Roland van den Brink: Unnoticed trends from which investors can learn
This column was originally written in Dutch. This is an English translation.
By Roland van den Brink, Founder of TrigNum
Being blind to what is to come; it happens to me regularly. A shame, because for investors: the trend is your friend. I have noticed several underexposed developments where history teaches us a lesson.
Why borders and power are constantly shifting
Global conflicts and shifting borders have been the order of the day throughout history. The period from 1991 to 2020, with relatively few tensions, was therefore exceptional. For a moment, this seemed to be the new normal. Unfortunately, it was not to be. Donald Trump, Vladimir Putin and Xi Jinping are all seeking to expand their territory. They are very similar in their behavior: create an enemy, set a goal, be bold and act decisively. They say what they want, they do what they say, and they make mistakes.
Many people are bothered by Trump, Musk, Putin and others, but for financial markets, personalities are a temporary phenomenon. From the many tabloid news items, I get the impression that little attention is paid to the real motives. An example: in 1567, the Spanish king Philip II advocated the attack on the Low Countries because of the Protestant faith that people adhered to there. In fact, it was also about the sales tax, the 'Alcabala', of 5% that the Duke of Alva had introduced.
Trump's argument about Greenland is supposed to be about US security, but is that the real reason? The Pituffik Space Base with its advanced radar for missile attacks is already there. I suspect it is mainly about the raw materials, including copper, nickel, zinc, gold, titanium, vanadium and molybdenum. Various American companies listed on the NYSE can mine these. An informative mining index is, for example, SPSIMMTR.
State debts are converted?
Approximately half of the American budget goes to supporting its citizens: Social Security (~21%), Medicare (elderly care) (~14%) and Medicaid and other aid programs (~12%). This is no different in many countries. National debts are rising and with the increased interest rates, so are the interest obligations. According to the International Monetary Fund (IMF), the situation is more problematic than the official figures suggest.
Governments are not the only ones with a problem. In various countries, student loans and mortgages are also a heavy burden for people in their thirties. The trend of mounting debts has often been called unsustainable. Here too, history teaches us how this ends, namely through high inflation or through a conversion of the debts. Some Americans suggest offering military security as a 'benefit' instead. This shows parallels with the issuance of war bonds.
Almost all institutional investors have invested heavily in government bonds that are considered very safe. However, there is a striking unanimity among the power blocs USA, EU and China to (secretly) convert their debt. If you think that this is not such a big deal, then look up terms such as 'blue-red bonds', European Safe Bonds (ESBies), 'state-contingent debt instruments' and 'European Redemption Fund'. Research is being done into how technologies such as Bitcoin enable governments to shift the problem (Strategic Bitcoin reserve). In Asia, digital certificates of ownership are already widely used, a trend that is not so well known in the West. I foresee that the nature of government bonds will change, possibly already under the rule of Trump and Lagarde.
The deterioration in Europe
I observe deterioration in many places, such as in Amsterdam around the Central Station and on Dam Square. This is also something that foreign friends notice. I was shocked by Brussels, the train station in Cologne, parts of Milan, Rome, London and Paris. British trains are expensive and bad. Walking through northern Italy, I saw cramped housing, much of it covered in mold on the inside. The people I met have little regard for society and are poor and indifferent.
It became clear to me that the combination of an aging population, political bickering and a fragmented immigration policy is causing a downward spiral that is difficult to reverse. In addition, there are sentiments in various parts of the world, such as North Africa, the Middle East and conservative America, that applaud the disintegration of Europe. The conversion of national debts will reinforce this trend because it allows countries and people to shirk their community obligations.
Looking at yourself critically in the mirror can be confronting. The faltering of German industry is probably a temporary phenomenon. The concern about the threat from within that the American vice-president J.D. Vance expressed about Germany is more relevant to me. History teaches us that socio-political circumstances are more important for returns than new technologies. The hope of Make Europe Great Again (MEGA) is blinding. Investors would do better to pay attention to the decline that has already set in, which will make European shares less attractive in the future as well.
The rise of a third sphere of influence
America is fighting with China for hegemony (and not the other way around). 'When two dogs fight over a bone, the third one wins', has been a well-known Dutch saying since the 17th century. The foreign policy and economic strategies of countries such as India, Japan, Indonesia, Saudi Arabia, Singapore, South Africa and Brazil show the rise of a third sphere of influence. There is a striving for independence, including moral independence, and a diversification of international partnerships. There is a more optimistic outlook with dynamism. As a result, we are seeing more and more (financial) initiatives from these regions. This is in contrast to Europe, which seemingly cannot get past creating more debt, introducing even more rules and raising taxes.
These medium-sized economies, with their own alliances, promote stability as a buffer between the superpowers. If the US's capriciousness continues, the rest of the world will try to reduce its dependence on America. Fewer US government bonds will be held and the role of the dollar as the world's largest reserve currency will diminish. That process strengthens the position of the aforementioned third current. An increased allocation to the aforementioned countries reduces the impact of major geopolitical conflicts. A fiduciary manager may be able to offer an instrument for this, such as the popular BRICS concept from 2010.
Finally, a few trends
The advent of the printing press, radio and television have each had an impact on what people accept as true, as was recently the case with Brexit. The combination of Artificial Intelligence and social media makes indoctrination a lot easier for many; a trend that worries me as an investor. The political wind can suddenly change direction. The Netflix series Adolescence provides an insight into how things are done at many schools. It is more important than ever for investors to closely follow sentiment and not rule out surprising outcomes.
Politicians are currently deliberately scaring us about Russia, causing Europe to invest heavily in defense through debt. The stock market has already anticipated this. However, these types of investments are not very productive, which reinforces the decline and depresses future returns. History teaches us that financially and militarily weakened countries rarely pose a threat. On the other hand, I am more fearful of North Korea, which has earned a few billion euros since 2023 through production for Russia and has a warlike ruler who takes no one into account. It is advisable to keep a close eye on this country as well.
On average, we are getting older and women are having fewer children. This trend has been described many times. Less attention is paid to the worldwide decline in male fertility, especially in the developed world. If this trend continues, after two generations its impact will be comparable to that of climate change. Investing in companies that are tackling this problem seems useful and could well be the bargain of the century.
Conclusion
Two factors determine the return: the price we pay, where less is more, and the productivity growth delivered, where more is more. The price is not low and since the credit crisis, growth has been limited globally. I am an optimist by nature, but the trends mentioned worry me. It seems to me that the negative effect of geopolitical unrest over the next three years will outweigh the benefits of technologies such as AI. Investors such as pension funds would do well to take this into account, not place too much hope in Europe, and consciously diversify into the third sphere of influence. For this period, I support the idea of selectively investing in shares, with a preference for companies with innovative power and pricing power.