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Investing in the Rise of the New Spending Class

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Investing in the Rise of the New Spending Class

Investing in the Rise of the New Spending Class

It’s no secret that the world has been a little down on China.

The world’s most populous country has been the primary engine of economic growth for decades, but recently investor optimism around China has diminished significantly. With a sliding manufacturing sector and lower GDP growth, most mainstream pundits have shifted focus to whether the country will have a “soft” or a “hard” landing.

Ever the contrarian, investor and author Gianni Kovacevic is not one to buy into this Kool Aid.

In his new book “My Electrician Drives a Porsche?”, Kovacevic examines the fundamentals around China and other emerging markets to create perspective on the newest and fastest-growing generation of consumers. Using an allegorical conversation between a doctor and his Porsche-driving electrician, the impact and ripple effects of this new “spending class” are described, affecting everything from the economy to the environment.

We thought the book had some great statistics on emerging markets, and that the easy-to-follow conversation was an effective way at introducing the contrarian way of thinking. Further, the book also outlines an interesting track on how to invest in green energy specifically.

Key Themes

Today’s infographic pulls some of the themes from this book to show who makes up the new spending class, and why their inevitable rise will translate to a blossoming green energy sector. There is much more meat to the book and to avoid spoilers, we’ve left out Kovacevic’s ultimate investment conclusion.

However, here are some of the points that we thought were most compelling:

Millennials

Millennials get a lot of media coverage in the United States. There’s 87 million of them and they have already had a profound impact on the economy. That said, it is incredible to think that the same generation in China is nearly 5x as big with 415 million people. This cohort of millennials (16-35 years old) in China is larger than the entire working populations of the U.S., Canada, and Western Europe combined.

Millennials in China and other emerging markets are nothing like previous generations. For example, in China, millennials have already earned 107 million college degrees, while all other previous generations have combined for a grand total of only 14 million. Newly educated and aware of the modern world through technology, China’s millennials do not want to work in factories or fields.

Spending Class Potential

China’s spectacular growth isn’t coming to an end anytime soon. The country is in 74th place worldwide in GDP per capita with $8,280. This is compared to neighboring countries such as Japan and South Korea, which have amounts closer to $30,000 per capita.

Only 22% of the Chinese population has drivers licenses, yet the country is already the largest auto market in the world with close to 25 million cars sold per year. Imagine how many refrigerators, air conditioners, and other basic comfort products the spending class will be buying over the coming years as their disposable income rises.

Energy

The common denominator of these goods is that they all take significant amounts of raw materials and energy to manufacture. Most of these goods, such as refrigerators or air conditions, require great amounts of energy to constantly power as well.

Today, the average person in China uses less than 30% of the energy used each year by an American. As 400 million people buy these essential goods of human progress and comfort, the energy draw will rise rapidly. Where will this energy come from?

Certainly all power sources will be a part of this energy mix going forward, but China is leaning green the most. Air pollution is so bad in China that it is commonly referred to as the “Airpocalypse”. It’s estimated that pollution kills 4,000 people per day in China, and green energy will help combat this problem.

That’s why China is building 1,000 GW of green energy capacity between 2014 and 2030, which is the equivalent of 90% of the entire current U.S. energy grid.

Tesla Tour

To amplify the message of the book, Gianni Kovacevic is embarking on “The Realistic Environmentalist Tesla Tour” to 32 official cities in North America. This one-of-a-kind, zero emissions book tour will be facilitated by driving a Tesla Model S from Toronto to California. The objective is to enlighten millions of people by illustrating what makes green energy and human progress factually possible while debunking common myths from the validity of electric cars to the future of energy.

Here’s more on the Tesla Tour in his own words:

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Green

Visualized: The Power of a Sustainable Investment Dollar

Do sustainable investments make a difference? From carbon emissions to board diversity, we break down their impact across three industries.

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Sustainable Investment

Visualizing the Power of a Sustainable Investment Dollar

Sustainable investments are booming.

Between January and November 2020 alone, investments in sustainable ETF and mutual funds grew 96%. The UN Principles of Responsible Investment now has over 3,000 signatories representing over $100 trillion in assets. The U.S. Commodity Futures Trading Commission established a Climate Risk Unit to analyze climate risk across derivative markets, and as of March 2021, new sustainability disclosures have come into effect in Europe.

But how do we know if sustainable investments have made a difference?

To answer this question, the above infographic from MSCI examines the effect of a sustainable investment dollar by looking at real-world examples.

A Sustainable vs. Unsustainable Dollar

To start, investing legend Benjamin Graham has compared the stock market to a “voting machine.” Just as consumers vote with their purchasing decisions, investors vote with their investment dollars. Especially in the short term, as more dollars flow to sustainable companies, this builds their exposure and access to capital.

In the long term, meanwhile, the market can be compared to a weighing machine. The market recognizes companies with profitable business models that improve their intrinsic value over time. Ultimately, this allows sustainable companies to expand and continue operating.

Given the rising momentum in both green assets and climate targets, here is how investment dollars have influenced and driven change across three industries.

1. Clean Energy vs. Fossil Fuel

Over the last several years, the energy sector has been associated with many of the problems causing climate change. For this reason, many investors are seeking out greener energy alternatives. But how does moving investment dollars from an ESG laggard to an ESG leader support the environment and society?

