Category: Society

The city is rising: how to invest in global urbanisation

Urbanisation is an unstoppable trend. More than half of the world’s population currently already lives in cities, and by 2050 (when the world population could be as high as 9 billion) an additional 2.5 billion of the world will live in them. That will raise the total figure to two-thirds. Some 90% of that growth is taking place in developing countries, most notably in Africa, South America and Asia. But the pull of the city still exists in the West as well.

Better paid jobs and higher living standards drive people to the city

The causes of urbanisation are quite clear. As a country becomes more industrialised, an increasing number of people move from rural areas to the cities as that’s where the factories and thus the jobs tend to be. In the cities they can not only expect better paid jobs, but also a higher standard of living, better medical conditions, housing, transportation and so on.

The developed world is already highly urbanised, with the US urbanisation rate above 80% and developed Europe’s rate similarly fluctuation around those levels (Germany is at 75%, France at 80% and the Netherlands at 90%). Meanwhile, the rate is still significantly lower in developing countries with China likely to reach 60% in the years ahead, but places like India not exceeding 35% as of yet. The trend in the developed world has some space to run, but clearly the developing world will face explosive urban growth yet.

But rapid urbanisation has negative side effects

Urbanisation can over the longer run have a positive impact on a population’s economic well-being, but in the short-run there are several negative side effects. These are mostly felt in the case of rapid urbanisation.

  • Unemployment. One of the primary issues with urbanisation is that as rural people move into the cities to chase jobs, the supply of jobs actually cannot keep up with the demand. That leads to unemployment.
  • Slums. Limited supply of housing leads to the formation of slums. In many developing countries that creates very poor living conditions where people cluster together without proper sanitation, sewage, lack of water and electricity.
  • Social anger and crime. The combination of the prior two points, unemployment and poor living conditions feeds into social anger and potentially crime.
  • Environmental impact. Negative impact on the environment of sprawling urban areas, notably including air and water pollution, forests being cut down, animals moving away, and so on

Opportunities for investors who want to benefit from this trend

Investors who want to benefit from this ongoing and explosive trend have plenty of opportunity for doing so. For instance by investing in:

  • Real estate. Benefit from the increasing demand for (economical) urban housing, offices, shopping malls and so on. Pick existing units to benefit from gentrification, or select new projects in the right cities globally and over the longer run you should see healthy returns.
  • Infrastructure. While in many new cities in the developed world infrastructure is still non-existent or will need to be built, in many developed countries infrastructure will need to be renewed. This can range from roads to public transport, to electricity and water or digital infrastructure.
  • Construction materials. Naturally, as new real estate projects are undertaken, the demand for source materials like metals will go up.
  • Shipping. As megacities pop-up, increasingly they will directly trade with one another, increasing global shipping flows.

Portfolio construction: real estate, infrastructure, materials and shipping

  • I constructed a portfolio consisting of 4 ETFs that cover all of the previously mentioned industries. Their expense ratios range from 35 to 65bps and each gets an allocation of 25%.
  • This portfolio gives you highly diversified exposure to 4 sectors that are likely to directly benefit from the trend of urbanisation over the next decades
CategoryNameIDTERAlloc %
Metals and miningSPDR S&P Metals and Mining ETFXME0.35%25.0%
Global infrastructureiShares Global Infrastructure ETFIGF0.47%25.0%
ShippingGuggenheim Shipping ETFSEA0.65%25.0%
Real EstateSPDR Global Real Estate ETFRWO0.50%25.0%

Risk, Diversification And Allocation

  • Risk level: high 
  • Diversification: low
  • For risk and total return since initiation see Portfolios
  • Probability of this theme playing out in the next 3-10 years: 25%-50%

Portfolio Characteristics (Full Look-Through, From USD Perspective)

  • Dividend yield: 3.37%
  • Ex-ante predicted volatility: 12.6%
  • 1 year 95% Value-at-Risk: -18.8%
  • Scenario: 2008 Lehman Brothers default period: -31.6%
  • Scenario: Interest rates +100bps: +3.6%
  • Scenario: 2008-2009: -12.2%
  • Scenario: 2010 onwards: +133%

 

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Why You Need to Invest in Healthcare Stocks Today

Wouldn’t you like to invest in something that

  • Would have given you a nearly 3% higher yearly return than other stocks over the last two decades
  • Is extremely likely to keep outperforming going forward because the fundamental trends driving it are only getting stronger every year
  • Is pretty much recession-proof given that demand for it is inelastic

In that case you should consider allocating some of your portfolio to healthcare stocks, as these meet all of the above criteria.

