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Top 5 Megatrends: How You Can Profit from a Upcoming Shake-up

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

Megatrends are exciting paradigm shifts that occur over a multi-decade horizon, changing life as we know it. One recent example is the semiconductor, which enabled the mass creation of computers and the internet, whilst transforming every industry in its wake. These trends also create tremendous opportunities for investors to make profits, but they must be patient and hold out for long term profits. Apple co-founder Ronald Wayne learnt this the hard way, selling an $800 stake in Apple that is today worth $90.8bn.

Investing-in-megatrends

Megatrends are exciting paradigm shifts that occur over a multi-decade horizon, changing life as we know it. One recent example is the semiconductor, which enabled the mass creation of computers and the internet, whilst transforming every industry in its wake. These trends also create tremendous opportunities for investors to make profits, but they must be patient and hold out for long term profits. Apple co-founder Ronald Wayne learnt this the hard way, selling an $800 stake in Apple that is today worth $90.8bn.

The key overarching theme across our megatrends is acceleration. As technology makes it easier to innovate, expect medical advancements, tech developments and shifts in the global economy to occur faster than at any other point in history. While you may not invest to directly profit from all megatrends, considering their power to transform our lives is a useful exercise. Here are five key megatrends set to transform the globe over the next few decades.

  • End of population growth – A recent Deutsche Bank report forecast the Global Population to peak at 8.7bn people in 2055 before declining. This would enable faster poverty alleviation, but increase challenges posed by an aging population, which would be particularly acute in the developing world.
  • Accelerated disruption in tech and AI – With increased computing power and innovation further accelerated by advances in AI, the pace of change is set to accelerate over the next few decades. McKinsey, a top-three global management consultancy, is already using robots to manage the process of innovating and automating processes in client organisations.
  • Medicine reimagined – Like AI, advances in medicine are growing at an exponential rate. China is becoming a power in biotech to rival the US and, in combination with increased biotech research globally, will at least double our level of progress. Slowing the aging process, in addition to cures for heart disease, dementia and cancer could be coming sooner than you think.
  • A shift in Global Economic Power – China is projected to be a larger economic superpower than the US and Europe combined by 2030. To quote Warren Buffett: “The 19th century belonged to England, the 20th century belonged to the US, and the 21st century belongs to China. Invest accordingly”.
  • Rapid Urbanisation - In three years, China used more concrete for the rapid development of infrastructure and housing than the US did over the entire 20th China is projected to have an urbanisation rate of 90% by 2050, with the lowest urbanisation rate globally mid-century being Africa, at 66%.

End of population growth

A growing body of evidence has led to current projections suggesting that the global population will peak much sooner than the end of this century, as predicted a few years ago by the UN. A recent Deutsche Bank report forecast the Global Population to peak at 8.7bn people in 2055 before declining thereafter. Other analysis published by academics from Vienna’s International Institute for Applied Systems Analysis projects that decline could come as early as 2040. This analysis shows the global population never reaching the 9bn mark, due to accelerated urbanisation and rapidly declining African birth rates.

One result of this is faster poverty alleviation across the remainder of the developing world. In the 17th Century, British economist Thomas Malthus foresaw a world where the human population would be capped at a level which allowed everyone to survive with the available food and no more. He believed that population growth would never stop until people literally didn’t have any additional food to support the population. Fortunately, this will not be the case, since global population growth is slowing rapidly and promising more resources for the people already on the planet.

Growth in percentage of people above 65 around the world

Figure 1: Growth in the percentage of people above 65 around the world (Source: UN)

The downside of this change is the challenge posed by an aging population, given the percentage of people over 65 is set to double between now and 2050, whilst fewer younger people will be entering the workforce. This will put a growing burden on aged care and medical systems around the world, which may need to be solved by AI and increased automation within the aged care space, a trend we are already seeing in Japan. Developing and emerging countries have thus far not been confronted with an aging population but will be home to 8 out of every 10 older people by 2050. While China is developing rapidly, its population growth is set to start declining within the next decade. China is set to get old before it gets rich.

As boomers retire, the number of elderly people globally is set to boom over the next 10-20 years, positioning industries like aged care that cater for the elderly to provide great long-term growth opportunities. Investors do however need to look to quality, as strong management teams are necessary to make sure industry growth isn’t snapped up by a competitor. In Macrovue, our international investment platform, we have a Silver Haired Economy portfolio with no management or performance fees that identifies companies which fit the bill. This portfolio has returned 19.74% over the last 12 months, highlighting how some of these megatrends will not take decades to deliver results, but are directly relevant to your investments today.

Accelerated disruption in tech and AI

AI projected to transform the labour market over the next 50 years, eliminating most jobs that exist today

Figure 3: AI projected to transform the labour market over the next 50 years, eliminating most jobs that exist today (Source: MIT Technology Review)

Artificial intelligence will transform the world as we know it within the next 50 years. Jobs such as truck driving, the number one occupation in several US states, will disappear altogether. McKinsey, a top-three global management consultancy, is already using robots to manage the process of innovating and automating processes in client organisations (automating the automators). While seen as science fiction as recently as a few years ago, autonomous cars are now already driving around the streets of some US cities. They are a lot safer than human drivers and are likely to become exponentially safer over time, putting little in the way of widespread legalisation around the world. Most jobs that AI does will be replaced, like how the industrial revolution made more than 95% of farming jobs obsolete, and computers completely transformed current jobs.