First, here is a brief explainer of ESG laggards and leaders:

  • ESG laggards: companies with the weakest environmental, social, and governance (ESG) performance in their sector.
  • ESG leaders: companies with the strongest environmental, social, and governance (ESG) performance in their sector.
Industry laggard: U.S. oil & gas companyIndustry leader: U.S. utilities company
Scale of carbon-intensive business lines equal to 73% of its operation47% lower CO2 emissions than the industry average
This is the equivalent of adding 26 million cars on the road annuallyThis is the equivalent of removing 9.9 million cars off the road annually
1 of 20 oil and gas companies are responsible for contributing to one third of GHG emissions since 1965Uses 3X as many renewable sources than industry average
3X fewer jobs are created vs. energy efficient sector, resulting in lower productivityThis is roughly the same as saving over 9 million pounds of coal burned
MSCI ESG Rating: CCCMSCI ESG Rating: AAA

Source: MSCI ESG Research

Based on the above example, investors have the ability to finance powerful green initiatives that reduce emissions by almost half, relative to their peers.

2. Safe vs. Unsafe Working Conditions

Weak safety protocols are a key sustainability issue for the industrial sector. Here’s how two companies compare:

Industry laggard: South African mining companyIndustry leader: U.S. mining company
11 fatalities in 2019Zero fatalities in 2019
Faced lawsuits from miners surrounding lung diseases contracted from dust exposure in gold mines
Settlement cost: $350 million
Board-level oversight monitors health and safety performance
Lags behind peers in high incident ratesLeads peers in low incident rates
Lags behind peers in setting incident reduction targetsLeads industry in lost time incident rate & total recordable injury rate
MSCI ESG Rating: CCCMSCI ESG Rating: A

Source: MSCI ESG Research

Despite the risks involved in the sector, investors can choose to support companies that take greater precautions to protect their workers.

3. Building Trust vs. Losing Trust

Over the last several years, the financial sector has faced increased scrutiny over fraudulent activities. Moving investment dollars from an ESG laggard to ESG leader may make a difference:

Industry laggard: U.S. bankIndustry leader: Dutch bank
$3 billion settlement in creating fictitious accounts to meet aggressive sales targetsSustainable finance portfolio valued at over $20 billion
Drop in top-tier bank ratings13% annual increase in climate finance
Board effectiveness questionedIncludes over 60 green loans, mobilizing environmentally friendly projects
Resignation of board membersOver 55% of board is female
MSCI ESG Rating: CCCMSCI ESG Rating: A

Source: MSCI ESG Research

From board diversity to green loans, a sustainable investment dollar supports companies that are actively advancing society and the environment.

Sustainable Investment: The Time to Act

Recently, investor dollars and shareholder activism have been closely linked.

Between 2018 and 2020, large institutional investors filed 217 shareholder proposals on climate change alone, putting increased pressure on companies. Meanwhile, 270 proposals were filed on corporate political activity and 228 on fair labor and equal employment opportunity over the same timeframe. Across all ESG proposals, $2 trillion in assets were pushing for more equitable corporate action.

Through the power of a dollar, investors can send a clear signal to companies: the time for sustainable investing is now.

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Debt

Visualizing the Snowball of Government Debt

After an unprecedented borrowing spree in response to COVID-19, what does government debt look like around the world?

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Visualizing the Snowball of Government Debt in 2021

As we approach the second half of 2021, many countries around the world are beginning to relax their COVID-19 restrictions.

And while this signals a return to normalcy for much of the global economy, there’s one subject that’s likely to remain controversial: government debt.

To see how each country is faring in the aftermath of an unprecedented global borrowing spree, this graphic from HowMuch.net visualizes debt-to-GDP ratios using April 2021 data from the International Monetary Fund (IMF).

Ranking the Top 10 in Government Debt

Government debt is often analyzed through the debt-to-GDP metric because it contextualizes an otherwise massive number.

Take for example the U.S. national debt, which currently sits at over $27 trillion. In isolation this figure sounds daunting, but when expressed as a % of U.S. GDP, it works out to a more relatable 133%. This format also allows us to make a better comparison between countries, especially when their economies differ in size.

With that being said, here are the top 10 countries in terms of debt-to-GDP. For further context, we’ve included their 2019 and 2020 values as well.

Rank (2021)CountryDebt-to-GDP (2019)Debt-to-GDP (2020)Debt-to-GDP (April 2021)
#1🇯🇵 Japan235%256%257%
#2🇸🇩 Sudan200%262%212%
#3🇬🇷 Greece185%213%210%
#4🇪🇷 Eritrea189%185%176%
#5🇸🇷 Suriname93%166%157%
#6🇮🇹 Italy135%156%157%
#7🇧🇧 Barbados127%149%143%
#8🇲🇻 Maldives78%143%140%
#9🇨🇻 Cape Verde125%139%138%
#10🇧🇿 Belize98%127%135%

Source: IMF

Japan tops the list with a ratio of 257%, though this isn’t really a surprise—the country’s debt-to-GDP ratio first surpassed 100% in the 1990s, and in 2010, it became the first advanced economy to reach 200%.

Such significant debt burdens are the result of non-traditional monetary policies, many of which were first implemented by Japan, then adopted by others. In the late 1990s, for instance, the Bank of Japan (BoJ) set interest rates at 0% to counter deflation and promote economic growth.

This low cost of borrowing enables businesses and governments to accumulate debt much more freely, and has seen widespread use among other developed nations post-2008.

What are the Risks?

Given that a majority of countries in this visual are red (meaning their debt-to-GDP ratios are over 50%), it’s safe to say that government borrowing is common practice.

But are large government debts a cause for concern?

Some believe that excessive borrowing will lead to higher interest costs in the long run, which could detract from economic growth and public sector investment. This theory is unlikely to become a reality anytime soon, however.

A recent report by RBC Wealth Management reported that the cost of servicing U.S. federal debt actually decreased in 2020, thanks to the low borrowing costs mentioned previously.

Perhaps a more prescient question would be: how long can the world’s central banks keep interest rates at near-zero levels?

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