US economist Hyman Minsky’s ‘financial instability hypothesis’, which we witnessed between 2007-09, saw the collapse of the US housing and credit boom and, due to the subsequent policy response, a recovery by banks, markets and economic activity. 
This period of economic repair has now been overtaken by massive secular trends overwhelming or obfuscating the cyclical.
Take for example the global automotive industry. As investors, if we look forward five years – how will cars be propelled? Who will drive them? Who will own them? This is an industry already going through great change.
The reverse supply chain – UK retail
The high street is being disrupted by online shopping, casual dining by delivery services and hotels by the sharing economy. In terms of market share, the UK is the global leader in online clothing purchases, at 24 per cent of total sales. This compares with 15 per cent for France and 6 per cent for Spain.
These percentages are lower than more commoditised categories – led by Amazon – in books at 33 per cent penetration and electronics at 48 per cent penetration. It is the nature of clothing – size, feel, colourways etc., that accounts for the lower penetration, but has also led to a new burgeoning industry called the ‘reverse supply chain’.
Many people, especially when ordering clothing, order different sizes and colours, keep one and return the rest.
ASOS, one of the pioneers of fast fashion online, estimates that 40 per cent of the products they deliver to customers are returned – a global average with regional variations.
Even Selfridges, a bricks & mortar-based retailer, suffers a return rate of 25 per cent. This has led to the growth of reverse logistics companies to handle these volumes.
It is not just about having lorries, vans and distribution centres. Clothing retailers need the returns sorted, dispatched to a dedicated steam room, re-hung and bagged, and returned to the retailer’s warehouse. In April, we invested in Eddie Stobart Logistics through their initial public offering (IPO).
Their CEO, Alex Laffey, who formerly ran Tesco’s logistical operations, has expanded the business into this part of the logistics industry, leveraging their existing expertise in distribution centres and the ‘middle mile’ haulage.
The other crucial part of fulfilling the online customer experience is around the payment process. We have witnessed significant improvements in online transaction security as well as growth in credit payment options, with companies such as Worldpay and Experian (both current holdings in the AXA Framlington UK Select Opportunities fund) benefiting from the growth of payments online.
Is global growth underrated?
The globe is experiencing significant structural, industrial and economic change brought about by technological change.
Melissa Kidd at brokerage Redburn has conducted an analysis on this and has come up with some interesting conclusions: “The significant change in the global economic model that is engendered by technological change is not picked up in traditional growth and inflation models.
“Inflation is under-reported because economic statistics fail to take into account the rapid quality improvements associated with new digital goods and services.
“Growth is therefore also under-reported – traditional measures of GDP based on output, income and expenditure cannot cope with over the internet, weightless, zero-marginal-cost digital products and apps which are beneficial to the public good.
“The unmeasured deflation associated with the new economy means real GDP growth is likely to be meaningfully stronger than official statistics suggest.”
This feels right. Take the photographic industry. Back in 2000, there were 80 billion photographs taken, compared to 1.6 trillion in 2015.
Over this period the price per photo dropped from 50 cents to zero due to your smartphone; these instant digital photos eliminated most monetary transactions concerning processing photos.
This also begs the question why does the UK compare unfavourably when productivity data is compared and analysed?
It is because we have embraced e-commerce as a nation. We have the second highest business-to-consumer ecommerce activity in the world at 6.1 per cent (China has the highest at 7.0 per cent).
We have the highest internet penetration of over 15-year-olds in the world at 93 per cent (second are Japan at 91 per cent) and we have the highest average spend online per capita at US$4,018, the US is second at US$3,4283.
Perhaps the major conclusion from Melissa’s economic analysis, with which we agree, is that there is a “circularity between low interest rates, the disenfranchisement of labour and the cost of capital for new (deflationary, substitutional) technological investment that means interest rates will be sustained at currently historically low levels for a long time!”
Nigel Thomas is manager of the AXA Framlington UK Select Opportunities fund. All views are his own and should not be taken as investment advice.