Where’s water in a non-Piketty economic environment?
Published February 4th, 2016
Are we on the verge of asset price deflation? Over the past twenty-five years, we have lived in a world of flat or falling consumer prices, but rising asset prices. There may have been wobbles, but generally we have come to expect equities, property prices, and other investment asset classes to rise in value more quickly than the economy as a whole since the early 1990s. This is about to change, and it is going to have implications for the water industry.
It seems natural to us today that the MSCI World stock market index should be 3.6 times higher today than it was in 1991, while the global economy has only grown 2.7x over that time, and the price of a Big Mac has grown 2.1x. The French economist Thomas Piketty would argue that the reason is because r>g, i.e. that the rate of return on capital is always greater than the rate of economic growth, and that the only thing that puts the two in line is a jolly good war. I don’t see it that way. I think the main reason why we have seen such strong asset price inflation over the past two and a half decades is because that period has seen one of the largest transfers of wealth from spenders to savers in history.
This has been driven by three big global trends. The first is China’s industrial revolution. This transferred jobs and money from the profligate Europeans and Americans to thrifty Chinese, who typically save more than half their income. It has also created a bubble in natural resources, which concentrated huge wealth in the hands of the sovereign wealth funds and oligarchs from the producer countries, at the expense of the general public filling their tanks at the pump.
The entrance of China into the global economy has also had the effect of holding down interest rates, which in turn have pushed savers to invest in equities, property and other investment classes, inflating asset prices.
The second big global trend is the ageing of the baby-boomer generation. As they approached retirement in Europe, North America and Japan, their pensions contributions reached a peak. The cruel truth is that the flow of their savings coincided with falling yields on investment, forcing the baby boomers to invest still more to ensure a good income.
The third megatrend driving the savings rate has been the growth of the internet. This has created vast excesses of wealth in the hands of a few Silicon Valley moguls at the expense of the much more diffuse beneficiaries of traditional business models. Apple Inc., for example, has a cash pile of more than $200 billion, the bulk of it invested in tax havens around the world.
This flow of savings from China, from oligarchs, from sovereign wealth funds, from baby boomers, and from Silicon Valley giants, has been like a giant firehose of money spraying into the investment sector for 25 years. Neither the dot-com crash of 2000, nor the global financial crisis, had any impact on the flow. It just kept gushing.
Only now are we beginning to see the pressure on the firehose subside. Gulf sovereign wealth funds have started to draw down their funds. China’s cooling economy is switching towards a consumption-led model. The top end of London’s property market has been caught by a sharp fall in demand for mansions fit for oligarchs. The baby boomers in retirement are living off their pensions, rather than contributing to them. The only sector which continues to transfer wealth reliably from spenders to savers is the high-tech industry, but growth there seems to be slowing. Apple’s 2016 and 2017 revenues are forecast to be below 2015’s. Google and Amazon may have more growth in them, but the unicorns – unquoted start-ups with a value of more than $1 billion – have a much less well-assured future.
We now live in a heavily over-invested world with curiously flat consumer demand. In economic terms, we have not been here before.
Water, however, is not in that world. It is anything but over-invested. You could sink a couple of trillion dollars into it and still not quench the need to invest. Furthermore, urbanisation and global warming are creating new necessities for spending, which ensure that whatever else happens in the global economy, water will be an interesting place to be. You could even argue that the up-turn in the US municipal water market last year in the wake of the energy price collapse is evidence that money is flowing out of the surplus profits of the oil industry and into water. The reality is that the drivers of water investment are more complex. Water is a political commodity, and how the politicians respond to changing the economic circumstances probably matters more than the changing economic circumstances themselves.
I feel that we are at an exciting moment of change, where the trends in the future are going to be different from what we have seen in the past. It is at these points of maximum uncertainty that I most look forward to getting together with other GWI readers at the Global Water Summit to hear what you think. It is only by picking up lots of data points from lots of different people in the industry that we can begin to understand the trends. This year’s theme is 'Water in 2050'. When the short-term visibility is down to zero, the best thing we can do is to focus on where things are going to be in the more distant future and work our way back from there.