Value Investing

Absolute Return Letter October 2013: Heads or Tails?

Absolute Return analyst Robert Lucas and Nobel Laureate on the Absolute Return letter. Demographics captivate me. There are around 7.1 billion of us occupying planet earth today, going to 10 billion by 2050. I often think about how good old mother earth will cope with the additional 3 billion people we are projected to produce between now and 2050. More people translate into increased pressure on already scarce resources, but that is only part of the story and a story well covered by now.

From an investment point of view, it is more interesting that over 150 million people from around the world join the middle classes each year. The Brookings Institution reckons that about 2 billion people can be classified as middle class today. By 2030, Asia alone will be the home of 3 billion middle class people, and the global middle classes will be approaching 5 billion, 90% of whom will come from countries we today consider EM economies. In other words, less than 20 years from now, Asia will have 10 times more middle class citizens than North America and 5 times more than Europe. When we entered the new millennium not many years ago, 1 in 6 middle class people came from the United States. By 2030, only 1 in 25 will be American (see here). Meanwhile, in Latin America, the middle classes have grown by 50% over the past decade and now account for 30% of the population (see details here).

You can define ‘middle class’ in more than one way, but let’s not get hung up on details. The important consideration here is the sheer magnitude of this demographic shift and the effect it will have on pretty much everything. Rising living standards imply more money available for iPhones and package tour holidays, but it also entails increased consumption of fat and sugar and thus growing obesity problems. Over 300 million people worldwide are now classified as clinically obese, a function of the changing eating habits and exacerbated by increasingly sedentary lifestyles.


The Absolute Return Letter