Investing for the long term
I often get asked, what are the best areas to invest in today, if you were a “young person” looking to grow your wealth over the next 20-30 years before retirement. Through this lens it is both easy to see where the wider economy is at, and also frustrating as the extent of the challenges for the future are laid bare. Let’s leave the frustrations of this age group to one side!
Since the 1980’s the advent of the housing and credit boom has moved the economy from being one of production to one of consumption (being real estate particularly). Indeed thirty years ago, economics used to study “the business cycle” and not “the economic cycle”. Such was the impact of businesses in hiring and firing workers, building new factories and lines of business, so they could continue to grow into the future.
Source: ABS Cat. 5206.0, First Samuel
Now, of course, one could argue the last thirty years have seen much technological development, to the point that maybe business investment is structurally less important. This is true to a degree. However, the wider issue of living for today (consuming) and not investing for the future extends past just businesses.
Look at the (relative) lack of development today in basic public functions – roads, water, sewerage, transport, telecommunications, both here and also in the wider western world, and it is clear that this is more than something that has been forced upon decision makers; it’s been an active decision – “it’ll be alright, we don’t need to worry about that road busting at the seams this year, we can do it after the next election cycle, if we get back in”.
This type of thinking in the boardroom was exacerbated by the Global Financial Crisis. Due to the degree of perceived risk (that feeling that the financial world is in imminent doom, all the time) businesses have been very slow to pick up their capital spending (instead ... handing capital back to their delighted shareholders in the form of dividends – bravo to management, well done!).
We see this pattern regularly, and in the world where everything has a finite life and deteriorates and depletes, this behaviour is leading to what might finally be a fulfillment of the “stronger for longer” mantra that existed prior to the GFC (the idea being that prices for goods and services would stay high for longer than is normal, as the structural growth of China and the industrialising world increased demand for resources).
In this light, three particular areas seem to come to our attention, time and time again.
1. Energy (being oil and coal) where global depletion rates of resources are high (being 6-8% pa), and new investment by most players of long-term scale are low (and have been now for years);
2. Industrial equipment, whereby most players since the GFC have been running their equipment harder and longer, but with the inevitable outcome that a big wave of capex will eventually be required, just to stay in business, and;
3. Civil construction and engineering. There is a mountain of work required to reduce the age of the western world's infrastructure back to acceptable levels (if you are bored, you can read about the number of bridges in the US that need to be replaced or significantly repaired), and of course this doesn’t account for the onward march (in fits and starts no doubt) of the developing economic world (think India and Africa).
So, to return to the opening question, if we were looking to invest our money for the next 30 years it would be in business. More specifically, it would be in businesses where nobody has been investing recently, or is likely to for many years (which will enable higher returns for existing capital until such time as the herd catches on). In essence, it was exactly this sort of thinking that drove First Samuel to invest for its clients in Emeco (when all else fled). It is also why we remain okay with resources (Northern Silica, NSL, Moreton Resources, BHP and South32), and other industrial businesses (MMA Offshore, Emeco and Cardno). These businesses may at first glance seem unexciting to the untrained eye, but they will drive good returns for investors in the years ahead.