Towers Watson has produced a thematic-based secular outlook designed to set out its Global Investment Committee’s (GIC) long-run expectations for global economic growth. The publication, entitled Secular Outlook 2013, expounds the merits of thematic investment relative to more traditional asset class-based investment frameworks and provides a new perspective on generating return and understanding risk. In addition, it encourages institutional investors to better exploit what should be one of their main competitive advantage: the length of their time horizon.
Robert Brown, chairman of the Global Investment Committee at Towers Watson, said: “We believe institutions with long time horizons have little choice but to try to gauge how global growth rates will evolve over longer periods so they can continually adapt in an increasingly transformative world. Consequently those societies, economies and businesses able to manage and adjust to this transformation will be most likely to outperform those that do not; and we suggest the best way of realising this competitive advantage is to overlay quantitative estimates with rigorous thematic analysis.”
Towers Watson’s secular outlook builds on its recent sustainability research entitled We need a bigger boat, in which the company’s Thinking Ahead Group (TAG) identified six mega-trends that it believes will influence economies and markets during the longer term: economic imbalances, adverse demography, degradation of natural capital, innovation and technology, business connections and government. The new publication expands on the collective impact of these themes in the next decade and beyond and includes:
- Developed world growth is likely to be below its long-term trend. Weak demographics, deleveraging and the resolution of inter-generational inequity are likely to be significant drags in some nations.
- While growth in the developing world is likely to be higher, significant headwinds need to be accounted for. This includes the need to rebalance sources of growth, and constraints due to resource scarcity.
- Overall, a more volatile socio-economic environment is likely to materialize. Competition for scarce resources, the impact of new technologies, rising intra-country inequality etc. all contribute to significant social, political and economic change which are likely to lead to more volatile economic outcomes and asset returns.
Tim Hodgson, head of TAG at Towers Watson, said: “We believe that a robust understanding of secular growth dynamics is critical to any long-term investor as the process of building those forecasts and understanding the variability around them is a powerful tool in understanding plausible paths for global growth looking forward. We also think that mega trends and their impact should play a greater role in portfolio construction to exploit thematic “winners” or “losers”; but how to achieve this in practice is a real challenge.”
In order to capture the influence of historical variables on future long-term economic growth and better influence portfolio construction, Towers Watson has constructed a Secular Growth Index (SGI). It is designed to more accurately forecast growth globally by including long-term themes that are expected to fundamentally alter the way economies grow. The company believes that the world is experiencing an extended period of transformative change and that any reasonable investigation of long-term future economic growth should include sustainability themes such as aging populations, new technologies and climate change.
The set of variables were selected based on their ability to influence two factors: future competitiveness and debt-cycle dynamics, both of which the company believes to be key drivers of relative growth over the long run. The index, which covers 25 countries, was constructed using estimate “baseline forecasts” which are qualitatively adjusted based on Towers Watson’s assessment of the key thematic influences on an economy’s growth prospects. Towers Watson will use the index to complement its other economics and capital markets models in the production of its Global Investment Committee’s forecasts.
Robert Brown said: “We believe this thematically enhanced growth forecasting is the best blend of quantitative rigour and qualitative judgement and is a sounder way of producing long-year projections. Forward-looking themes are, of course, impossible to capture through a purely statistical approach that relies on historical data; thus we consider a qualitative overlay to be critical.”
Towers Watson warns that its SGI does not produce precise answers and that many plausible growth outcomes can arise from it. The example in figure 1, using the US and China, demonstrates this through the ranges for both future growth and the likely impact on growth of key thematic influences.
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