Future shock

I don’t want to get bogged down in a theoretical argument about whether the next decade starts at the end of this month or in a year’s time. Technically, I suspect it’s 12 months hence, but I don’t expect that to stand in the way of a deluge of ‘the world in 2030’ prognostications between now and the New Year. We love a round number and the fact is that, for most people, the 2020s start here.

Perhaps uncoincidentally, it is also the 50th anniversary next year of the publication of a book which had a profound impact on me many years ago, Alvin Toffler’s Future Shock. In 1970, the American futurologist caused a big splash with his predictions about the psychological disorientation he expected to be caused by an unprecedented period of rapid technological change.

He defined Future Shock as the personal perception of ‘too much change in too short a period of time’, coined the term ‘information overload’ and sold 6 million copies of his book. Like all futurology, it got the details a bit wrong, but Toffler understood the general direction of travel and the mental discombobulation this would cause humanity. He realised that rapid change is stressful for a species whose brains developed in a world that didn’t alter much for millennia at a time until the advent of what he called the industrial and post-industrial eras.

Some of his predictions now seem prescient, if quaintly obvious from our standpoint. For example, his suggestion that a second generation of computers would appear before the end of the expected period of usability of the first generation. He foresaw, the growth of transience as workers’ knowledge and skills are rapidly rendered obsolete by change and the rise of mass migration. Interestingly, he saw this as a search for work rather than a consequence of climate change, which shows that crystal ball gazers (including investors) can sometimes get the right answer by asking the wrong question.

Predictions about the future tend to come in two flavours. The first identifies unstoppable forces and follows them through to their logical conclusion. These tend to focus on demographics and are the more reliable forecasts. The second type extrapolates a recent trend into the future and suffers from humans’ recency bias, overstating the importance of what’s just happened. This is where futurology often gets it wrong - the popular 1989 prediction that the Japanese would dominate the global economy is a good example.

An interesting note from Bank of America Merrill Lynch crossed my desk this week. Transforming World: the 2020s picks 10 themes for the next 10 years, most of which fall into these two categories of forecast. Two ‘inevitables’ relate to the world’s ageing population and climate change and are uncontroversial if impressively backed by powerful statistics. I didn’t know, for example, that as soon as next year the number of people over 65 will exceed children under 5. Or that by 2030 eight out of ten people in the global middle class will live outside Europe and the US.

The more interesting predictions from an investment perspective are the ones that count on a continuation of recent trends. Because of the binary nature of these forecasts, a great deal of money will be won or lost on whether they turn out to be correct. The ‘probables’ and ‘possibles’ that complete the top ten fall into this category.

I would further group these forecasts into three categories of descending certainty:

  • Technological change. Bank of America rightly expects a rapid growth in connectivity. There are an estimated 30 billion connected devices today. There will be perhaps 500 billion in ten years’ time. If, as forecast, we interact with an online device every 18 seconds by the mid-2020s, rather than every 6.5 minutes today we will have taken a scary step closer to the fusion of man and machine. Privacy and individual freedom are the price we will pay for the perhaps illusory benefits of this connected world.
  • Peak globalisation. The next decade is likely to see a sharp reduction in free movement of people, goods and capital. This will have profound implications for financial markets and could mark a turning point in the relative valuation of global financial assets like large-cap growth shares versus local, real assets like commodities and farmland. The rise of populism is also probably inflationary, although the prioritisation of labour over capital will be offset to a large degree by the rise of robotics and automation - perhaps half of all jobs might be replaced by machines in the next 10 to 15 years. Another likely symptom of peak globalisation is a division of the internet into two competing online domains, dominated by the US and China respectively. Again, this has investment implications, probably favouring Asian and emerging markets over the US and the rest of the developed world.
  • The post-post-crisis era. This is where the forecasts become less obvious because how financial markets react to the changing world is unpredictable, dependent to a large degree on how much of that change has already been priced in. It is fair to forecast that at some point in the next ten years the slow, steady recovery of the last ten years will reverse into recession, but no-one knows when. It is a safe prediction that fiscal stimulus will be required when that happens because monetary policy has run its course and central banks are out of ammunition. Again, this has inflationary implications. It is also a reasonable assumption that the rapid growth in what the bank calls ‘moral capitalism’ is not a flash in the pan and that sustainable investment strategies could be a key theme of the 2020s.

When we don’t even know who the UK Prime Minister will be at the end of next week, it might seem reckless to try and picture the world in ten years’ time. Today’s future shocks are likely to be a lot more important for our investments than who wins the election.

Tom Stevenson is an investment director at Fidelity International. The views are his own. He tweets at @tomstevenson63.