Across my desk last week came US Trust’s 2015 Investment Strategy Overview, a 40-page publication laying out their view of the year ahead for investors, including their highlights and overall perspective as well as a global macro overview, their views on specific asset classes including “alternative” assets, an investment themes update, and their sector allocation rationale. I won’t belabor all of it by any means (you can find the Executive Summary here), but throughout it is a model of thoughtfulness, nuance, and above all a quality sorely lacking in so much of what passes for public analysis, namely perspective and context.
We all know (I hope) and some of us occasionally acknowledge, that macroeconomic demand for sophisticated legal services is not anything Law Land can really influence. We don’t drive corporations to do M&A deals because out latest acquisition agreement goes from 0—60 in 4.3 seconds; we don’t incite regulators to investigate our clients (now there’s an idea!); we don’t come up with novel patent-worthy inventions; and we don’t lay the factual predicate for litigation. That’s why it’s worth paying attention every once in awhile to informed opinion on macroeconomic growth trends.
Here are some of US Trust’s key thoughts and observations:
- The US will remain “the key engine of world growth.”
- Volatility in the developing world will increase.
- The cumulative impact of two decades of technological progress will begin to be realized in the real economy; 20 years ago, for “perspective,” PC’s were just beginning to appear in numbers, wifi didn’t exist, printing was 1-D, mapping a genome took years and countless millions of dollars, cellphones needed a base station in the trunk of your car, and the word “cloud” was only used by small children and weathermen on the local news.
- The US and the UK have emerged from the post-GFC “repair” period and appear poised to enter a longer than normal upward business cycle:
- Capital is still remarkably cheap;
- Inflation poses no foreseeable threat;
- Private sector balance sheets have been restored to health;
- And, shockingly, the US is back in a position of manufacturing strength and energy independence.
This is not to gainsay challenges and profound unmet needs, including high-quality and affordable healthcare and educational systems, structural unemployment, climate change, income inequality, and terrorism and geopolitical risk. But some of those actually pose opportunities for economic growth on their own terms, if they’re to be solved or even addressed.
What about the alleged soon-to-be #1 economy in the world? Isn’t China slowing? “Our take: Fear not slower growth in China. Investors should pay more attention to the trend lines than the headlines.”
US Trust sees China’s economic transformation of the past 30+ years “entering a new phase,” moving from exports and capital investment to personal consumption and service sector growth. Yes, this will “produce hiccups along the way and trigger fears,” but growth itself will proceed apace, as the private sector’s share of GDP continues to grow at the expense of the public sector’s. A few data points:
- In 1978 state-owned firms produced 78% of industrial output; by 2011 it was cut in a third, down to 26%;
- By 2008, 80% of Chinese retailers were in private hands;
- Including workers in state-owned firms, total public-sector employment in China was 11% of the “economically active” population, vs. 15% in the US, 14% in Germany, and 24% in France.
This brings us to the EU, and here, unfortunately, there’s no question that the EU constitutes “the main drag on global growth,” and will remain in gloom as far as the eye can see. I have no desire to depress my readers, but three themes (not from US Trust, from yours truly) might well encapsulate the Continental European dilemma:
- An excess of central control but a shortage of federalism;
- Baked-in and strongly negative demographics; and
- A certain cultural brittleness.
Think this is all quite lovely, but a bit academic?
Actually, at least one Big Law Heavyweight seems to have adopted the same perspective as US Trust. Did you notice what Matthew Layton’s announcement this week of Clifford Chance’s new international strategy studiously omitted to discuss? It was premised on the two indispensable, and complementary, pillars of aiming to become “the global law firm of choice for the world’s leading businesses,” and of seriously pursuing more flexible models of service and of work, building on smarter and more pervasive use of technology and its “Continuous Improvement Program.”
Articulated financial targets are to increase the share of total firm revenue derived from the US from 11% to about 20%, and the Asia-Pacific share from 14% to 20—25%, all within the next five years.
As for the EU? The studiously diplomatic phrase is “maintaining position.”
Maybe the US Trust report crossed Matthew’s desk as well.