Ageing populations that are increasingly middle class = more demand for healthcare

Let me start with some statistics for you to ponder over:

  • Globally, the world population has been ageing. The number of people over 80 years old is expected to triple by 2050. By that time there will be 2.1 billion people over 60 years of age, partly due to the fact that the average life expectancy increased by 5 years between 2000 and 2015 alone
  • Making matters worse, more doctors and caretakers will retire, leaving fewer people to care for more of us
  • The global middle class is increasing rapidly as people lift themselves out of poverty. By 2021 for the first time more than half of the world’s population may be living on a middle class income, and by 2030 that will be as much as 65%. One of their first priorities is going to be to pay for better healthcare
  • Medical breakthroughs are now coming through at an increasingly rapid pace in areas such as cancer, HIV, gene therapy etc. A lot of these advances are helping people with chronic diseases live longer

These are all reasons for the demand for healthcare to keep growing every year over the next decades.

Outperformance because it fares better in the bad times

Since 2000, the MSCI World Health Care Index has had an annualised performance of +7.5%, whereas the regular MSCI World generated +4.7%. That’s an outperformance of +2.8% a year!

Part of the reason for that longer term outperformance is the fact that healthcare is a necessity with no substitutes. Even in recessions people will not cut back on it in any significant way. In 2008 the health care index did have a negative return of -21%, but the broader MSCI World returned -41% over the same period.

Moreover, in the period that followed, healthcare stocks outpaced the broader indices. So the bad times weren’t as bad, and the good times were better.

So to summarise, why should I invest in healthcare?

The three main reasons you should consider to allocate some of your investments into healthcare related stocks are:

  1. Higher risk-adjusted returns. Healthcare features a historical Sharpe ratio of around 0.47 versus around 0.3 on all global stocks. Simply put, that means you got more units of return per unit of risk
  2. Smaller losses during drawdowns. MSCI World lost -41% in 2008, whereas MSCI World Global Health Care lost only -21%. In the years after that, healthcare beat the index again.
  3. Fundamentally there is much, much more to come. The world population is rapidly ageing and becoming increasingly middle class while medical breakthroughs are coming faster than ever

What have been some of the key medical advances of recent years?

As this article and this one outline, some of the biggest advances in the past decade alone have been in the areas of:

  • 3D printed body parts
  • gene therapy and stem cell research
  • cancer therapies
  • bionic eyes
  • synthetic cells
  • a cure for hepatitis C
  • minimally invasive surgery

Since 1950, the number of drugs approved for use by the FDA doubled every year and given all of the above should not be slowing down any time soon. All these advances help humanity live longer and better lives, but they also create opportunities for new technologies to carve out niches in the market and drive growth.

Healthcare is a highly diversified industry

The healthcare sector is comprised of everything from hospitals and medical care to pharmaceuticals and biotech, medical devices manufacturers and health insurance companies. Each of those subsectors will have different dynamics and different risks attached to it.

Whereas pharma, biotech and medical devices are the ones to deliver and profit from spending on research and development, the health insurance firms and private hospitals are well positioned to profit from overall demographic trends like ageing populations. On the other hand, these are also the ones most at risk from changing regulations and public anger about increasingly expensive healthcare.

Some of the subsectors within healthcare include:

  1. Hospitals, nursing and residential care or other care services. Including everything from full-blown hospitals to nursing homes, doctors, chiropractors, homeopaths and psychologists.
  2. Medical devices. Provide machinery and tools to doctors and hospitals that can be used to diagnose or treat certain conditions
  3. Pharmaceuticals. spend money on research and development to create drugs on a chemical basis that prevent, alleviate and cure diseases
  4. Biotechnology. similar to pharmaceuticals except they produce their drugs on a biological rather than chemical basis

Naturally, within R&D of the last three mentioned above, the success rate is highly hit and miss, and finding individual companies that succeed can be an extremely difficult task.

