21st Century Megatrends: Perspectives from a Fox. Clem Sunter

the “Hard Times” scenario, companies with intelligent strategies will continue to grow but companies with mediocre strategies will go to the wall. Value for money and the cheaper alternative are the key drivers of consumer behaviour, so companies that reflect this trend in their product offering will do well.

      Ultraviolet

      The second mainline scenario we offer is called “Ultraviolet”. It is where the Old World economies go through the five year ‘U’ while the New World economies experience a ‘V’ like recovery and grow at least three times faster than their Old World colleagues. In other words, we live in a two-speed ‘UV’ world where the principal strategy for multinational companies is to chase the ‘V’. For many American and European companies it is their favourite scenario. Accordingly they are doing everything they can to establish a presence in China, India, Africa and South America.

      Our principal flag for choosing between “Hard Times” and “Ultraviolet” is China’s future economic growth rate. If it remains in the range of 8–10% p.a. then all the countries supplying China with resources will continue to do well in China’s slipstream. If, however, China has the kind of wobble that Japan had at the end of 1989, then everybody is condemned to “Hard Times”. We have gone more negative on China for two reasons: exports constitute 38% of China’s GDP and exporting into a flat Europe does China’s growth prospects no good; and in major cities outside of Beijing and Shanghai there are large numbers of unoccupied suburbs where municipalities have borrowed the money to build them from Chinese banks. These loans could go bad and trigger a banking crisis in China.

      Accordingly, we give a 40% subjective probability to “Hard Times” during the next five years and 30% to “Ultraviolet”. Like two racehorses leading the field but with not much distance between them, they are jockeying for prime position. Watching the data coming out of China on its economy is thus a continuous activity. Of course, you can bet on both scenarios by offering value for money and chasing the ‘V’ at the same time.

      New Balls Please

      We would not be good futurists if we did not explore the outer limits of the cone of uncertainty that opens up into the future. We have two scenarios which we call ‘outsiders’, but for which Malcolm Gladwell would prefer the term ‘outliers’. The first is an extremely positive one where Ben Bernanke’s policy of almost zero interest rates works for the US – the world’s largest economy. It fully recovers next year and drags the whole world up with it in a full-scale ‘V’. The title of this scenario is “New Balls Please”, a Wimbledon expression to signify the players are getting new tennis balls because it is a new set.

      We feel the recovery will usher in a completely different game for which new balls are needed in two important respects. Firstly, the East will be the economic equivalent to the West, thereby overturning several centuries of Western supremacy. Marketing strategies of companies will need to accommodate this. Secondly, the world is finally running out of resources and there is no Planet B. With rising population numbers and a widespread economic recovery, resource prices will go through the roof – oil possibly reaching $500 a barrel. One statistic says it all: if China ever mirrors American standards of living we would need four planets (which we have not got).

      Technologies which improve the efficiency of resource consumption, particularly oil and metals, will be the most sought after as will substitutes like solar energy. More efficient supply chains which reduce the freight cost element in the final price of a product will also be a precondition for competitiveness. Our lifestyle will probably change whereby shopping at local neighbourhood stores will be preferable to travelling to distant malls. Localisation will replace globalisation.

      At the moment, we only assign a 10% probability to this scenario as the two flags which would indicate it is in play are down: a drop in the US unemployment rate to around 7% (it has come down from 9.5% to 8.3% but still has a way to go); and a levelling-off or reduction in the national debt to GDP ratios of the Old World economies to indicate that governments are finally getting their financial affairs in order. Obviously, the best strategy in this scenario is to invest in resource businesses (like farming, water, mining and energy) as well as renewable alternatives to fossil fuels.

      Forked Lightning

      The last scenario we put forward is the one we most fear: a double dip where the worst is yet to come. We call it “Forked Lightning”. There is a parallel: 1932. Everyone talks about the Wall Street Crash of 1929. In actual fact, the market went down in 1929, recovered in 1930 and 1931 and then crashed to 11% of its peak value in 1932. The equivalent today would be the Dow Jones Industrial Average free-falling from its current level of 12 500 to 1 500 which would be a catastrophe. We have two flags for this scenario. The first one is a sudden jump in the interest rate on US 10 year treasury bonds to somewhere between 4 and 5%. This would indicate a loss of faith in the way America is handling its budget deficit. Right now this flag is down as the interest rate is below 2% since most investors prefer American to European paper.

      The second flag is a default by either Italy or Spain on their national debt as such an event would have much bigger repercussions for European banks and pension funds than a Greek default. The financial numbers are much larger and the markets would probably freeze like they did in 2008. We give this Black Swan scenario a 20% probability in light of the present Eurozone crisis. The odds are now high enough for the flags to require extremely close monitoring, particularly given the risk of contagion in Europe. Remember, you can do nothing once the lightning starts except go indoors! Hence, the best option is to make sure your financial situation remains fairly conservative, so that you can survive the storm if it hits.