Things Don’t Change Much—or Do They?
The next big theme I will call, “Things don’t change much—or do they?” Over a period in the last week, BHP, an Anglo-Australian multinational miner, has become the most valuable company in the British economy, which is one of the most advanced, modern economies of the world and is heavily services based. If you’ve ever worked in London, you know that financial services are a significant driver of wealth in the British economy.
But despite everything we’re reading about the rise of service-based economies in wealthy, developed nations—the rise of climate-based industries, the rise of legal, the rise of consulting, the rise of wealth management—the largest company by market cap is a miner. The two largest companies behind that are Shell, an oil and gas company, and Unilever, a multinational consumer goods company. There isn’t a bank, a tech company, an auto company. We’re not seeing what we would consider modern economy companies.
What is the insight? There are two ways to look at this. One is that maybe the UK is showing us that we’re going to live in a world where tech, finance and services will be the dominant drivers of growth, but companies like oil and gas companies and mining companies can still be dominant players. Alternatively, maybe it’s a sign that the UK’s economy is not as strong as we think it is. It could be one or the other. But there’s another insight here: Maybe all the press coverage about the decline of miners and the decline of oil and gas is overhyped. Maybe the media is publishing a set of stories without fully considering all the drivers at work and all of the sources of value.
We can even go deeper into these insights. If you are an investment professional and you have read everything in the press about the decline of miners and oil and gas and you said, “Well, these companies have no future, so I’m going to bail out,” you would have missed an opportunity as BHP’s share price rallied. BHP is exposed to coal. Of course, they’re exposed to different kinds of coal, and they’re exiting some categories of coal. But more importantly, and here’s an even deeper insight, they’re exposed to categories of commodities that are seeing increased growth—like copper. BHP owns some of the largest copper mines in the world. As electric vehicles become more popular and digitalization continues to take place, you need copper.
What happens when emerging economies like China and other big economies like Indonesia, Mexico, Brazil and India start booming and the things they need have fallen out of favor in the West? Because a company is domiciled in the West, exposed to products that have fallen out of favor in the West, but are heavily in demand and seeing an increase in the share price, do we then say we won’t be exposed to them as investors?
This is what happens when you get interlinked global supply chains. BHP’s global headquarters are in Melbourne, Australia, but they’re exposed to demand in emerging economies. They’re domiciled in one location where they raise their capital, their assets sit in another location, and the demand is in a third location. But if our policies and procedures in the West move in one direction, do we then exit our holdings in companies that are showing material wealth creation if they’re exposed to industries we actually don’t want to invest in?
How do you play this? If you’re an investor and you have an index fund that automatically buys the shares of companies with highest market capitalisation, obviously weighted in some way, on the UK stock market, the FTSE 100, do you decide you’re going to exit BHP and Shell? How does it work?
The insight is that it’s very hard to decouple strategies because the world is not decoupled. I’ve seen many investors say they’re going to pull out of certain commodities in certain sectors and regions of the world. It’s actually hard to do that. For example, banks have said for a long time that they’re going to withdraw. If you’re a bank and you don’t fund a coalfield, but then your wealth management arm invests in an index fund that’s exposed to the largest companies in the UK stock market, of which two of the top three happen to be old school companies, you’re still supporting an old industry. This is not to say Shell and BHP are doing anything wrong. It’s not for me to say that. But what is important to understand is how difficult strategies are to implement. How hard it is to decouple things.
This is an excerpt from Monday Morning 8 a.m. newsletter, issue #16.