Big pharma firms like Johnson & Johnson diversify that risk by having a balanced product portfolio that besides consumer goods and medical devices features pharmaceutical products across for instance immunology, cardiovascular disease, vaccines, neuroscience, oncology, etc.

Yet in order to find even better diversification, you need to look at ETFs.

Portfolio construction: pharma, devices, innovation and cancer

  • I have designed a portfolio that includes a 20% weight to an overall healthcare sector ETF, and splits up the remainder to a cancer immunotherapy specific ETF, a medical devices ETF, a healthcare innovation ETF and a pharmaceuticals ETF
  • This gives broad-based exposure to the sector, though with an overweighting to innovation and devices, which though having more of a growth orientation and fairly high average P/E ratios, should help to generate outsized profits as they come up with new products
  • This is a high risk portfolio, with a 99% Value at Risk over 1 year (max. expected loss with 99% certainty) of over -21%. Nevertheless, stress scenarios also show that losses in periods like 2008 are in fact not quite as bad as the VaR seems to imply. If you prefer a healthcare portfolio with lower risk, you could opt to lower exposure to HEAL and IHI in favour of IXJ.
  • Moreover, a return of +211% since 2010 makes it obvious that over the long run this portfolio should be a sound investment under practically any scenario you can imagine
CategoryNameIDTERAlloc %
InnovationiShares Healthcare Innovation ETFHEAL0.40%25.0%
DevicesiShares US Medical Devices ETFIHI0.43%25.0%
CancerLoncar Cancer ImmunotherapyCNCR0.79%10.0%
Healthcare overalliShares Global Healthcare ETFIXJ0.47%20.0%
PharmaSPDR S&P Pharmaceuticals ETFXPH0.35%20.0%

Risk, diversification and allocation

  • Risk level: high 
  • Diversification: low
  • For risk and total return since initiation see Portfolios
  • Probability of this theme playing out in the next 3-10 years: 50%-100%

Portfolio characteristics (full look-through, from USD perspective)

  • Dividend yield: 0.7%
  • Ex-ante predicted volatility: 12.8%
  • 1 year 95% Value-at-Risk: -21.2%
  • Scenario: 2008 Lehman Brothers default period: -19.1%
  • Scenario: Interest rates +100bps: +6.3%
  • Scenario: 2008-2009: -10.5%
  • Scenario: 2010 onwards: +211%

 

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How to Invest and Profit from Long Run Water Scarcity

Without water there is no life on earth. And while apparently 70% of our planet is water, only 3% of that is potable. Per estimates of the WWF,  1.1 billion people currently lack access to drinking water, while by 2025 two-thirds of the world’s population across every continent may face water shortages. Not only drinking water is an issue, as hygienic sanitation is tightly linked to it and inadequacy in that area risks the spread of diseases.

There is sufficient fresh water available on earth for everyone, but distribution and usage is unequal which is increasingly going to cause socio-economic issues. Global warming only exacerbates these trends and is going to add a full 20% to water scarcity this century. By 2030, demand could be higher than supply by some 40%. Besides global warming, issues like ageing infrastructure and increased irrigation in agriculture (which consumes 70% of all water) play a role.

Water is such a fundamental part of our lives that it plays a role in practically every segment of business, making this supposed undervaluation of a commodity without substitutes an excellent longer term theme to invest some of your money in.

What assets to invest in to benefit from this trend?

That’s perhaps not the best way to phrase it. People are suffering from physical and economic water scarcity, and the first question should probably not be how to profit from that. Nevertheless, it is unquestionably a massive global trend and investing for it may actually do some social good.

