A TPDEARR Article
Trans-Pacific Dynamic Equity Allocation Research Report

In taking the study of “demographics” as the analysis of groups of human populations and how they change, we cannot limit our understanding to only “natural” factors and indicators, such as age, fertility and ethnic composition. There is more at play than that. We must also incorporate societal elements that have newly emerged over time, such as the digitization of information databases, the penetration of internet-based services within a society, and the adoption of newly-introduced behaviors, as well as how they interrelate, to more clearly grasp how demographic populations interact with modern commercial society, and where profitable opportunities are most supported by population fundamentals.

In this Demographic Trends section of the MAR.24 issue, we’d like to revolve this conversation around a concept referred to in consulting circles as “the New Retail Nexus“, a term recently popularized by TD Cowen’s Oliver Chen, as it does a decent job of summarizing the pivot point of retail and how said threshold sets the stage for spending and consumption dynamics moving forward, particularly as they relate to shifting demographics and (for our purposes) emerging economies around the trans-Pacific. Further on, we dissect how a manifestation of capitalism has emerged in a new form as a player among the power brokers, pointing specifically to its influence on capital flows. To cap it all off, we will refocus on a particular trend of demographic evolution that highlights an alternative to the challenges and unsustainable path that the global meat industry is on, and how investors can identify opportunities in the shifting landscape.

The New Retail Nexus

In short, the three primary pillars of the “new retail nexus” are digital advertising, the marketplace model, and AI optimization. The theory is that companies which can successfully leverage their operations by implementing each of these three pillars are best positioned to capitalize off of (increasingly globalized) commerce in the coming years, which aligns with our TPDEARR Squad investing time horizon of 12-18 months nicely. The challenge, though, is that firms, particularly legacy firms with their large and embedded bases of operations, must spend considerable outlays to update their systems to this new digital nexus. Behemoths like Walmart (WMT) are well on their way, but many mid-sized firms might find the costs still a little prohibitive, especially if they currently lack the internal staff to perform such a transformation. All the layoffs happening in the tech sector may prove to make some of those companies more attractive to buyouts and mergers, helping the larger firms adapt to the nexus quicker. Highly competitive market environments, like in the US, will likely see a fair amount of this type of merger/acquisition activity in the coming years.

How does all of this relate to our demographics focus? First off, the model of a “typical consumer” has been undergoing its own digital evolution over the past few decades as a larger and larger slice of the retail pie is attributable to e-commerce, now boasting more than 15.6% of the total. According to a report about the “Future Shopper”, nearly a third of all online spending globally is done over mobile phones; people are more comfortable with technology with each passing year; and the proportions of comfort with technology and e-commerce purchases as a percent of the total are both rising now, and for the foreseeable future. So the demographic indicators of a typical shopper are changing, with advertising, browsing, and purchasing all becoming more and more digitized.

In rural China, as well as in the emerging economies of Southeast Asia (SEA), where infrastructure, like transportation, pales in comparison to more developed nation-states, being able to access massive e-commerce platforms from formerly-remote areas is accelerating the growth of the consumer demographic as more rural-ites are able to tap into large-scale commerce via mobile computing, increasing domestic demand beyond what would have been possible in years past. Companies that excel in the new retail nexus are better able to accommodate both rural and urban spenders without needing to wait for infrastructural development. The largest share of the expansion of the consumer base via digital shopping will be sucked up by the largest companies with the biggest budgets for digital advertising, AI and the expansion of online marketplaces.

As well as folding in rural shoppers, the nexus will also have an impact on the older demographic of consumers, making many of their potential purchases more streamlined while also extending their financial relationship with the economy as they are automatically incorporated into updated systems. Very little will go untouched by widespread adoption of the pillars.

The new retail nexus has an even more significant aspect, though, than the newly digitized consumer. No matter whether the adopting firm is a tiny new business or an enterprise-level corporation, each pillar of the nexus is fully reliant on computation, making semiconductors an intrinsic and fundamental feature, and laying great support for our inclusion of [MAR.24 Squad Asset #1] in this quarter’s squad. As tech companies compete to provide retail companies with the means to master the nexus, no matter who comes out as market leaders, semiconductor firms will continue to win.

The Aggregate

The days of yore, with smoke-filled rooms of power brokers making deals that impact all citizens of society, are…still here, in many ways, actually. But they no longer act with the same makeup as they used to. The composition of power has changed among the participating members. These days, shifts in the infrastructure of societal participation have resulted in a new player on the chessboard: the archetype of the aggregate. At its core, we should consider the role of the aggregate as the representation of not one individual, but a population of individuals whose collective wealth is being guided by trading algorithms, debt covenants, and fiduciary duty to that almighty of motivations: capital gains. Now, sitting at the metaphorical table is the manifest representation of capitalism, along with agents who act on its legal behalf to pursue only profitable opportunities, as they are bound to do. This is no mere human; power brokers are now partnering and negotiating with the manifestation of the profit motive itself, not just with all the other old, crusty whites that make up the traditional elite aristocracy.

