In today’s Exponential Investor

  • How to invest for the 2020s and beyond
  • Building a better society
  • UK to become a science “superpower”

When it comes to investing, it’s best to think about it in terms of years, not months.

Look, don’t get me wrong, fast gains make you feel good. And for an analyst like myself, we secretly love the validation that comes with getting it right (analysts are more in need of reassurance than any starving artist you’ll ever meet, but I digress…).

The problem with fast gains is that the market giveth… and can then taketh away just as quickly. It’s why knowing your “exit” point is the most important thing when it comes to investing. We’ll cover some handy investing strategy tips in the weeks to come.

Investing isn’t as simple as “see stock, buy stock”, either. Any investment decisions you make should reflect the economy you’re in and where you think it’s heading, particularly when then are major demographic shifts at play…

The three phases of money flows

A few years ago, I read a paper entitled “The Urbanization of Capital” in which David Harvey analyses the way in which capital flows through an economy.

Harvey believes there are three phases or circuits – primary, secondary and tertiary –  in an urban, capitalist society.

The primary circuit is an economy in the production phase — the ability of a country to produce goods.

Take Australia, for example. We were the world’s quarry, established by convicts. Several resources booms and busts later, we were able to use our labour market, and available minerals allowed us to exploit these for profit to grow the economy.

Put another way, we had rocks to sell and other people wanted them. For decades, this worked.

The multi-decade mining boom provided vast growth for the Aussie economy, giving the Lucky Country a near 30-year recession-free run. The financial crisis of 2008 was nothing but a speed bump for Aussies as China went on an unprecedented infrastructure boom.

But, according to Harvey’s analysis, too much “success” in the primary circuit results in overaccumulation. Something Aussies witnessed firsthand.

For the most recent mining boom – the one that ended in 2012 – we were supplying far more commodities than the global market demand. We had too much iron ore left over when Chinese demand suddenly dried up. Iron ore prices fell, as did resources stocks.

In turn, firms reduced staff numbers and scaled back production. This led to higher rates of unemployment, while investors moved elsewhere in search of returns.

Mining towns built around giant holes went bust, and triple-figure salaries dried up too.

But, as the primary circuit ends, capital flows into the secondary circuit, says Harvey.

This is where an economy shifts from producer to consumer.

The secondary circuit is very much about money flowing into fixed investments that support building and consumption.

This means houses, shopping centres, and leisure activities. On an individual consumer level, this is money spent on swimming pools, nights out at the movies, dining out, and even new cars.

Throw in some loose credit policies and, before you know it, people are buying £200 toasters and overpriced books for their coffee tables.

This phase is often referred to as the “built environment” and the “built environment for consumption”. Meaning that the economy becomes focused on what it can build, rather than what it can produce.

But just like in the primary circuit, excesses build up in the secondary phase, too. That’s when too much is built or there’s too much to do and no one wants to buy things any more.

Harvey’s argument is that, once an economy becomes focused on building for growth, the whole system starts to look shaky. Furthermore, he points out, too much credit amplifies these circuits.

And if any of the circuits is propped up with debt for too long, unsustainable bubbles are created, with severe ramifications for the economy in question.

And this is where Australia finds itself today…

The UK does what Australia can’t

Australia has one more circuit it could transition too, but I’m not sure. The UK, however, already has. And, frankly, there are going to be major investing opportunities ahead.

Harvey’s research suggests that, following a construction boom, money moves into a sector that benefits society much more in the long run.

That is the tertiary sector. It’s where we invest in science, technology, and other products that have social value.

Harvey’s theory suggests that capital moves from a construction bust into investing in science and technology.

He also points out that the secondary circuit — that is, using construction as a driver of economic growth — generally results in some form of a crisis. If there’s no money to be made in production or construction, life-saving medical investments will attract early investors.

This has a twofold effect.

The economy benefits from new jobs, created in new fields of science and high-tech methods of production. This results in societal benefits which improve our lives.

Once gains from the secondary circuit start to decrease, money moves into the tertiary circuit.

Essentially, this final stage is an investment in society.

It’s the part of a capitalist society where lower economic growth is sacrificed for overall population health.

Money flows into science and technology, ideally creating a healthier population. And innovators look for more efficient methods of production and building.

The UK is leading the way, with the Financial Times writing:

Some of the world’s biggest property investors are planning to spend billions of dollars on labs and offices for the booming life sciences sector, a vote of confidence in the government’s ambition to make the UK a ‘science superpower’”. 

Property developer and investor Tishman Speyer and biotechnology investment firm Bellco Capital have raised US$3bn to develop and buy buildings for life sciences, ranging from highly specialised laboratories to more traditional offices located close to research hubs.

The investment in transforming the UK into a “science superpower” makes sense. The sector has already received significant investment coming out of the pandemic and fits in with Prime Minister Boris Johnson’s goal of the UK being a leader of science.

This is a remarkable shift in the direction of money, and investors should think long term when it comes to investing for the rest of this decade.

Until next time,

Shae Russell
Co-editor, Exponential Investor