Unlike other commodities like oil or gold, investing directly into water is not possible. Exposure has to be gained by investing in companies that handle, process or deliver water to consumers and businesses. Here are some of the classic ways to gain access to water in your investment portfolio

  1. Water Utilities. Obviously, publicly traded stocks from the water utilities sector should be your first stop. They are responsible for bringing water to your doorstep and stand to benefit from improving the quality and quantity of water available. Usually monopolies. Think American Water Works, Aqua America and Veolia
  2. Desalination. As fresh water is scarce, increasingly countries are turning to desalination techniques where ocean or sea water is treated to remove minerals and salt in order to make it potable. Water companies like Veolia and Doosan are involved in the business of desalination, and a few companies like Consolidated Water which offer direct exposure to this thriving business
  3. Water value chain. improvements will be needed along the entire water value chain and for each component there will be companies worth investing in: from abstraction and pumping, pipes and pumps manufacturers to sewerage, filtration and waste water treatment. Each of these sub sectors offer opportunities
  4. Beverages. Out of the scope of most of the above are manufacturers of bottled water, which could prove an interesting investment as well

Portfolio construction: water, water, water

  • The constructed portfolio consists of two ETFs with relatively similar exposure. Guggenheim has slightly more US and utilities exposure than PowerShares.
  • The portfolio’s volatility is medium to high at 9.6%. Its return since 2008 would have been +140%
  • Given that this does not quite reach ETF-like diversification, I am suggesting an allocation of 0%-10%. I have great faith in this theme playing out
CategoryNameIDTERAlloc %
WaterPowerShares Global Water Portfolio ETFPIO0.75%50.0%
WaterGuggenheim S&P Global Water Index ETFCGW0.65%50.0%

Risk, diversification and allocation

  • Risk level: medium to high
  • Diversification: low
  • For risk and total return since initiation see Portfolios
  • Probability of this theme playing out in the next 3-10 years: 50%-90%

Portfolio characteristics (full look-through, from USD perspective)

  • Dividend yield: 1.4%
  • Ex-ante predicted volatility: 9.6%
  • 1 year 95% Value-at-Risk: -15.5%
  • Scenario 2008 Lehman Brothers default period: -22.6%
  • Scenario Interest rates +100bps: +4.0%
  • Scenario 2008-2009: -21.2%
  • Scenario 2010 onwards: +140%

 

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Investing in Travel and Tourism is Going to Earn You Solid Long Term Returns

The Chinese are coming. I’m sure that’s the thought going through many a traveler’s mind when walking around in European capital cities nowadays. Indeed, first came the Americans, then the Japanese, then the Chinese. And it’s not like the Europeans are sitting still and not casually booking trips to New York and Bali rather than the Provence, nowadays. Global tourism is thriving, something which should of course be seen as part of the greater ongoing trend of globalisation.

Predictably there is some backlash in places like Amsterdam, Barcelona and Venice, old European cities that were not designed to cope with the enormous amount of travelers touching down on their streets every day. Yet travel and tourism will apparently rise by 4% each year for years to come, while by 2030 there should be 1.8 billion international tourists around. And of course it should be noted that not all traveling involves tourism; just think about the increasing amounts of expats/immigrants living abroad and frequently returning home to see their family. The airline industry has a bright future ahead of it, in all cost segments.

Travel and tourism already form more than 10% of global GDP. In order to cope with the ongoing growth there will need to be massive investments in infrastructure (whether airports, airplanes, hotels and the like) and new and ambitious ways to maintain positive travel experiences in global hotspots. Clearly this is a trend to keep a close eye on and potentially expose some of your assets to – it’s one of those undeniable and unstoppable global trend that cannot but benefit your portfolio in the long run.

