Equity Advisory


Friday, 2 July 2021

Weekend Reading



1. The coming regime shift towards capital-heavy companies
Investors used to invest in capital-light business models, but now they are flocking towards capital-heavy business models. The trend towards more capital-heavy companies is driven by four structural themes: investment in “reshoring”; a shift from investment in information to infrastructure; the need to develop climate-transition technologies and, finally, investment in technologies needed to secure geopolitical leadership. These all require shifts from investing in ideas and information to investing in stuff. 

Investing in infrastructure, not information, is a theme for governments, companies and investors. The Global Infrastructure Hub estimates global infrastructure needs $94tn of investment over the next 20 years to keep pace with demographics and replacing ageing infrastructure. After decades of neglect, this will boost demand for commodities and capital-heavy companies. The shift towards capex-heavy business models will initially be driven by those sectors that have been starved of capital over the past 20 years as they benefit from reshoring and increased infrastructure spending. However, longer term it could be the nascent technologies required for the climate transition and geopolitical “proxy wars” that deliver increased returns to investors from capital-heavy companies. 

2. How 'Chaos' In The Shipping Industry Is Choking The Economy
In the early days of the pandemic, global trade hit an iceberg and sank into the abyss. Then the economy rebounded, and American consumers unleashed a tidal wave of demand that swept through the shipping industry when they started shifting their spending patterns. Unable to spend money on going out, many started spending their money (and their stimulus checks) on manufactured goods — stuff that largely comes from China on container ships.

At first, it wasn't the ships that were the problem; it was the containers. When the buying spree began, Chinese exporters struggled to get their hands on enough empty boxes, many of which were still stranded in the U.S. because of all the canceled trips at the beginning of the pandemic. More importantly, processing containers here has been taking longer because of all the disruptions and inefficiencies brought about by the pandemic. Containers have been piling up at dockyards, and trains and trucks have struggled to get them out fast enough.

With so much shipping capacity bogged down, importers and exporters have been competing for scarce containers and vessels and bidding up the price of shipping. The cost of shipping a container from China/East Asia to the West Coast has tripled since 2019, according to the Freightos Baltic Index. 

Rising shipping costs and delays are starving the economy of the stuff it needs and contributing to shortages and inflation. It's not just consumers and retailers that are affected: American exporters are complaining that shipping companies are so desperate to get containers back to China quickly that they're making the return trip across the Pacific without waiting to fill up containers with American-made products. 

3. Can literary books predict the next war?
Three years ago, a small group of academics at a German university launched an unprecedented collaboration with the military. The name of the initiative was Project Cassandra: for the next two years, university researchers would use their expertise to help the German defence ministry predict the future.

The academics weren’t AI specialists, or scientists, or political analysts. Instead, the people the colonels had sought out in a stuffy top-floor room were a small team of literary scholars led by Jürgen Wertheimer, a professor of comparative literature.

The group decided instead to focus on what it calls “literary infrastructure”: what happens around the text? How is it being received? “We became interested in what hit a nerve,” Rogge says. “Was a book heaped with awards and state prizes? Or was it banned and the author had to leave the country?”

When Azerbaijan gave anti-Armenian books to Georgian libraries, the project predicted conflict. A year later, war broke out.

4. China tries to take on the US on EV
Fuelled by government largesse, China’s electric-vehicle sector has raced ahead of America’s, sparking fears that the United States has fallen dangerously behind its chief rival in a crucial future industry. China’s “state capitalism” (Beijing prefers “socialism with Chinese characteristics”) is rewriting the rules of how countries and companies compete in the global economy. All governments place their thumb on the scale to favour home grown firms—recall the Obama administration’s bailout of General Motors—but China bends entire markets to a degree unimaginable in the more laissez-faire U.S. By offering funds and protection for nascent, high-tech industries including electric cars, as well as chips, AI, and a host of other futuristic sectors, the Chinese government could potentially swamp the world with subsidized products.

Beijing’s goal is to leapfrog Western powers into the forefront of next-generation technologies, dominance that could hand China’s leaders the political clout to shove the U.S. aside and become the world’s premier superpower. In the process, they would pulverize a key tenet of the American worldview—that free markets and free people are inseparable, and the sole route to national success—and thus legitimize Beijing’s illiberal policies and practices. The contest over electric cars is therefore a proxy war between the West and China, between their economic models and political ideologies.

5. Having a fun portfolio on the side can help you with your long term investment 
One of the reasons 95% of all diets end in failure is it’s impossible to be perfect at all times. That’s why the best diets allow for a cheat day here and there, to let yourself go wild and eat what you want. The same concept applies to portfolio management. Carving out a small piece of your portfolio, call it anywhere from 5% to 20%, offers the ability to cheat on your investment diet.

As long as you have the majority of your portfolio following a long-term plan, you can go nuts in your fun portfolio. You can pick stocks or other speculative investments, time the market, or invest in things you wouldn’t dare put your money in with your non-fun portfolio. Willpower is fleeting because the human brain is like a muscle in many ways: Eventually, it needs to rest. This is why it pays as an investor to automate good decisions ahead of time. The best investment advice the majority of the time is to do nothing and simply follow your long-term investment plan and get out of your own way.

With a small allocation to a fun portfolio, you could test your abilities as an active investor by comparing it with your more boring, low-cost, long-term investments. That way you know whether you’ve got what it takes, or you have a front-row seat to how hard it can be to outperform the market.

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