While jobs will change and people will adapt to work with AI, jobs as we know them will be changed irreversibly. This will also accelerate the pace of disruption, transforming financial markets.

High-level skills such as human interaction, expert judgement and decision making will be in demand in the future, given they are the hardest to replace with tech. AI could also enable far more efficient learning in our education systems, helping humans upskill and adapt to the newer, more demanding workplace. The upside to all this technological innovation, however, is the potential to massively boost productivity across the world, enabling everyone to have a lifestyle currently reserved for those on million-dollar annual incomes. Given that the average person in the most advanced country in the world 200 years ago had less than 1% of the purchasing power of the average Australian today, this estimate is not as unrealistic as it sounds.

With the average company staying in the S&P500 for less than 15 years, as compared with 60 years a few decades ago, not reviewing positions in previously untouchable blue-chip stocks is becoming a risky business. The pace of technological growth is accelerating, and the leaders of tomorrow will be the companies best able to capitalise on this trend. We, therefore, established the disruptive technologies portfolio in Macrovue, another no fee basket of international stocks that achieved a 34.05% annual return over the past year. If you would prefer to stick domestically, stocks like Appen (ASX: APX), Altium (ASX: ALU) and WiseTech (ASX: WTC) are already making big inroads into AI and tech.

Exponential Improvement in Medical Research

One of the industries set to be transformed most by technology is medical research. The 20th century was a marvel for medicine but will be nothing compared to 21st-century medicine which genomics, AI and advanced analytics stands to disrupt. This acceleration is so profound that the average person born today will become a centenarian, and the first person to live past 150 has most likely already been born. If realised, this will be the fastest acceleration in life expectancies in history. China has recently filed more patients than the US, promising, in combination with increased research from other parts of the world, to at least double our rate of progress.

Venture capitalists and private equity firms have already realised the potential of this trend, increasing their investments in biotech by 232% between 2010 and 2018. We have chosen to play the trend through a focus on clinical genomics, a fundamental leap forward in technology that will touch everything from cures, immunotherapy and even aging. CSL, the favoured Aussie pharma giant, is investing heavily into gene therapies because they recognise the enormous potential the technology has. Having turned each IPO dollar into more than $120, they aren’t a company known for making mistakes.

Quantum leaps in gene technology has seen the cost of sequencing a human genome come down from $100m in 2001 to just over a $1000 now. One of the companies we invest in, Illumina, is set to drive this cost down even lower. Much like genes are the building blocks of life, sequencing is the building block of gene therapy. We recently introduced this Vue in April, and it is slightly up (3.7%) since then.

Shift in Global Economic Power

E7 projected to be double the size of the G7 by 2050

E7 projected to be double the size of the G7 by 2050 (Source: PWC)

As China develops, the centre of global economic power will shift towards the Asian region. This will make the region a more and more important place for companies, and businesses that are well-positioned to understand and prosper in the region will perform well. We are already seeing this shift within the luxury goods market for two main reasons. The first is the emergence of the Chinese middle class has lagged the emergence of an affluent upper class, while the second is the aspirational and optimistic mindset of Chinese millennials. Louis Vuitton suffered for a few years as aggressive marketing gave the brand too large an appeal in the mass market, causing elites to shun the brand and tarnishing the luxury image on which its premium pricing is set. Hermes, by contrast, grew more sustainably and did not have to go through the same brand revival process that LVMH needed to embark on.

While this is just an isolated example, it highlights the increased importance of engaging with the Asian market. Companies that do not do this are set to be left behind in a global economy increasingly dominated by spending in the region.

Given 70% of growth in luxury goods expenditure comes from China, with well over three quarters coming from the Asian region, this is our preferred sector for playing the Asian growth story. Luxury goods producers have high profit margins and sticky customer bases, making them perfect long-term investments. They are particularly well positioned to take advantage of growth in China, given the high levels of luxury goods expenditure amongst the nation’s booming middle class. Many of the companies in this portfolio have significant family ownership stakes, including Hermes and LVMH, protecting them from short term biases in decision making.

Global Urbanisation

Every year between now and 2050, China alone is set to move over 10m people into cities every year. This will create a huge demand for commodities such as iron ore, which are needed to fund the development and expansion of cities. In three years, China used more concrete for the rapid development of infrastructure and housing than the US did over the entire 20th century. China is projected to have an urbanisation rate of 90% by 2050, putting it on par with much of the developed world. The only major region in the world not to be almost fully urbanised by the middle of the century is Africa, with a projected urbanisation rate of 66%.

There are many investment opportunities in the local mining sector that will benefit from urbanisation story in China, with BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue (ASX: FMG) having been profitable investments for Aussie investors.

You must ask yourself though if Aussie stocks, halfway around the world, is really the only way of playing Asian urbanisation. If playing the trend from Australia is so profitable, surely there are some companies in the regions that are urbanising which are worth looking into. Our belief is that global urbanisation will transform much of the world economy by bringing people from agrarian environments, relatively unchanged over hundreds of years, into the dynamic 21st-century global economy.

One interesting way we have found to play the urbanisation story is focussing on stocks that combat water security. Water use increases with urbanisation, and global water use is projected to soar over the next 20-30 years. The UN forecasts that half the world’s population will live in an area of high-water stress within the next 30 years, while some commentators say the situation could get particularly dire in parts of Africa. Experts are predicting that wars will be fought over water rights if the situation remains unchanged. While this could be taken as alarmist, a solution is badly needed and the businesses that deliver it are set to perform well.

 


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978) (“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.

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