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Livewire Markets

July 29, 2021

The megatrends investors can't afford to ignore


Glenn Freeman, Livewire Markets

The invention of electricity. Telephones. Automobiles. The internet. They’re all megatrends that revolutionised the world; powerful transformational forces that have wide-reaching effects.

Megatrends are keenly anticipated by the most successful investors, who are constantly watching for new structural shifts. In the first instalment of this three-part series, four fund manager representatives explain how they define a megatrend and which they’re watching most closely as fiscal 2022 gathers pace. As listed below, I spoke with three stock-pickers from active fund managers – names that will probably be familiar to regular Livewire readers. And in a slight departure from the norm for these series, I also tapped an exchanged-traded fund provider for an alternate take.

“The most important computing development of a generation”

Christopher Demasi, Montaka Global Investments

I define a megatrend as something that brings a multi-decade transformation. While inflation is obviously something on investors’ minds right now, it isn’t a megatrend. We focus on identifying megatrends that are somewhat predictable and are longer-term in nature, that we can understand in the context of how the world is changing and transforming. These trends indicate where markets are going to grow, and which companies will be the winners in those markets. That presents investment opportunities for us and that's how we think about and build our portfolio.

Cloud computing is one of the most exciting megatrends for us today. As the most important computing development of our lifetimes, or certainly of our generation, alongside the invention of the personal computer, I think this is just going to be bigger and move quicker than anything we've ever seen in computing before. It's really changing the way everybody works and lives and is enabling digital transformation on a scale that we've never seen before.

Cloud computing is creating these massive markets, and they're only just getting started. It's a very broad term that gets a lot of attention, but the very nascent stage of cloud computing is often overlooked. We’re in the early stages of multi-decade expansion, not just a multi-year one.

The fact there’s only a small handful of winners in the space is particularly exciting for investors. And guess what? They've already been cemented. You can identify them, and we know that they're going to be the dominant players along that journey for a very long time.

In cloud computing, we’re talking about everything that sits below the application level. This includes infrastructure and platform as a service, which are growing rapidly. Because of that, we're seeing the benefit of the costs coming down, which is allowing a greater speed of innovation. This in turn means more resources in organisations are going towards creating new valuable services and applications than ever before.

A window of opportunity (that will quickly close)

Nick Griffin, chief investment officer, Munro Partners

I’d single out decarbonisation. There are three things that are coming together at the same time:

  1. Investors clearly value responsible corporate activity in what they invest in, and there's this ESG investing wave that’s unlikely to stop any time soon.
  2. Corporates recognise this, so they're setting their own zero-carbon or other ESG targets.
  3. Governments are doing the same thing because constituents are demanding zero carbon targets by 2050. Looking across all those targets, you end up with numbers well north of $30 trillion or $40 trillion in terms of how much it will cost to decarbonise the planet.

Decarbonisation will undoubtedly be the single biggest and most ambitious thing humans attempt to do, and it’s going to play out over the next 30 years. Our job, from an investment megatrend viewpoint, is to go and find where that $30 trillion to $40 trillion will be spent and who will be the big winners. And we'd argue there's going to be plenty. We've seen one already with the growth of Tesla from obscurity, and we expect there will be more.

From an Australian context, I can see why local investors aren’t yet fully engaged with ESG investing – there’s not a lot of locally-based assets to invest in and there probably won't be. For example, the largest wind turbine manufacturer in the world is listed in Denmark, which is the biggest generator of offshore wind power.

The largest electric car company in the world is from California. This is not a coincidence. The countries and the regions that have focused on this early have ultimately created the biggest champions so far, and the longer Australia takes to focus on it, the more likely it is that we won't have any champions. But these are far and away the best-performing stocks in our portfolio over the last 20 to 24 months and are significantly outperforming digital companies, for example.

People need to recognise that if they don't invest in these companies soon, these businesses will end up splashed all over local commercial television and on Netflix. And by that point, it’s mostly too late.

Investing in anxious times: BREXIT, MAGA and war fears

Stephen Cabot, investment consultant and director, Credit Suisse

We’ve identified six broad areas that will shape societies, economies and markets for the next decade and beyond. One that I’d emphasise is what we call “anxious societies,” which refers to inequalities we're seeing across the world and the rising populism and protectionism that is more pronounced now in the context of COVID.

Across developed countries, we’ve got a disgruntled middle class that is shaking up politics. Shifting away from globalisation and the idea that everything was shared and collegiate, countries have become more insular.

Former US President Donald Trump was a classic example with his "Make America Great Again" and emphasis on jobs for Americans. And in the UK, BREXIT was driven by fear about a whole range of similar factors. People are now more worried about conflict, and in our own backyard, Australia has its trade challenges with China. There's a whole range of factors driving this increase in global friction, which are particularly driven by inequalities of the past and the need for food security and universal healthcare.

The companies that we think can benefit from this megatrend are those that are helping to lower the costs of basic needs. So, companies that are in the businesses of healthcare, housing, education, and food production are going to be beneficiaries.

And in helping to address the ongoing trend of jobs going offshore, education companies focused on re-skilling and training will also benefit, as will those that are helping to improve the safety and security of societies. Defence is one area, alongside companies in cybersecurity and personal physical security.

Spotting megatrends: The rule of three

Kanish Chugh, head of distribution, ETF Securities

To us, a megatrend is a long-term structural shift that transforms an economy, with an example being technological transformation. It also has to be intertwined with government policy and support, and has to have demographic changes. If you have all those three, that’s a long-term trend rather than something short-term.

At a high level, we’ve identified four megatrend buckets:

  1. Health and healthcare
  2. Transformative technology
  3. Society and lifestyle
  4. Environment and resources

Within those, you have more specific megatrends you can focus on, things like battery technology or decentralised finance. They’re perfect examples of these long-term trends. To me, inflation and the commodities boom, while capturing plenty of attention right now, they’re macro themes rather than megatrends.

The reason why “megatrend” has become something of a buzzword is that in the past, the only way you could get exposure to these things was via an active portfolio manager, such as a global growth fund or a debt portfolio. For example, take the megatrend of automobiles from 50 years ago, which would’ve been part of a broader transportation theme. To get exposure, you’d either have to own individual stocks or invest via a broader manager that’s looking at transport as a sector while not focusing specifically on it.

In the ETF space, we’ve been beneficiaries of the rising investor demand for these types of long-term thematic exposures.

The wrap-up

While each of our four respondents named different megatrends, they’re also linked in various ways. For example, Demasi’s cloud computing theme is a part of Chugh’s transformational technology. And Griffin’s pick of decarbonisation arguably cuts across a few – battery technology is related to rising electrification, which is itself a key part of the shift away from internal combustion vehicles, and also fits into Cabot’s “anxious societies” theme.

But it’s interesting to note the different ways each of these investment managers slice and dice the categories. And as we find out in the second part of this series, turning the question of “what is a megatrend” on its head is perhaps just as informative in trying to identify and understand multi-decade trends.

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