A Brave New World

By Jim Mellon and Al Chalabi

We are entering a delicate phase of the economic recovery; the outlook remains murky and uncertain across the major economies, with China continuing to lose steam, the Eurozone still facing a possible break-up and zero growth, and the US Fed poised to raise rates for the first time since the Global Financial Crisis.

China

In 2014, China’s economy grew by 7.4% (the official rate), the slowest in 24 years. Several years ago we wrote about how China’s seemingly unstoppable annual growth rate of 10+% that we had all become accustomed to over the past 20 years was coming to an end – its export-based economy was becoming less sustainable. We suggested that China’s economy would gradually slow to annual growth rate of 5% over the course of this decade, and economic data over the past few years would support our hypothesis.

Manufacturing continues to suffer – HSBC’s Purchasing Manager’s Index for January 2015, came in at a disappointing 49.7 on a seasonally adjusted basis (a number less than 50 implies a contraction).

In the coming months, Beijing will likely announce some sort of targeted stimulus plan in an effort to revive the economy, but fundamentally China’s economy will continue to remain vulnerable until a rebalancing occurs that allows consumer spending to contribute more to its GDP (it is currently around 35% of GDP versus, say the US which is 70%) while reducing its reliance on investment and exports.

Europe

The spotlight is back on Europe, and will likely remain there for the remainder of 2015 given how much uncertainty remains concerning the viability of the great European experiment and weak to no growth across the board.

Greece made headlines in January by voting in a left-wing anti-Eurozone prime minister. Now all eyes are on the newly elected Alexis Tsipras and what his plans are to turn his country’s economy around. More importantly, what is his stance concerning the repayment of the €240 billion bailout money? Such a debt burden will haunt the country for generations to come.

Greece’s debt to GDP ratio stands at around 175%. It would be fair to say that the probability of Greece repaying its debt in full is extremely slim, so a more realistic outcome will be for Greece to agree to repay only some of it over many years. However, any debt pardon is forbidden under the ECB’s statutes.

Greece may be better off defaulting on its debt, exiting from the Eurozone and reverting to the Greek drachma as its national currency. But any concessions on debt repayment will be watched carefully by other club Med countries, who no doubt would also like to secure more lenient terms on their bailout loans.

United States

The recovery of the American economy is well underway, which might not be good news for US equities as they are now facing a number of headwinds that will limit their upside for the remainder of 2015:

• The relative strength of the US dollar compared to most other currencies will hurt companies that generate most of their sales from outside the US, resulting in weaker earnings;
• The strengthening economy in a post QE3 environment will put more pressure on the Federal Reserve to start raising interest rates – an environment of rising rates invariably hurts stocks;
• The S&P 500 is trading at a price-to-earnings ratio of 18.8, versus a historical mean of 15.5. The further we stray from the mean, the more likely we will revert to it.

For 2015, investors in US equities need to be stock pickers – companies with strong domestic earnings growth will probably outperform those with a high percentage of overseas income.

Europe and Japan’s loose monetary policy compared to America’s tightening monetary policy will likely mean that European and Japanese equities will outperform those in the US in 2015, although US dollar investors should hedge against further falls in the Euro and the Yen.

Fast Forward – An Update

Such is the pace of change in our brave new world of technological acceleration, we would like to provide our readers with an update since Fast Forward was published in December 2014. This is the first such update, hopefully of many.

We wrote Fast Forward more as a template or guide to the principal areas in which technology is likely to radically alter our lives, rather than a definitive bible on new technologies. We plan to provide regular updates to our readers, who now number over 100,000, on what is happening right now in the exciting themes covered in our 8 chapters.

Firstly, the book itself; we are gratified with the response to it, which has been featured in major publications such as Money Week, the Financial Times, the Daily Mail, the South China Morning Post and Spreadbet Magazine. A financial institution has bought a large number of copies, and an extract has been distributed to nearly one million people.

In the coming weeks, we will be promoting the book in Asia, and making presentations on the theme of Fast Forward in Europe as well. In some ways, this book is ideal reading for young people who are thinking about their futures; the old professions of doctor, lawyer, accountant and finance are going to be unrecognisable in a few years’ time, and teenagers and young adults need to take account of this in their career choices.

In mid-January, Jim went, as always, to the JP Morgan conference on biotechnology in San Francisco. One of the meetings he had was with Fred Moll, co-founder of Intuitive Surgical (NASDAQ:ISRG), which devised the Da Vinci robot for surgical procedures, now widely used for prostate surgery in the US, and a multibillion dollar corporation. He is now working at a new company, Aurius, which is developing robotic surgical systems that are much smaller, more pliable, and will perform laparoscopic and endoscopic surgeries with greater precision, less risk of perforation and better patient outcomes.

Remaining with the life sciences, it was recently reported that a little girl, Mina, from the UK, had successful open heart surgery, with the surgeon first making a 3D model of her heart to assist in guiding him to correctly position his instruments in what is a very small organ and to improve his chances of success. The process whereby 3D printing techniques are used to produce organs or bones with stem cells mixed into a glue-like scaffold and then implanted into patients is now becoming more common, and recently an entire pelvis was replaced using just such a technique.

Statins have been responsible in the last two decades for a dramatic reduction in deaths from heart disease – down 25% in the UK in the last ten years alone – and are now also thought to have anti-inflammatory properties too, possibly reducing cancer mortality for long term users. Statins, combined with daily aspirin, are one factor that is boosting life expectancies, particularly in the developed world.

