One could pick any number of trends, themes or sectors to pinpoint opportunities for the long-term, but Jan Luthman, co-head of UK equities at Liontrust, has opted for pharmaceuticals, resources and, his favourite, the long-term global readjustment of currencies and wages.
Pharmaceuticals
Speaking at the Morningstar Investment Conference in London, Luthman kicks off with pharmaceuticals. A theme that plays into the hands of population change and industry transformation.
Luthman compares the pharma industry to the tobacco industry, noting tobacco companies' hugely strong performance over the past 20 years. Tobacco firms were focused on mature markets, there was lots of litigation and political interference in the industry, and no pricing power. Just as the tobacco industry reorientated itself towards emerging markets, the pharma industry is doing the same currently; just as tobacco firms dealt with the challenge of regulation, pharma is addressing the huge financial burden and risk of research and developments but sharing that risk in form of partnerships.
Luthman thinks the pharma industry will replicate the returns of the tobacco industry over the past two decades, and even outperform it. One can't underestimate the transformational impact of a change in investor perception, he says.
Pushed for a particular name, Luthman says GlaxoSmithKline (GSK) is probably his favourite in the sector.
Resources
Luthman's story surrounding resources--raw materials and energy--is centred on the real asset value at a time of currency debasement; demand based on the need for fast-developing economies to build out infrastructure; and societies and individuals perception of natural resources companies.
The latter, emotive factor is likely to play out in such a way that companies that avoid doing business in ethically contentious regions will be favoured, Luthman believes. The industry may see an increasing use of 'arm's-length partners' or deals in which resources are swapped for royalties streams.
As the risks to companies associated with unethical dealing increase, as governments crack down, and the social perception of such resource-based businesses develops, Luthman expects to see premium valuations emerge on companies that avoid business in the contentious areas. Institutional sensitivity will bring these premiums about, he believes.
Global Readjustment of Currency and Wages
The third and final theme highlighted by Luthman today was that of a globalising and world, in which economies will need to move to some sort of cost parity, in Luthman's eyes. He notes that we, or the US, berate China for supposed manipulation of their currency, allowing renminbi to appreciate, but we're all human and every single one of us likes wage increases and dislikes wage decreases, Luthman says.
China's latest 5-year plan outlines a clear commitment to expanding domestic consumption, a key element of which will be sustained wage increases (13% each year, for 5 years). With consumers' earnings rising 13% year-on-year and savings falling (and spending rising) year-on-year, it makes sense for us as investors to tap into this, via companies such as Reckitt Benckiser, Unilever, Heinz, Pepsi, Kimberley-Clark, Luthman names a few, particularly given that they're earning in a currency that's appreciating against sterling.