Travel trends to keep an eye on for the next few years

  1. Going off the beaten track: While a city like New York may have a long way to before it would be considered overcrowded due to tourists (the place is overcrowded as it is, but not necessarily due to tourists!), smaller towns in Europe or even China may not be able to cope as well. Increasingly expect other alternative locations to attract some visitors in their place
  2. Experiences: Tourists want authentic and genuine experiences. Not just flying in and out of France, but to experience the lavender fields of the Provence. To see the Northern lights. To take part in one of India’s colorful festivals
  3. Technology improvements: Recently I noticed that a hotel in Singapore was offering guests a mobile internet device with a travel guide on it to take along with them during the day. Similar gadgets and technology improvements will be forthcoming in everything from hotels to airplanes. Moreover, increasingly bookings will be done by mobile phone
  4. Societal: Baby boomers are retiring, have plenty of cash on hands and are full of energy. Countries like China and India are coming up and increasingly sending huge amounts of tourists abroad. That trend will continue to grow, and their preferences will evolve
  5. India, Africa and the Middle East: Relatively underexplored travel destinations will attract more and more visitors
  6. Glamping: Actual camping is not for everyone, but staying in hotels far away from anything green gets boring too. Glamping may be the in-between solution
  7. Immigration: An effect of globalisation is that more than 3% of the world population lives abroad. Many of these immigrants or expats will need to fly home to visit their families on a regular basis

What assets to invest in to benefit from this trend?

Surprisingly, there are currently no cheap global tourism and travel ETFs available, so I had to resort to putting together a diversified equity portfolio to address this theme myself. In order to benefit from the trend, the following companies look like obvious targets:

  1. Hotels. Companies like Intercontinental and Wyndham will face healthy prospects if the tourist industry keeps expanding. More tourists and money spent on tourism means more hotels, more overnight stays and more profits. Certain macro trends that play into that could be new regions attracting tourists and alleviating the stress in other popular places, winter becoming a more popular time and more focus on wellness and “experiences” than simply overnight stays
  2. Cruises. Meanwhile the cruise industry also faces a bright future and is focusing their attention on China, better connectivity and bigger ships
  3. Booking sites. When was the last time you called up a hotel and booked a room directly? Right, everyone nowadays uses booking apps, mostly on his or her mobile Phone, and spending $200 is easier than ever. Expect that trend to persist and the bigger players in western and Asian countries to benefits
  4. Airlines. And finally, someone has to bring all of those people from destination A to destination B. Expect further segmentation between (ultra) low-cost no-frills carriers like RyanAir and those choosing for luxury and preferring to fly Singapore Airlines. There is space in the market for both

Portfolio construction: hotels, airlines, cruise companies and booking sites

  • The constructed portfolio consists of individual stocks as there are no relevant ETFs in the market at the moment. Each stock takes up Some 11.1%
  • It diversifies your holdings across 9 companies that operate out of a handful of different markets (China, UK, US, Singapore and Japan) in different segments of the tourism and travel industry: hotels, airlines (one low-cost and one high-end), cruise companies and booking sites. You could replace any of these with similar companies that you may have a higher conviction in, bottom line is that you want to these sectors
  • As this is an equity-only portfolio, volatility is high at 11.7%. However, the portfolio would have returned +192% since 2010, thus more than making up for that. I suggest to allocate a small bit to these companies and hold on to it for the longer term.
  • Given that this does not quite reach ETF-like diversification, I am suggesting an allocation of 0%-5%.
CategoryNameIDTERAlloc %
Travel bookingExpediaEXPE-11.1%
Travel bookingCtripCTRP-11.1%
HotelsWyndhamWYN-11.1%
HotelsIntercontinentalIHG-11.1%
HotelsJapan Hotel REIT8985 JT-11.1%
CruiseRoyal CaribbeanRCL-11.1%
CruiseCarnivalCCL-11.1%
AirlineRyanAirRYA-11.1%
AirlineSingapore AirlinesSIA-11.1%

Risk, diversification and allocation

  • Risk level: high
  • Diversification: low
  • For risk and total return since initiation see Portfolios
  • Probability of this theme playing out in the next 3-10 years: 25%-75%

Portfolio characteristics (full look-through, from USD perspective)

  • Dividend yield: 2.1%
  • Ex-ante predicted volatility: 11.7%
  • 1 year 95% Value-at-Risk: -18.2%
  • Scenario 2008 Lehman Brothers default period: -29.1%
  • Scenario Interest rates +100bps: +4.5%
  • Scenario 2008-2009: -33.7%
  • Scenario 2010 onwards: +192%

 

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