Go to Tokyo, it’s said, and you’ll visit the future. The sentiment may apply mainly to Japan’s capital’s neon-lit Ginza district, its futuristic fashions or cutting-edge technology, but the future doesn’t look so bright if applied to measures of the Japanese economy, where quarterly gross domestic product, released yesterday, shrank 3.5% on an annualised basis, the weakest result since last year’s devastating Tsunami.
In Europe, where German GDP figures will be released Thursday night – analysts on average believe the powerhouse economy will barely manage growth of 0.1% – the situation looks similarly dire. Greece’s latest austerity budget all but guarantees another year of contraction for Europe’s sickest state, and the pain in Spain, of course, continues to reign.
Notwithstanding growth in China and the United States – something largely dependent upon artificial fiscal and monetary stimulus anyhow – it all begs the question where to put your money in a world lacking aggregate economic expansion, especially in a market where gold and precious metals look overdone and cash is likely to earn ever-diminishing returns.
But it also begs another question: where to invest if this no or low-growth environment is here to stay. Should we continue to embrace the next emerging markets? Institutional investors are now looking to Africa where they once looked at India and China; soon they’ll have to find somewhere undiscovered. Should we chase the next tech stock? With Apple shares down over 20% from their September peak, Wall Street is looking for the next low-hanging fruit; will there be another Facebook? Or should we take up a new paradigm entirely? If we’re facing a post-growth world in economics, should investing be post-growth as well?
Obviously, this holds something of a contradiction – an investment without growth must mean an investment without gain – but just as Japan hasn’t fallen to bits despite a largely static GDP over the past 20 years – on measures like life expectancy, per capita income or housing affordability, things have greatly improved – an investment made without the expectation of growth can still produce a healthy and reliable return.
More to the point however, investing without growth as the sole objective can mean a more holistic focus on other measures, just as post-growth economics shifts the imperative from quantitative expansion to qualitative development. By looking at an investment, such as a share, from the perspective of its leverage, its revenue history or its operating cash flows, one needn’t get caught up in the hype of forward earnings projections that doesn’t just characterise speculative bubbles, but describes the core of mainstream investment thinking.
While we often hear of social and environmental factors expressed as part of a triple-bottom line, they should more appropriately be classed as part of a company’s assets and liabilities, rather than nebulous outputs on a periodic income statement. After all, just as there are sustainable limits to the world’s natural resources, there are sustainable limits to a company’s balance sheet before it becomes overextended. A business’s social, environmental or cultural capital may appear as intangible items in the linearity of current accounting standards, but in a potentially post-growth world these properties deserve further consideration as a post-growth world is likely to price such things.
And correct pricing is what is required. Just as polluters are unlikely to reduce emissions without an imposed cost, investors are unlikely to reward virtue without a tangible reward derived from an agreed valuation. Carbon is the most noticeable market for such environmental assets, but attempts have been made to cost and trade water, bio-diversity and even cultural heritage. We all know, for instance, that clean lakes, healthy forests and historical beauty are valuable things, yet while pricing these may seem distasteful, they will never be protected by altruism alone.
Although pricing is chiefly the prerogative of regulators, markets are springing up to make these intangibles tangible and reward investors and enterprises, public or private, which place value on them. Fascinating innovations are occurring in the world of impact investing too, where investments are explicitly made to create a social as well as economic good.
A sector that was this week forecast to double in Britain, where pioneering work has been done, impact investing ranges from social bonds – where investors can pay prisons to improve rehabilitation efforts and earn a cut of the savings from reduced recidivism – to micro loans and now micro equity – where tiny third-world start-ups can be financed through debt or risk – to the philanthro-capitalism of entrepreneurs like Richard Branson or Dick Smith, and ‘B’ or ‘Benefit Corporations’ of various US states, which have social or environmental objectives hardwired into their articles of association. Estimated by JPMorgan and the Rockefeller Foundation to increase ten-fold over the next decade, impact investing as a sector promises an exponential growth curve yet is also entirely post-growth in ethos and outlook.
But just as policymakers need new measurements to wean themselves off GDP, something based on transactions and little else, investors ultimately need better accounting treatment to value non-financial factors. What the eventual alternatives to raw profit and loss are in the investment world is as yet unknown, but moves to embrace post-GDP measures economically like the UN’s human development index, Bhutan’s gross national happiness index or the EU and Canada’s genuine progress indicator, offer hope.
Now that would represent genuine progress and a financial future worth getting excited about.
Michael Feller is an investment strategist at Macro Investor, Australia’s leading independent investment newsletter covering stocks, trades, property and fixed interest. A free 21 day trial is available.