Angry societies

Around the world, there is a shift away from the political establishment toward populist leaders and outsiders who pledge to prioritize national interests. Populist parties now form part of every third European government, according to Swedish think tank Timbro. In the USA, there are signs that society’s polarization may further widen ahead of the 2020 presidential election. Relatedly, the shift towards a multipolar world is evident in the USA’s trade tensions with China as well as with neighbors and allies. We believe that security firms, national brands in developed markets, and consumer companies in emerging markets (EM) are best placed to adapt to this changing socio-economic backdrop. 

1.1 National champions and brands

Buy domestic

While populism has been on the rise over the past decade, the world began to feel the economic repercussions last year as trade conflicts intensified. Indeed, the World Trade Organization (WTO) sees trade tensions as the biggest risk to its global trade growth forecasts for this year and next. Between mid-October 2017 and mid-October 2018, WTO members imposed 137 new trade-restrictive measures including tariffs, quantitative restrictions or export duties affecting USD 588.3 billion worth of trade – seven times more than in the prior-year period. 

The World Economic Forum’s Global Risks Report 2019 notes that “global risks are intensifying but the collective will to tackle them appears to be lacking. Instead, divisions are hardening.” Indeed, economic confrontation/frictions between major powers as well as the erosion of multilateral trading rules and agreements were the top short-term risks cited by respondents in the WEF report. 

In 2019, trade relations will likely remain high on the global agenda. The USA and China continue to pursue trade negotiations but have yet to hammer out an agreement. Europe also appears to be rethinking its approach to trade. Earlier this year, Germany’s Economy Minister Peter Altmaier released the National Industry Strategy 2030, which calls for national and European champions to gain critical mass in order to thrive in the high-tech sector. This plan can be viewed as a response to other countries’ recent efforts to boost their domestic economies and high-tech industries, including US President Donald Trump’s America First doctrine and China’s Made in China 2025 initiative. 

We believe national champions (major domestic companies with a large workforce in their home country and strong regional demand) as well as national brands (national champions with well-respected brands and a loyal global customer base) remain well placed to benefit amid the evolving international trade environment. When trade tensions heated up and equity markets came under pressure in 2018, the national champions outperformed global equities. They have also posted attractive absolute returns during the current market rally, providing an attractive risk/ reward profile, in our view.

1.2  Security and defense

Threats on many fronts

Safety and security remain a key concern for many people. Crime and violence were among the top worries in a monthly survey of adults in 28 countries conducted by Ipsos Public Affairs. In contrast, concerns about terrorism have abated in some developed countries including France, Germany and the USA since we launched our Supertrends in the spring of 2017, according to Ipsos survey data. 

But the threat of terrorism is still on people’s minds, particularly given this year's tragic terrorist attacks in New Zealand and Sri Lanka. Hence, we would expect continued demand for security guards and surveillance technologies, such as smart cameras, drones and access control.

Defense technology race

Within the defense space, the focus remains on new technologies. According to the US Department of Defense, technological advancements in fields such as advanced computing, big data analytics, artificial intelligence (AI), robotics, directed energy, biotechnology and hypersonics are key to “win wars of the future.” The USA remains by far the biggest spender on defense: US President Donald Trump has proposed a 2020 budget of USD 718.3 billion for the Department of Defense to fund efforts against China and Russia. The US defense budget includes the largest research and development request in seven decades, covering investment in new technologies and cyber security. We expect this global technology race – and investment – to continue for the foreseeable future. However, the long-term outlook for defense spending is more uncertain given the growing budget deficit in the USA.

Urgent need for data protection

We see data protection solutions as the most promising area for investors within security and defense. Social media applications continue to expand rapidly, with Statista forecasting some 2.8 billion users in 2019. At the same time, the number of connected devices such as smart phones, smart homes or intelligent speakers is increasing rapidly. Indeed, Gartner forecasts that more than 12.9 billion consumer Internet of Things (IoT) devices such as smart TVs will be in use by 2020 compared to 4 billion in 2016.

As a result, the amount of personal data available is increasing tremendously. According to the European Commission, the potential value of the personal data of European citizens could reach almost EUR 1 trillion annually by 2020. However, a steady stream of data breaches and the misuse of personal data have provoked outrage from consumers and politicians alike. Indeed, the scale of data breaches in the first half of 2018 already surpassed the number of breaches for all of 2017, according to Experian’s Data Breach Industry Forecast 2019. Experian’s top data breach predictions for 2019 include a cloud breach, saying “it’s a matter of when, not if, a top cloud vendor breach will occur.” Attackers could also go after vulnerabilities in touch ID sensors or face recognition, according to Experian.

