It has always been entertaining to read predictions that fail the test of time. In 1865, as engineers were racing to develop the telephone, an American editor sniffed: “Well-informed people know that it is impossible to transmit the human voice over wires . . . and that, were it possible to do so, the thing would be of no practical value.”
A more recent favourite is the 2007 interview with Steve Ballmer, then chief executive of Microsoft, in which he confidently declared: “There’s no chance that the iPhone is going to get any significant market share. No chance.” About one in five smartphones sold globally is now an iPhone.
Fun to gloat, perhaps, but less entertaining to have money resting on your own predictions. Unfortunately, investing requires you to do just that. You cannot avoid having to make forecasts. If you own a share today then you must believe that it will be worth more in future.
Maybe you think the company has a product that will enjoy growing sales. Maybe you think the share price does not reflect current profits. Maybe you believe you are on to something early and that you will offload your stock once the herd belatedly piles in.
Some predictions depend on so many moving parts that you can be wrong even if you are right. Pity the investor who backed 50-year inflation-linked gilts at the beginning of this year in the belief that the market was underestimating the trend for RPI inflation.
They were right. At that time RPI was expected to peak in April 2022 at 8.6 per cent. In the event, it hit 11.1 per cent and Citigroup economists now expect it to peak in January at 18.6 per cent. But they failed to account for the response of central banks in raising interest rates and the impact of that on long-duration fixed interest assets. The value of their investment has nearly halved in just eight months.
While predictions cannot be avoided, it seems odd how much money is invested in areas where there is a history of forecasts being wildly wrong. Think inflation, the number of months before the next credit crisis, how long a war will last or who will be the next UK prime minister (and what they will do).
However, there are some predictions that can be made with considerable confidence. Among these are demographic trends, the move towards power with lower carbon emissions and increased automation of manufacturing. Timing can often prove tricky, but the direction of travel here is pretty certain.
Let’s take demographic trends. One prediction seems inescapable: the world’s population will age. The World Health Organisation (WHO) expects the proportion of the world’s population aged over 60 to double by 2050 — from 12 to 22 per cent (it is already over 30 per cent in Japan). That’s 2.1bn people — up from just 1bn in 2020. In the UK the Office for National Statistics estimates there are likely to be an additional 8.5mn people aged 65 and over.
The irony of investors exploiting the opportunities this creates to fund their own pensions is not lost on me. We have been waiting for some time to buy a hearing aid maker at a reasonable price. Hearing aids used to be rather basic small loudspeakers that would amplify all sounds and blast them into your ear. Digital hearing aids are tuned to each person’s weaker frequencies and increasingly focused to enhance the sound from the direction in which you are looking and reduce background noise.
Wearing a hearing aid is generally something you do reluctantly. The more advanced digital aids are expensive, but they are smaller and less noticeable than the older models.
Demand for them is likely to rise — and for some time. The WHO estimates that more than 1bn young people are at risk of avoidable hearing loss due to unsafe listening practices. This must include all those commuters listening to music turned up loud enough to hear against the background clatter of the train.
The trend will result in an even larger market for hearing aids as these working generations age. On top of that, adoption in many emerging markets is starting from very low levels.
Sonova is the Swiss-based global leader in this area. Like many “quality growth” companies, its valuation soared a couple of years ago, with the price/earnings ratio approaching 45x at one point. The shares have fallen recently as consumers delayed purchases and the company has, like many others, seen input costs inflate.
The shares now trade closer to their long-term p/e multiple of 25x. For some this will still look pricey, but this company’s long-term prospects suggest the valuation is worth paying.
Similarly, we have recently added a Japanese eyeglass maker to our portfolios. Hoya is a world leader in producing eyeglasses, contact lenses, photomasks for semiconductor manufacturing and glass discs for large data storage. All these sectors have long-term growth potential, and Hoya shares — like many Japanese shares — have fallen back in sterling terms this year.
An ageing population supports eyeglass demand. I now seem to carry reading and driving glasses despite having had laser eye surgery 20 years ago. The greater engine of growth is the young — and specifically young people in Asia, where myopia levels have risen astonishingly in the past 50 years.
Studies suggest more than 80 per cent of 20-year-olds in Asia are short-sighted and need glasses — more than twice as many as in Europe. Some believe myopia is associated with greater time spent doing close work such as studying and watching screens; others think the problem is too little time spent outdoors.
The evidence is mixed, but China’s recent crackdown on private tutoring and the video-gaming industry is in part a response to the problem. Whatever the cause, I am daring to predict that demand for glasses will rise.
Lastly, for some of us cycling seems a good way to travel if only if it were not for hills. Electric bikes — including cargo bikes, which carry modest loads — are selling well around the world. Shimano, the Japanese global leader in regular bike brakes and drives, is benefiting from this trend, yet its shares have fallen from Y35,000 to Y25,000 over the past year.
The company is developing more powerful brakes for electric bikes with heavier loads, as well as automatic gears for those who do not want to change gears themselves. Advances in technology sometimes seem more modestly valued in shares listed as “consumer goods” stocks rather than “technology” stocks.
With fuel bills eating into household budgets, consumers may defer buying a new bike — as some have deferred buying an expensive hearing aid. However, a longer-term investor might take advantage of the share price weakness.
Many shares have tumbled further this year and some might prefer to look through the rubble of those fallen stocks for better bargains, in the expectation that economies will rapidly return to modest inflation, interest rate cuts and steady growth.
I do not like to base my investment decisions too heavily on any of those predictions. I prefer very high-quality businesses whose shares have come back to reasonable levels but whose growth can be more reliably predicted. I may be wrong. You can laugh at me later if I am.
Simon Edelsten is co-manager of the Mid Wynd International investment trust and the Artemis Global Select fund.
Source: Economy - ft.com
