The Horasis Global Meeting brought a diverse group of leaders from the worlds of government, business, media and academia to Cascais, Portugal. Princess Martha Louise of Norway, President Hage Geingob of Namibia, President Armen Sarkissian of Armenia and former European Commission Vice Chairman José Manuel Barroso were among the participants, as were former presidents or prime ministers of Sierra Leone, Finland, Romania, and Belgium. With politics seemingly replacing monetary policy and the economy as the biggest “left tail” risk for markets, Horasis sessions were a thought-provoking intersection of politics, policy and markets.
Globalization was the connecting theme for the event, and the diverse group of participants gave fresh perspective to a topic in which logic is often replaced by slogans or emotions. A commonly expressed point of view was that the U.S. may be committed to the “idea” of globalization but is uncomfortable with the reality of it. American dissatisfaction with globalization may be connected to the uncomfortable transition to a world in which the U.S. is no longer the dominant power.
Politicians at Horasis acknowledged that the merits of globalization are often difficult for political leaders to champion. Unfortunately, the benefits of globalization are not always clear, but the costs are often painfully obvious. It is very difficult for politicians who want to be re-elected to be candid with their political base about the inherent conflict between globalization’s winners and losers.
The reality for investors is that the glory days for global trade are likely to remain in the rearview mirror. Consequently, global supply chains and trading relationships may be replaced by more regionally focused arrangements, with smaller Asian countries potential beneficiaries if supply chains relocate from China. American consumers may face higher prices in a less globalized world, though some leaders think that higher consumer prices would be a favorable tradeoff for the return of high-paying manufacturing jobs to the U.S.
Disruption was a common topic in conference sessions and informal discussions throughout the event. A global economy transitioning from manufacturing to services was commonly mentioned as a catalyst for change. Technology disruption compounds the impact, making it possible to increase manufacturing production without adding manufacturing jobs. The replacement of high-paying manufacturing jobs with lower-paying service industry jobs is a major factor contributing to the rise of populist movements in the developed world, as is rising income inequality.
Discussions of blockchain, machine learning and big data were also hot topics throughout the event, with participants sharing a mix of excitement and trepidation about investment and societal implications. As is the case in most events I attend, there was spirited debate about the investment opportunities created by “disrupters” and the risks and opportunities for the ranks of the “disrupted.”
I spoke on a panel focused on alternative investments. Investment opportunities in private real estate, private equity and venture capital were top of mind for panelists and audience participants. Worries about economic growth and risks were also discussed. Private real estate was discussed as a desirable alternative to exchange-traded real estate investment trusts that increasingly trade more like stocks than like real estate. Multifamily residential and industrial real estate were highlighted as segments with strong potential in the private real estate universe.
E-commerce is the demand catalyst for industrial real estate, given the need for strategically located warehouses to serve as distribution hubs. With e-commerce still only 13% of retail sales in the US, industrial real estate may be in the early days of a long-term expansion of demand, while supply is still relatively scarce.
Multifamily housing demand may also be in a positive long-term trend, as high home prices coupled with stricter mortgage lending requirements make affordability and access to homeownership difficult for millennials entering the workforce. Changes in taxation and a shortage of entry level homes are also tailwinds that should support demand for multifamily housing.
There was considerable interest in private equity. Discussion about the “demise” of public companies in the U.S. set the stage for a conversation about the opportunities and risks in private equity. The number of public companies in the U.S. today is about half of the number in 1996. There are more equity market indexes in the U.S. today than there are public companies!
There are multiple factors contributing to the increasing number of companies preferring to be private in the U.S. The Sarbanes-Oxley Act of 2002 increased the burdens associated with being a public company; the JOBS Act of 2012 made it easier to stay private. Venture-backed companies are staying private for much longer. In 2013, the average age of a venture-backed U.S. company going public was seven years; in 2018 the average age was 10 years. Amazon went public with a market capitalization of about $650 million, Google at about $30 billion. Many of today’s IPOs go public at much higher valuations, which may reduce the potential upside for public market participants.
Panel members balanced their enthusiasm for private equity and venture capital by sharing realistic expectations about future growth and risk. Investors interested in private equity and venture capital should also understand that returns between top- and bottom-quartile funds vary far more widely than is the case among public equity and bond funds, which underscores the importance of selectivity in manager selection.
The atmosphere at the event reflected the unease that many participants feel with the apparent turn of the U.S. away from multilateral institutions. European participants were particularly emphatic in making the case for collective action to address challenges that transcend national borders. Climate change, migration, protection of intellectual property, and the uses of gene-editing software were cited as challenges that no single country can solve on its own. In the words of one participant, “global problems require global solutions.”
Daniel S. Kern is chief investment officer of TFC Financial Management, an independent, fee-only financial advisory firm based in Boston.
Prior to joining TFC, Daniel was president and CIO of Advisor Partners. Previously, Daniel was managing director and portfolio manager for Charles Schwab Investment Management, managing asset allocation funds and serving as CFO of the Laudus Funds.
Daniel is a graduate of Brandeis University and earned his MBA in Finance from the University of California, Berkeley. He is a CFA charterholder and a former president of the CFA Society of San Francisco. He also sits on the Board of Trustees for the Green Century Funds.