Investment: megatrends of the next 20 years

For investors, the prospect of finding the next Amazon, Microsoft or Tesla is always seductive. A lot of people spend their life looking for the next gems, but few ever find it. Furthermore, even those fortunate enough to identify the winners were mostly unable to withstand the drawdowns that those companies had to navigate in the equity market. In reality, these multi-year success stories are rare, but investors can put themselves in the best position to detect future world-beating companies by identifying areas of structural growth in the global economy. Aligning a portfolio with prevailing socio-economic themes can be a route to faster growth and improved returns. But beware, caution and humility are required.

To be valuable to investors, a theme needs to be powerful and disruptive – significant enough to reshape economies, businesses and societies. Such shifts will have a duration measured in decades rather than months or years. Examples in recent years include the emergence of e-commerce, the advent of cloud computing, and – perhaps – the development of blockchain and Artificial Intelligence. Identifying these trends can help steer an investor toward companies set to enjoy stronger long-term growth than the market as a whole, and away from businesses on the wrong side of disruption and history.

There will be winners and losers from these shifts, and it is important to identify both. Just as e-commerce has benefited logistics groups, warehouses and specialist software providers, it has challenged the business model of bricks-and-mortar retail businesses – the city centres of Europe and North America are littered with the empty premises of traditional retailers who have lost out. Tesla has not only revolutionised automobile manufacturing but forced change on existing auto groups, many of which are now committed to phasing out combustion engine vehicles within the next couple of decades.

Major socio-economic shifts will have a duration measured in decades rather than months or years, like the emergence of e-commerce, the advent of cloud computing, and – perhaps – the development of blockchain.

Many economists and investment groups have sought to identify these megatrends. They might vary at the margins, but a number of central themes recur over and over again.

The energy transition

The impetus to shift the way the world creates and consumes energy is becoming all but unstoppable, as least in Europe. To limit global warming to the recommended ceiling of 1.5°C, greenhouse gas emissions must peak before 2025 at the latest and decline by 43% by 2030, according to the UN’s Intergovernmental Panel on Climate Change. It argues that 1.5°C is the level beyond which a more severe impact on the world’s climate becomes inevitable, including major disruption to food supplies, more frequent natural disasters and population displacement.

Sticking to the limit already seems increasingly unlikely. Since 1981, the average rate of global warming has been twice as fast as in previous decades. The National Centers for Environmental Information says the 10 warmest years in its 143-year records have all occurred since 2010, with the last nine years (2014–2022) the warmest on record.

Governments are belatedly recognising the urgency of the need to take action, bringing in a raft of new legislation, accompanied by financial incentives, for companies to reduce emissions and to encourage private sector financing of climate protection solutions. For investors, businesses involved in addressing climate issues, from renewable energy to emission-free transport and carbon-neutral buildings, offer a strong pipeline of growth. Those on the wrong side of the transition are liable to face increasing regulatory restrictions and struggle to raise capital at competitive prices in public markets.

Digitalisation

Many of the business trends that took root during the Covid-19 pandemic proved transitory, but digital transformation, which was underway beforehand but received a major boost from the impact of lockdown restrictions, is more entrenched than before. Companies across the economic landscape recognise that using digital technologies to adapt their business model offers them efficiency savings and in many cases new revenue streams. Beneficiaries range from insurance companies using digital technology to automate the processing of claims to manufacturing businesses that deploy smart tools for precision engineering.

Digitally-savvy companies should be in a better position to collect, analyse and use data. It should help them to identify which parts of their business are operating effectively and which are not. It should help businesses to evolve, become more productive and focus on areas offering the strongest potential for growth. Companies increasingly recognise that, used thoughtfully, digital technology can give them a competitive edge; at least it can save them from being left behind.

Transformation of healthcare

For all its horrors, the pandemic demonstrated what could be achieved when the international pharmaceutical and healthcare communities joined together with governments to address urgent challenges. It also accelerated advances – the mRNA technology used to develop the Pfizer BioNTech and Moderna Covid-19 vaccines was originally conceived for cancer treatment, but proved useful in protecting billions of people from the virus.

Other major breakthroughs include immuno-oncology, which aims to harness the body’s immune system to fight tumours and promises to be a less invasive and more effective treatment than chemotherapy for certain cancers. Combining genomics and AI enables far broader and faster drug discovery than ever before. Lining up against ageing populations in many developed economies as well as China, the biotechnology and healthcare sectors have become significantly more dynamic.

Demographic shifts

In 2022, the world population reached 8 billion, even though the global birth rate has halved since the 1950s. Advances in medicine and nutrition have extended life expectancy. This is particularly evident in certain developed economies, such as Japan. These trends have persisted even in the face of a global pandemic, an obesity crisis in many developed countries and slow progress in resolving some highly prevalent diseases.

This also has ramifications for investors, for example by giving sectors such as healthcare a natural tailwind. People are living longer, but only to a limited degree in better health. It is a boost for areas such as wealth management, since individuals need to save for a retirement that may last decades rather than years. It damages government finances, leaving fewer members of the workforce to pay for more ageing dependents. It may even affect the balance of global economic power, as countries with younger, more dynamic populations grow faster than their peers.

Geopolitical disruption

From the war in Ukraine to mounting tension between China and the US, the world has become a more fractious place in recent years. Along with the impact of the pandemic, this is threatening to disrupt the global world order, with implications for global supply chains, trade and defence.

The shift has been felt most acutely in the technology sector, where protectionism is increasing. The recent CHIPS and Science Act in the US directed $57bn toward boosting domestic semiconductor manufacturing capacity, R&D and workforce development, along with $24bn in tax credits for chip production. However, this funding will not be available to companies that invest in new production and R&D in China. The era in which technological intellectual property spread rapidly around the globe now appears at an end.

The biggest problem with investing in themes is that too often other people will have spotted them too. Investors risk over-paying for growth that may not necessarily materialise.

How to invest in themes

The biggest problem with investing in themes is that too often other people will have spotted them too. Investors risk over-paying for growth that may not necessarily materialise. In addition, it can be difficult to access some of these themes directly. In many cases the most promising initiatives may be a small part of a larger technology business. In the case of the energy transition, slow-growing legacy businesses may be incubating new innovation.

However, there is an increasing choice of investment funds on the market that are seeking to exploit these developments. They will often set parameters for the revenues derived from a particular theme – 80% of revenue might be the target for direct income from digitalisation, for example. These specialist vehicles may be a good choice for investors who are looking for additional exposure to future-oriented businesses in their portfolios, but they can be concentrated and volatile – not all innovations deliver on their promise or can be reproduced at scale.

Other themes may relate more to risk management than identifying growth opportunities. Investors need to adjust their exposure to legacy businesses that face particular challenges as a result of new developments.

Investing to benefit from specific themes is not automatic guarantee of growth. However, themes can provide a useful roadmap to identify sectors that have potential for growth or are vulnerable to decline. Investors often have a time horizon of 20 to 30 years, so it is worth maximising the likelihood that the companies they invest in will be around for the long term.