Welcome to our first edition of Global Insights Report. This Report will touch upon global issues and how they might impact your investment thinking.
In the US there are 92 million people ready to enter the financial markets, they are bigger than the Baby Boom generation, were born into a world with a different view from other generations, a time of rapid change giving them a set of priorities and expectations sharply different from previous generations – they are the "Millennials" – and Goldman Sachs has just produced their report by the same name looking at US based statistics.
Goldman Sachs believe this large generation born between 1980 and 2000 is about to move into its prime spending years and due to their view of the world are likely to reshape the economy. "Their unique experiences will change the ways we buy and sell, forcing companies to examine how they do business for decades to come."
So what are the differences? Well to start, there are more of them: there were 77 million Baby Boomers, those born after WWII, and only 61 million Generation X (1965-1979). The Millennials peaked in 1990 and 1991 with approximately 4.73 million born in each of those years. Other key characteristics include:
- they grew up with the internet and smartphones in an "always-on" digital world (playing video games, downloading music and videos and watching TV online)
- they are "connected", with 44% using SMS, 38% using both social media and instant messaging as opposed to 15% and 11% of Baby Boomers respectively.
- Lower employment levels and smaller incomes have left younger Millennials with less money than previous generations.
- Student loan payments have meant the generation is massively encumbered with debt. The mean student loan balance for a 25 year old has progressively risen to nearly double from $10,649 in 2003 to $20,926 in 2013.
- Lack of money has changed priorities with the offset of marriage and home ownership - a case in point being marriage with 23 being the median age in 1970 rising to 30 in 2010. In 1968, 56% of adults 18-31 were married and living in their own home, in 1981 this was still as high as 43%. In 2012, the number had more than halved in a 44 year period to just 23%.
On the last point, it may be that Millennials have increased their willingness to rent, a trend we are seeing in Australia not to mention stay in the family home - 29.9% of 18-34 year olds in 2010. A nuance of that trend is seeing Millennials purchase cheaper investment properties and using the income to contribute to the rent they pay elsewhere. However, Goldman Sachs believes that their reluctance to enter the housing market might alter, and that due to the size of this group any future desire to settle down might mean a surge in home sales. They see 93% of 18-34 year olds planning to buy a home in the future.
The Millennials reluctance to buy is not limited to home ownership. The social theorist Jeremy Rifkin has dubbed it a "sharing economy" - "25 years from now, car sharing will be the norm, and car ownership an anomaly". Relatively new businesses such as Zipcar in the US and GoGet in Australia allowing people to share access to cars 24/7 will be far more commonly used going forward. With a more urban consciousness towards environmental sustainability, limits on available parking, congestion on roads and rising insurance costs, such businesses are adding a valuable solution to a number of problems.
Rifkin pursues this theory to an additional degree believing that "machines" or technology will change our future existence entirely. It is this technology that will undermine our sense of private property, take away our jobs and turn us into free agents in a new global “sharing economy”.
The outlook for retail is a hugely changing phenomenon. The high street store is already fading away with stiff competition on rents and from the major shopping malls. Add to that technology (90% of 25-34 year olds made a purchase online in the last 12 months), product information - only 57% of Millennials compare prices in store and 34% use their online networks to make purchasing decisions, reviews and price comparisons and you see a sharp movement towards "brands that can offer maximum convenience at a low cost."
Tech boom or bust?
Having lived through the first dot-com boom and subsequent crash of 2000 I remember just how many people, friends included, lost vast fortunes (much of which was paper based) overnight. Ultimately, the basis for the bust was the "growth over profits" mentality and the aura of "new economy" invincibility which meant start-ups being given huge valuations without ever producing a dollar or producing annual losses – the expectation being future based values.
We have witnessed a steady growth in valuations since 2010 with massive acquisition prices and private company valuations. Companies such as Salesforce.com have seen share prices at all-time highs without ever turning a profit and yet business valuations are in the billions of dollars.
There is money to be made in the tech space and no one wants the crash to happen but as Chuck Prince, ex-Citigroup CEO was quoted as saying “When the music stops…things will be complicated. But as long as the music is playing, you’ve got to get up and dance.”
I will leave you with one local example from an Australian tech start-up and leave you to make your mind up: a solid business built up in 2012 for $500,000, sluggish management meant that the business went live but revenue generation was negative. The principal shareholder had the right to remove management, which they duly did, and dilute all shareholdings, which they duly did, leaving the other cash investors with valueless shareholdings which the principal shareholder then acquired from the other shareholders. Being a savvy shareholder with market credibility, the (now sole) shareholder has repackaged the business (making no material changes to a so far non-revenue making enterprise except for new management) and went back to market at a 19x valuation ($9,500,000) – all investment that they got placed.
So while the Millennials may be turning the tide towards a "machine" or technology based "sharing economy" will the sheer volume of the Millennials be enough to sustain the huge market capitalisations and the growing number of technology based businesses yet to prove themselves or is the next crash right around the corner?