As economies develop and advance, wage and wealth growth contribute to a growing pool of household capital that ultimately finds its destiny participating in the investment game. Emerging economies have to choose how to develop their own independent financial institutions (which must be trustworthy enough to coax foreign investors into importing capital,) or else this wealth will percolate out into other countries’ capital markets where it can start profiting from more broadly accessible capital gains ventures. In the US, for example, over the past few decades, funds offered by the big three firms of State Street, BlackRock and Vanguard have agglomerated so much of the excess, investment-bound wealth of individuals that they now collectively “own” more than half of the shares of companies listed in the S&P 500. So, as a majority shareholder, how does one of these funds participate, along with other human shareholders, in a given firm’s decision making? Although given a “voice” similar to humans, such funds are representative of the archetype of the aggregate, and they have no freedom to participate in a human-like way, believe it or not.

The aggregate is not an individual person, nor member of one of the firms who hosts a given fund. The aggregate is an overlapping plurality of contractual obligations and fiduciary duties to its own set of shareholders, who are just “regular” people, but who have no direct say in how the fund’s funds are utilized; all utilization of funds is governed by highly detailed trading strategies and debt covenants laid out in their respective prospectuses, and cannot be legally strayed from on a whim. The aggregate’s primary overarching goal is retention and growth of assets under management, only.

Demographic advancement expands and exacerbates participation of the aggregate the world over. The more capital flows through an economy’s investor class, the more the demographic archetype of the aggregate swells and influences board meetings, shareholder agendas, media coverage, and political platforms; essentially, the whole mainstream economy. And as such, though it may seem like it’s “the rich people” who are to blame for economic inequality (which, itself, forces different demographic groups of earners to oppose each other,) it is all holders of investment assets who are to blame for the exacerbation of capitalist tendencies, including all the usual culprits who stereotypically shout out in opposition to the “evils” of capital gains, like teachers, firefighters, union workers, and any possible type of wage earner who also has a retirement account, whether or not it’s provided by their employer. How do these people think “investing” really works? If one seeks to gain the means to retire by investing in the stock market, one is complicit in the economic devastation wrought on the lower classes by the levers of capitalism. Economic losers are the necessary counterpart of economic winners. But in the end, even if they know all of this, most people don’t actually want equality; they just want to be members of the “winning” economic class.

We investors would be wise to not underestimate the impact of the aggregate on our allocations in different market economies. The World Data Lab predicts that 91 million new consumers will join the global middle class in 2024 from Asia alone; 31 million are estimated to emerge from the People’s Republic of China (mostly in urban areas; with an estimated 80 million additions by 2030,) and 12 million more from Indonesia, Vietnam, the Philippines, and Thailand in the coming months. As household earnings for many in these countries elevate above subsistence level and start providing pockets of disposable income, the aggregate will grow in influence. Increases in national capital flow beget increases in investments and growth of investment funds, setting the stage for the emergence of the aggregate in a nation’s markets. Thusly, the aggregate emerges along with an expanding middle class; it’s our own damn fault and we are all to blame.

Before we move on to a slightly different demographic topic, we would be remiss not to mention how the aggregate can be such a devastating force. Because the aggregate is not a free-thinking entity, but rather a force which reacts to explicit market signals as laid out in the various funds’ trading documentation, it must be perceived of as responsive, as opposed to trailblazing. Responsive behavior such as this, which is triggered by other real-time local behaviors and signals, contributes to what’s called “trend-reinforcement”. The market/trading reinforcement of trends, such as selling when value is dropping and buying when it’s climbing, is what blows up bubbles, and then makes them explode. The “up” and “down” behaviors do not transpire symmetrically. The aggregate is fully complicit in this process. Some can get rich from this type of market activity; very few manage to hold onto the wealth in the long-term. When the aggregate, an imperfectly-rational and responsive force, is involved in market activity, which is irrational and unpredictable, things don’t become more rational. Volatility increases; explosions frequently ensue. So “who” is actually contributing to the management of the assets you invest in? Is the aggregate the majority shareholder? If so, rest assured that “the pedal” is “to the metal”, as it is in the aggregate’s nature to be so, and only so.

