Is Your Portfolio Ready for the Millennial Effect?
Submitted by Silverlight Asset Management, LLC on January 27th, 2017
As Ian Bremmer aptly said in Time magazine last year, “There are few things in this unstable world that we can project over the long term, but demographics are destiny.” Indeed, demographics are known quantities, which is a rare weapon for those in the investment trade (we rely mostly on history, statistics, and probabilities). Known quantities allow us to make reliable decisions. If you know it’s going to rain tomorrow, you’ll make the optimal decision to bring an umbrella with you to work. Similarly, if we know the spending and consumption patterns of the biggest demographic group in the country, we can reasonably know which “sellers” are likely to thrive. The sellers most attuned to the needs of the biggest buyers are companies we want to consider owning.
The largest demographic group today, those between 25-35 years of age, are known as Millennials, and their decisions—whether to buy a house, buy a car or start a family—will guide our economic and market “destiny” in the years to come.
In a speech to the Federal Reserve Bank of New York last October, Ray Dalio of Bridgewater said the following:
"To me an economy is nothing more than the aggregate of the markets that make it up, and that to understand what is going on, we need to look at who is doing what buying and selling of goods, services and financial assets, and why… and then project what they will do [emphasis ours].
By looking at the major buyers to estimate how much money and credit they will spend and the major sellers to estimate what quantities they will sell, we divide the total amount spent by the total quantity to determine the price."
Dalio’s framework can be applied via a demographic lens. Consider Baby Boomers the future ‘Sellers’ and Millennials the future ‘Buyers.’
What Will the Future ‘Buyers’ Buy?
The old childhood song, “First comes love, then comes marriage, then comes the baby in the baby carriage” may have described the typical life path of Baby Boomers during their 20s and 30s, when roughly 35% of people below the age of 35 owned a house. However, only 15% of Millennials own a house today.
There are likely several reasons for this shift—Millennials prefer urban areas where rent is the only option; longer life expectancies delay the urgency of household formation; Millennials are notoriously shifty when it comes to making career choices; and so on. An investor can look at this one of two ways: either 1) Millennials are too stubborn to change; or, 2) there is a big wave of new home owners about to hit the market as Millennials trickle into their prime household formation years.
Option #2 seems much more likely to us.
Even if a lot of Millennials continue to prefer cities over suburbs and craft beer over car seats, there could still be a sizeable shift in the demand currents of the economy.
In the study of economics, we learn that changes at the margin are powerful. Each generation’s psychology is shaped by how they grow up, leading to different decisions. So even if the Millennials don’t shift gears fully to embrace the lifestyle choices of their parents in the exact way/order their parents did, a huge re-composition of household spending is likely to happen among the millennial group over the next three to five years, at least at the margin. If that amounts to 5-10% of them forming conventional households, it still means there will be between 17 – 23% more home and car buyers on average in the next ten years, compared to the last ten years. That’s significant.
But investors should still think one step further, to account for the multiplier effects associated with such purchases. When you buy a big-ticket item like a new home, you typically buy a lot of other things that go along with it. Thus far, the current recovery hasn’t seen much support from the housing multiplier effect. If that changes simultaneous to a new fiscal stimulus program, inflation and growth could accelerate rather quickly over the next few years, meaning significant opportunities for equity investors but just as many challenges for bondholders.
Millennials Rising – The Investment Implications
Silverlight employs both top-down and bottom-up analytics in our investment process. Every security we buy must have the right mix of fundamentals and price to justify ownership. However, we are not pure quantitative investors just buying stock symbols a computer churns out. We study qualitative features like a company’s strategic attributes, industry, and we consider long wave secular themes which may benefit or hurt their prospects.
Here are examples of current positions we consider good companies, trading at attractive prices, and which happen to fit our secular demographic theme of ‘Millennials Rising.’
We’re long where it all starts—in the delivery room—via a position in Mednax (ticker: MD); owner of the largest neonatal physician practice in the country.
We’re long General Motors (ticker: GM), whose SUVs will transport growing families, and whose stock trades at a P/E ratio of just 4.
We’re long Disney (ticker: DIS), an iconic blue-chip corporation whose stock languished for a period but became attractive late last year. Kids will watch Disney shows while they sit in the backseats of those SUVs.
We’re long new homes where those SUVs will park courtesy of NVR (ticker: NVR); an East Coast builder with a unique asset light business model and best-in-class profit margins.
After years of tech sector outperformance, the S&P 500 is overweight to computer science and underweight to blue collar construction and services. We’re long the latter segment through positions in Home Depot (ticker: HD), Sherwin Williams (ticker: SHW), and a lesser known conglomerate called Chemed (ticker: CHE), which includes Roto-Rooter Plumbing among its mix of assets.
The Millennials will reshape consumption patterns in the years to come. Is your portfolio ready?
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by Silverlight Asset Management LLC to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Silverlight Asset Management LLC, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.
The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.
