Recession talk ignores evidence

Seen from a debt-ridden perspective, it is not surprising that 2008 seems to offer little cheer. An overdue housing correction and some much-needed consumer belt-tightening point to an austere package this year. But the danger is that investors are distracted by all the downbeat headlines and fail to see the wood for the trees. All this talk of recession might lead you to believe consumers and businesses have thrown in the towel. In fact, the reverse is true.

The key word for anyone with an investment horizon beyond the next tricky year or so is “scarcity” – too many people chasing too little stuff. Long after the financial excess is washed through, population growth and rising incomes mean the world’s principal economic theme will be the battle between excess demand and finite or limited supply.

Fund manager Robeco recently asked research group Iris to look into scarcity as a theme. Its findings won’t come as a surprise, but this should not detract from the importance of chronic shortage as a focus for investors. Robeco expects scarcity to be a dominant theme in five main areas, in all of which companies that become part of the solution will prosper. Humankind’s genius for finding the answer (eventually, when push comes to shove) ensures shortages of commodities, energy, food, water and clean air are not just social problems but economic and investment opportunities too.

Behind all of these shortages lies one fact: The population of the world has increased by a factor of 2.6 times since 1950 and is nowhere near peaking. Back then, developed countries represented a third of a global population of 2.5 billion. By 2005 they accounted for less than a quarter of a 6.5 billion world population and the United Nations predicts that by 2050 there will be nine billion of us on Earth, more than 85 per cent of whom will be living in emerging markets.

In 1900, only 13 per cent of the world’s population lived in urban areas, treading lightly on the Earth’s surface. By 2030 it is anticipated that 60 per cent of the world’s population will live in towns and cities. Countries such as China and Mexico will have income levels comparable with Spain today. It is not surprising that the World Bank forecasts that economic growth in the next 25 years will be higher than in the last 25. By then, Mother Earth will be dreaming of recession.

Demand for energy has increased by 2.6 per cent a year since 2000, twice the rate of the previous 20 years, but if current trends persist, we haven’t seen anything yet. In China, per capita consumption of oil is about one thirteenth of that in America and comparable with that in Japan and South Korea at similar stages of their economic development. If China follows a similar trajectory, its demand for energy will rise 10-fold in 30 years.

The implications of this simultaneous growth in the size of the world’s population, its average wealth and the desire by the 85 per cent for a share in the prosperity enjoyed by the 15 per cent are mind-boggling. Here are a few certainties:

  - Demand for industrial metals will continue to outstrip supply. In
    2005, the exploration budget of the mining sector as a whole 
    represented less than five per cent of total profits. Meanwhile, 
    China uses around a third as much copper per head of population 
    as the developed world, and is catching up fast.

  - World energy demand will be 50 per cent higher in 2030 than it is 
    today. In the long run that is bound to lead to a higher oil price than 
    even today’s $100 barrel, and that in turn will fuel a dramatic 
    explosion in the alternative energy market, perhaps 15 per cent a 
    year every year for the next decade.

  - Food prices will continue to rise. Crop-hungry meat consumption, 
    which has grown by 75 per cent since 1990 in the world’s 
    emerging economies, will continue to increase. Meanwhile, 
    government biofuels targets mean that within 15 years 12 per cent 
    of the world’s agricultural land will be needed for transport against 
    just two per cent today. Farmers, food and fertiliser manufacturers, 
    and anyone involved in boosting crop yields and improving 
    irrigation stand to gain.

  - Water, already scarce, will become even harder to find. The World 
    Health Organisation predicts 35 per cent of the world’s population 
    will live in water-stressed areas by 2025. The non-economic 
    pricing of water will change, providing opportunities in water 
    distribution, treatment and efficiency.

  - The quality of the air we breathe will get worse. The World Bank 
    says the economic cost of air pollution in China was already 3.8 
    per cent of GDP in 2003. The market for the reduction of pollution 
    was worth $60bn (Dh220bn) last year and it is forecast to double 
    within five years.