I’ll Have What They’re Having

And finally we get to the last stop on our demographic probe for the quarter: food, or rather, feed, as the following notion applies to both the food we eat, and also the food our food eats: the feedstock of our civilization. One thing that’s been noted aplenty with the rise of economic development is how consumption of meat (particularly beef, pork and chicken, globally) grows along with it. Generally speaking, people demand increases in meat to go with their increases in money. The USDA estimates that the rate of growth of meat consumption in developing economies is >3% annually, which is more than 6 times as fast as in developed countries, wherein health, ethical and environmental concerns create a lot of headwind pressure on expansion of the industry. Also of important note is the fact that the root nutrient of the whole meat supply chain is, largely, soybeans, which are the primary ingredient in most livestock feeds as it is the most protein-rich crop widely dispersed throughout human society. Soybeans are also the most prolifically used ingredient, perhaps ironically, in plant-based meat alternatives, which are getting ever-more popular by the day as the tastes and technologies involved continue to develop at a now-rapid clip.

So what? I hear you say. Invest in soybeans? (sigh) If only it were so easy. The supply and demand values for major agricultural commodities like soy and corn are so important that they are heavily influenced by government policy. Acreage, yield and processing all interrelate with government levers, and subsidies ensure that prices remain cheap, which affects market profits in other ways. We have found something else of interest in the feed discussion: bugs.

Though insect-based feedstock is not an entirely new idea, it is a relatively new idea; so new, in fact, that there aren’t yet any publicly accessible equity market pure-plays on companies specializing in the field. But that’s not to say the space isn’t filling up with competitors, and impacts on the broader market. Enormous companies like Cargill and Tyson are partnering with private insect-feedstock companies and looking to scale up quickly. Hundreds of millions of $USD has already been injected into promising operations, and the agri-behemoths and meat barons are clamoring to incorporate insect feed into their value chains to lower costs, optimize land usage, and quell the constant uproar from the environmentalists who, rightly so, call unflattering attention to the eco-devastation of modern agri-business. This all makes for the type of business environment in which, once a startup proves it can scale up, it’s highly likely to be gobbled up by a larger player in the space who already has access to market share and can unleash financial reserves to start expanding new operations immediately. The costs to access the protein-rich end-products of insect feedstock are still above fishmeal and soymeal, but they are lowering quickly, and when factoring in new variables such as the ability to support insect-feed operations with food waste byproducts, and the reductions in resource usage (such as water,) the value proposition increases dramatically.

The idea of insect-feedstock becomes even more interesting when we find that many of the major players operate around the trans-Pacific. Burgeoning middles classes in Asia will continue to accelerate the demand for meat and meat substitutes, both of which stand to benefit from growing implementation of novel insect-feed operations coming to scale for the first time. Furthermore, some of the major players are headquartered in Singapore, Vietnam and Thailand, and are even providing the insects (such as crickets and black soldier fly larvae) themselves to companies who are both in Western nations and are partnering with the aforementioned agri-behemoths, and also throughout the Asia Pacific, where insects have already been a part of diets for centuries, and so there are fewer psychological and regulatory barriers¹ to implementation. So even though this information pertains to our society’s collective use of Natural Elements, it finds its significance here in our Demographics section for its relationship to the growth of middle classes in developing economies, as well as the absolute size of the populations involved, such as is usually the case when considering implications of economic involvement with the People’s Republic of China.

A chance to contribute investment funds to a trans-Pacific startup specializing in insect-based feedstock (such as Singapore’s Nutrition Technologies Group or Protenga Pte. Ltd., or Thailand’s JR Unique Foods or Global Bugs) before the inevitable wave of coming IPOs would likely be very profitable in the intermediate term, particularly as the environmental problems involving the meat industry, such as greenhouse gas emissions, continue to mount. One way or another, providing for the affordability, quality and availability of meat and meat-substitute products to meet global demand calls for at least a sustained level of investment in the industry, with plenty of profits to be made as evolutions in the market segment transpire. Don’t worry, if you closed your eyes, and you didn’t know, maybe you’d never even taste that it was bugs. Welcome to the future. Hold your nose, and invest wisely.

Additional Notes

To wrap up these demographic trend analyses, let us remember that, when it comes down to whether or not the sentiment of the general public, in all its demographic vicissitudes, is going to support a particular market evolution with concerted spending power, we must ask ourselves the question: “Are the consequences of the outcome going to convince “the people” that they are satisfied with the circumstances supporting their quality of life?” People will say lots of things out loud, but how they spend their money is never a lie. As relative proportions and dynamics of spending power shift through growing and shrinking demographic groups, keep following the dollar. It will point to what people actually want.

1. Food for thought: what’s the difference between selecting a live lobster (or cockroach!) from a tank to be skewered, boiled and brought to your table, and shutting down a meat-free, insect-based protein barbecue restaurant after violations of health code pertaining to the presence of insects on site? ↩︎