Al Bawaba

Burkhard P. Varnholt, Chief Investment Officer of Bank Sarasin & Co.

A new world order is emerging. It is a powerful development that will be full of surprises – some profoundly positive, others stunningly negative. In the current issue of “Perspectives”, Burkhard P. Varnholt, Chief Investment Officer of Bank Sarasin & Co. Ltd examines the non-linear, interconnected forces – economic, political, demographic and scientific – that together pose the greatest historical theme of our time. One of the most important themes of the emerging world order is the principle of sustainable development and sustainable investing: embracing this trend will be one of the best investment decisions to take in 2012. 

There are at least five key drivers behind the emerging world order: i) the recent explosive population growth, ii) the change in the demographic and public health profiles of both the developed nations (ageing populations with low growth) and emerging nations (young and healthy populations with moderate growth), iii) accelerating technological and scientific innovation, iv) increasing resource scarcity or degradation and v) unprecedented connectivity. Radical change of such historic proportions doesn’t happen without friction. Resource shortages, new competitors or the quest for political influence will be sources of conflict. The emerging world order will challenge investors seeking to preserve purchasing power because it will affect all asset classes: cash, stocks, property and commodities. 

Resource shortages will spur innovation although commodity prices will still rise

Shortages in resources such as power, fuel and water will spur research and innovation that will ultimately end our addiction to fossil energy. Only sustainable solutions can fix these global challenges. Therefore, investors should beware of firms cutting corners or understating the environmental risks to their business. Instead, enormous rewards will go to companies who can turn resource shortages into sustainable business opportunities. In the meantime, investors should expect prices of almost all scarce commodities to move upwards. On a five-year horizon, a diversified basket of scarce commodities will nominally double in most currencies. 

Burkhard P. Varnholt, Chief Investment Officer of Bank Sarasin & Co. Ltd: “Investors often ask me if the current decade will belong to China, India or Brazil. My answer to this question is that this decade will favour the power of ideas more than the power of individual countries. The concept of sustainable development touches every corner of the globe. Whether a company, a country or region will rise or decline depends on whether they – their staff or their citizens – understand and embrace the idea of sustainability, be it on a political, social or business level.” 

Democracy is losing its sparkle; liberal pluralism on the rise

Within the global investment community it has become fashionable to oversimplify the theme of the changing world order with slogans such as “the emerging BRIC states”, or “the rise of the East and the decline of the West”. While these catch-phrases appeal to some, they can be misleading. It is clear that the West’s model of parliamentary democracy has lost much of its luster thanks to political short-termism, the power of special interest groups and a widespread loss of fiscal discipline. Many emerging countries are looking for a new political model to adopt: some through popular uprisings and others through a demand for more personal and entrepreneurial freedoms. These states will try to avoid some of the West’s weaknesses. Liberal pluralism seems to be on the rise and may catch on across Asia, in Africa, and possible even in Russia. Many consider it better able to deliver more sustainable government policies. Meanwhile, the western democracies will struggle to restore a fiscal sustainability. 

The new world order makes sustainable analysis crucial

In its simplest form, sustainable behaviour can be described in three dimensions – sometimes called the “triple bottom line”: i) the economic, ii) the social and iii) the environmental dimension. A fast-growing number of companies and countries are facing structural tipping points in one or all of these three dimensions. No company and no government is rich enough to ignore the risk of an unsustainable business or political model. This means that they cannot live beyond their economic means indefinitely, just as, given that society is too populated and too connected, it can’t turn a blind eye to the social impact of its activities. And nor can a country or a company ignore the importance of environmental risks. The investment corollary of this is to build a more holistic framework for sustainable investment analysis. Sustainable investment analysis is more relevant than ever. 

Long term consequences for investors

Firstly, sustainable investment analysis is the only way to locate assets with higher valuations. The emergence of a new world order has forced investors to be much more critical of unsustainable corporate attitudes. A larger world population, more integrated financial markets, greater reliance on limited resources and higher connectivity reduce global risk tolerance in many ways. Lower valuations are arguably a direct reflection of this feature. During the past decade a global sustainable equity portfolio doubled in value, while the MSCI World Index stagnated. Companies with sustainable business models are usual higher valued and thus face lower costs of capital. 

Secondly, today’s gloom about the health of the world economy seems wildly exaggerated and off the mark. Investors should take much more confidence in the flexibility and adaptability of an increasing number of free and aspiring economies. Even today’s awesome resource bottleneck will inspire new thinking, new technologies and new processes. Investors should embrace the change caused by the emergence of a new world order and make the most of the many themes underlying this megatrend.