It’s not all good news here though; because of lifestyle changes, rising obesity and stress, women’s traditional advantage over men in life expectancy is being eroded fast, and is likely to go entirely within 20 years. One reason, of course, is that men are not subject to brutal manual labour or perpetual wars as in the past, but also it is down to women’s rising smoking rates and increasingly, alcohol abuse.

The goal of universal life expectancy of 120 years that we delineated in Fast Forward has been shown in separate studies to be entirely possible. It does need, however, moderate exercise (leading to the burning of 1000 to 2000 extra calories a week), and less consumption of sugar and salt as key components.

One thing that is difficult to find is a gene that marks out those who are destined for extreme old age and those who will die earlier. So far, research into this so-called longevity gene doesn’t seem to be yielding any results.

Taking rapamycin and resveratrol supplements, both compounds mentioned in our books, do seem to extend life….at least in mice!

During the last couple months, stem cells for pulmonary repair have been shown to repair lungs where distal airways expressing both P6 and KrT 5. This holds out hope for those afflicted with emphysema, pneumonia or COPD (Chronic Obstructive Pulmonary Disease.)

Many readers will have seen the exciting news about a new form of antibiotic, targeted at super-bugs, and derived from soil. This antibiotic (teixobactin), which is still to undergo extensive trials, shows promise in attacking pathogens that have become resistant to conventional antibiotics.

For companies in the life sciences, we like Sangamo (NASDAQ:SGMO) which is a leader in so-called Zinc Finger Nuclease, which along with CRISPRS are a form of genetic scissors. Sangamo really is making big strides in in-vivo genetic alterations focussing on oncology and HIV and it has partnerships with Shire and Biogen.

In other technology news, it has been revealed that a new form of lithium-ion battery that can be recharged to 70% of capacity in two minutes is close to commercialisation. Additionally, the battery life is twenty years, substantially longer than current lithium-ion batteries.

Battery technology is being challenged in transport by hydrogen fuel cells, which Toyota is championing with its new Mirai hydrogen powered car. This is selling for less than say, a Tesla, and has a range of 400 miles. A refill takes only two minutes in contrast to an electric vehicle which takes at least 30 minutes. Furthermore, hydrogen cells have zero emissions, whereas electric vehicles that are powered by electricity produced in coal-fired plants are 3 times more polluting over their lifetime than a conventional fossil fuel powered car.

Uber continues to grab headlines in the taxi business and is now adopting a new cuddly cooperative image, lest its most recent (and ridiculous) valuation of US$40 billion be eroded. But transport apps, which are a precursor to full-on driverless taxi services are potentially commoditised businesses. Grab Taxi, based in Malaysia, and with about 500,000 users in South East Asia, recently secured an investment of US$250 million from Soft Bank of Japan.

In the meantime, driverless cars get ever closer. They are likely to be licenced for general use in California in 2017, and already many safety features in conventional cars, such as auto-parking systems, and distance sensors are effectively rendering the human driver partly redundant.

In this area, we like Sunny Optical from Hong Kong which is the leader in micro sensors in cars. Also, Alps and Denso of Japan are key component makers for the automation of cars, and are both portfolio buys.

More prosaically, researchers at the University of Bath have developed a self-healing concrete that will prevent the all too familiar scourge of potholes in roads!

In the Internet of Things, watch out for French company Sigfox, which may well go public soon. Sigfox has developed a low cost unlicensed radio spectrum network for connecting objects with each other using tiny transistors. Sigfox now covers almost all of Europe and is moving into the US and sells licences to large companies (initially security companies to connect cameras) as a means of establishing its early business model.

On a more sinister note, Russia is deploying military robots in the field, offsetting the good done by Microsoft which has come out with Holosoft, part of its new Windows 10 operating system, and a worthy competitor in the virtual reality arms race to Facebook’s Oculus Rift.

Various luminaries, including Stephen Hawking and Elon Musk have come out to warn of the perils of unimpeded development of Artificial Intelligence. Their vision of sociopathic robots displacing humans is familiar and was covered in Fast Froward, but the debate is much higher profile than just a few weeks ago. Indeed, Oxford University recently said that 47% of US jobs will be lost to robots or automation in the next twenty years, and China in 2014 became the world’s biggest buyer of robots, snapping up 36,000 of them.

Is humanity imperilled? Absolutely not. And if you haven’t read Fast Forward yet, please do so for the optimistic take on why not.

P.S. Experience Jim Mellon live at the Master Investor show in London on 25th April 2015. This is your chance to hear Jim’s latest thoughts and ideas, ask him questions, and see many other world-class speakers, including Merryn Somerset-Webb from MoneyWeek, the legendary short seller Evil Knievil, and UKIP leader Nigel Farage. 

For a limited time only we can offer you up to two tickets for the show for free (retail value GBP 20 / each). Given our exciting line-up of speakers, pre-event ticket bookings of over 2,500 and a few other surprises to be revealed over the coming months, this will be the biggest and best Master Investor conference in its 13 year history. Don’t miss it!

CLICK HERE to book your ticket using promo code FF2015

P.P.S. Fast Forward: The Technologies and Companies Shaping Our Future is now available in bookshops in the UK and Hong Kong, as well as online at www.fastforwardbook.com and Amazon (UK & US).