t expect GDP to grow at a particularly attractive rate in the years to come, and the reason is simple – adverse demographics. Demographics affect GDP growth in a number of ways but, most importantly, ageing of society will have a profound, and negative, impact on aggregate demand.

As little can be done to affect demographics in the short to medium term, assuming you are looking for robust equity returns, and assuming respectable GDP growth is a necessary condition for solid corporate earnings growth, which again is key to decent equity returns, you are effectively left with two options. You either invest in countries with a relatively benign demographic outlook (and they are few and far between), or you invest in productivity enhancing technologies, as rising productivity is the only way to circumvent the demographic problem.

This is far too comprehensive a topic for one newsletter, so I have taken the executive decision to make this month’s letter the first part of a 2-part letter – how to invest successfully in a low growth environment.

Jensen believes that the topic of “investing in a low growth world” is one of the examples why he had to roll out ARP+. ARP+ is a program wherein ARP shares investment strategies and opportunities to subscribed members. For £300 a year, ARP+ subscribers will get: (1) Megatrend Papers that are based on investment themes that that drive the firm’s product development, asset allocation, and portfolio construction; (2) Insights in the form of articles about investment opportunity research, strategy summaries, and opinions or thoughts about current events and development; (3) Quarterly live webinars with Jensen sharing his thoughts about current events in the world of finance.

In his October letter, Jensen talked about how China could possibly see high GDP growth in their economy for the years to come. He also wrote a special note on France and the United Kingdom:

Although overall workforce growth is already depressingly low almost everywhere, one part of the labour market continues to experience robust growth, and the industry that stands out is tech. The robust growth there is driven mostly by a high number of new entrants but, to a smaller extent, it is also the result of widespread re-training of the existing workforce.

I have noted that the tech workforce is growing significantly faster in France than it is in Germany and the UK (Exhibit 2), but that the existing ICT (information and communication technology) workforce is bigger in the UK than it is in the other two countries.

That implies that France and the UK are likely to be better equipped than Germany when it comes to human technology resources. There is not much point in having access to all this fancy new technology if you are so short of human resources that it cannot be rolled out.

However, given the current Brexit mayhem in the UK, and given how much damage a disorderly exit from the EU will do to the British economy, I am not convinced I want to increase my exposure to the UK until the dust has settled on all this mess, and that could take years.

That leaves us with France as the most likely European winner of the forthcoming next wave of the digital revolution (advanced robotics, IoT, AI, blockchain, etc.). I must point out, though, that I have chosen to ignore some of the smaller European countries, e.g. Finland and Sweden, which are at the forefront of technological innovation (see Exhibit 3 again).

According to the OECD, France’s working age population (those aged 20-64) will grow by 0.04% annually between now and 2050, i.e. France is one of only a handful of European countries that will experience any growth at all in the working age population over the next 30 years.

France is therefore in quite a unique position – at least amongst the bigger European countries. In the years to come, overall workforce growth will continue to make a modest positive contribution to GDP growth, and a suitably trained workforce should allow France to roll out all those productivity-enhancing new technologies faster than elsewhere. That could make France one of the most vibrant European countries over the next few
decades.

And the UK? Truth of the matter is that nobody knows. Here, four weeks before we supposedly leave the EU, the wider implications are unknown, as we still don’t know the actual format of the exit. The only thing we (I) do know is that a Brexit without any exit agreement in place will be very painful for the average British tax payer.

In his conclusion, Jensen said that GDP will stay low for years unless productivity growth fully compensates for poor workforce growth. He also mentioned that governments and monetary authorities might possibly utilize controversial policy tools to improve the economy. He will talk more about this topic in the Part 2 letter.

You can download a copy of Absolute Return Partners’ October 2019 Letter – Part 1 here:

The Absolute Return Letter 2019