In response to these ongoing breaches and misuses, regulation has been strengthened over the last year. In particular, the European Union’s General Data Protection Regulation (GDPR), which came into force in May 2018, has set a global standard for data protection and privacy. Among the GDPR rules, personal data may not be processed unless the user has given their consent. Companies that violate the GDPR rules on record-keeping, security, breach notification or privacy could face penalties of up to EUR 20 million or 4% of their global turnover. California has also made inroads with regard to data protection. The California Consumer Privacy Act was signed into law in 2018 and takes effect in 2020. Due to the size of the California economy, the new law will likely have a large impact on businesses. In terms of US-wide data legislation, the probability appears fairly high given bipartisan support.

Interestingly, given the rising regulatory pressure and corresponding financial consequences, only 52% of companies surveyed said they had a highly effective data breach response plan in place in 2018, up from 49% in 2017, according to Ponemon Institute’s Sixth Annual Study “Is Your Company Ready for a Big Data Breach?”. Further, the survey showed that only 20% said they are fully prepared for an IoT attack, a low number given the proliferation of IoT devices. These trends confirm our view that companies will need to continue investing in processes and technology such as cyber security to protect personal data.

1.3 Emerging market consumers

Travel a growth spot

In an increasingly multipolar world, the growth of emerging markets – and EM consumers – remains an important subtheme. September 2018 was a tipping point for the world, according to a Brookings Institution report. For the first time in history, just over half of the world’s population lived in households considered middle class or rich. And the middle class should continue to increase at a rapid rate: from 3.6 billion people currently to 4 billion by the end of 2020 and 5.3 billion by 2030, according to the Brookings report. Asia is the source of much of this growth: almost 9 in 10 of the next billion middle class consumers will come from this region, underscoring its huge potential.

Despite the promising outlook, the performance of EM consumer stocks in 2018 proved rather disappointing. This was due to overall weakness in EM equities, increased uncertainty stemming from trade disputes, fiscal tightening as well as country-specific reasons such as elections (e.g. in Brazil). However, considering the positive longer-term fundamentals, we see phases of weakness as possible buying opportunities for EM consumer stocks, for example the Q4 correction and subsequent rebound in Q1 2019. Indeed, the mood in EM has improved of late. The Credit Suisse Research Institute’s Emerging Consumer Survey 2019 confirmed that the average readings for survey sentiment indicators (personal finances and income expectations) increased in 2018. While India remains the most attractive country in terms of sentiment, Russia and Turkey had the weakest survey readings.

With higher disposable income, discretionary spending among EM consumers should increase, starting with cheaper goods like cosmetics, then expanding to large ticket items such as cars and travel. In recent years, car ownership has increased in many EMs. But EM Millennials, an important target group as they earn above-average wages, could prove to be a spoiler. Fewer consumers aged 18-29 in the survey in Brazil, China, India and Mexico said they intended to buy a car.

Going on vacation remains attractive for EM consumers. While the survey showed that the share of EM consumers who plan to take at least one vacation declined in five countries, levels are still high. Accordingly, air traffic remains a bright spot – the number of consumers flying to their holiday destination is steadily increasing.

The International Air Transport Association (IATA) expects the number of air travelers will soar to 8.2 billion in 2037, a compound annual growth rate of 3.5% during the next two decades. The biggest growth driver will be the Asia Pacific region, accounting for more than half of new passengers, IATA says. The organization expects that China will surpass the USA as the largest aviation market in the mid-2020s. India will take third place, leapfrogging the UK, around 2024. And Indonesia will jump to fourth place by 2030, according to IATA. We believe that airlines, airports, duty free operators, hotels, as well as tour operators all stand to benefit from the rapid growth in EM air traffic and tourism.

  • Data breach (data leak, data spill): A data breach is an intended or unintended release of private or confidential data such as medical records, financial records or credit card details— either in electronic or paper format.
  • GDPR: The General Data Protection Regulation (GDPR) is designed to harmonize data privacy laws across Europe and to protect and empower all EU citizens data privacy.
  • Middle class: Households with spending of USD 11-110 per day per person in 2011 purchasing power parity (Brookings Institution).