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Gazing into the crystal ball
AS WE step into a fresh decade, questions loom large in investors' minds. Those who stayed invested over the past decade would have been richly rewarded, despite worries over a myriad of risks including the path of interest rates, various domestic elections, protectionism and more recently the trade war.
But what of the next 10 years?
We ask the experts to gaze past the near term for megatrends that are likely to lift portfolios and benefit from powerful tailwinds such as demographic trends, for instance, and rising affluence. Some common themes emerge, including millennial consumption, technology (digital enablers, robots, automation) and climate change issues.
Says Rob Powell, BlackRock head of thematic and sector product strategy (fundamental active equities): "Megatrends are long-term structural forces and we expect them to evolve over time ... We use the megatrends as a base to identify investable themes to launch products or to ensure our clients are well positioned for them."
BlackRock has a platform of 18 thematic products, each of which is backed and shaped by at least one megatrend.
In particular, BofA Global Research's report Thematic Investing: Transforming World: The 2020s is thought provoking. We enter the next decade, says the report, at an inflection point: Interest rates are at 5,000 year lows; we have the largest asset bubble in history; climate change is intensifying and a "deflationary profile of debt, disruption and demographics" prevails.
Over the past decade, nearly one billion people were added to the world; the population is ageing; up to 800 million are threatened with job automation.
"At the same time, three billion more people will be connected online and global data knowledge will be 32 times greater than today. The social, political and economic responses to these challenges, all heading to a boiling point this decade, will overhaul traditional paradigms," says the report. Here are some highlights of experts' views:
INTENSIFICATION OF CLIMATE CHANGE
Opportunities: Rise of ESG investing, clean energy, electric vehicles
Trends in climate change have grown more worrisome, even alarming.
BofA Securities points out that the past four years have been the hottest on record and more extreme weather is leading to larger-scale displacements.
Eli Lee, Bank of Singapore head of investment strategy, says risks to businesses from climate change are rapidly materialising.
"Today businesses are already vulnerable to short-term disruption from fl ooding, hurricanes and droughts. Policy changes are introducing new regulatory risks for companies, especially those in sectors such as mining and power generation.
"Overall, we believe companies will face increasing regulatory, environmental and consumer pressures associated with climate risk, forcing them to adapt or perish. At the same time, the transition to a more environmentally friendly, climate resistant global economy will introduce new opportunities for investment and growth."
BofA Securities reckons the efforts to curb global warming will require behavioural and systemic changes, and provide substantial opportunities for investors. The clean energy market, for example, is worth US$300 billion, and the global waste industry presents a US$2 trillion opportunity. It cites US SIF (The Forum for Sustainable and Responsible Investment) which says climate change is the #1 ESG issue for ESG asset managers. Some US$3 trillion of ESG assets consider climate change as part of their investment decisions.
Opportunities: Millennial and Gen Z consumption; Silver generation opportunities; emergence of middle class in emerging markets (EM)
DBS' chief investment offi cer Hou Wey Fook reckons that millennials - loosely defi ned as those born between 1980 and 2000 - are reshaping the world. "As millennials enter into adulthood, their consumption patterns will have profound implications ... Companies catering to their needs and lifestyles will be winners," he says.
Beneficiaries include companies in the athleisure segment of clothing where robust topline expansion has translated into strong bottom line growth. Mr Hou says the combined earnings of leading sporting footwear and apparel fi rms such as Nike, Under Armour and Lululemon are consistently rising and have more than doubled since 2011. Gastronomy is another trend, and established restaurant chains are benefi ting.
BOS' Mr Lee points out that millennials are mostly found in Asia. Just fi ve countries - India, China, US, Indonesia and Brazil - account for nearly half of the world's millennials. "This points to Asia's continued importance to consumer spending and potential economic growth in the coming decade."
Standard Chartered Bank's chief investment strategist Steve Brice points to China's middle-income population which is expected to more than double to 315 million households from 116 million currently.
The increase in the number of upper- middle class (US$24,001-46,000 pa) and affl uent (>US$46,000 pa) households is transforming China's consumption landscape, accounting for 81 per cent of consumption growth through 2020, he says.
At the other end of the spectrum, the ageing demographic is yet another megatrend, as BofA Securities sees it. By 2050, there will be 2.1 billion people over age 65 and just four workers for every retiree versus eight today.
"A key implication of an ageing population is that an economy's savings rate tends to rise, while increases in investment levels tend to decline. The global pension savings gap is set to soar at 5 per cent per annum, from US$70 trillion in 2015 to US$400 trillion by 2050, driven by India, China, and the US."
Wealth management for the silver generation is a key fi nancial markets trend. "Overall, the ageing of the population is encouraging saving rather than spending, which is defl ationary rather than infl ationary," it adds.
TECHNOLOGY, AN UNSTOPPABLE TREND
Opportunities: cybersecurity; enabling technologies; automation
Citi Private Bank's Ken Peng points to technology trends that he sees as "unstoppable" as they have "deep and enduring drivers, including demographic developments, technological progress and new behaviours". Portfolios, he says should be exposed to cybersecurity and fi ntech innovators, among others.
UBS managing director and APAC head of equities Hartmut Issel expects 5G - rollout in 2020 - to fuel signifi cant innovation over the next decade via faster speeds, greater capacity and more fl exibility, paving the way for new applications from autonomous driving to remote surgery.
He advises a diversifi ed approach to a number of key themes. These include digital data - companies involved in the storage, transfer, processing and analysis of data; enabling technologies; e-commerce; healthtech; fi ntech; and security and safety.
Mr Issel says: "Asia, propelled by key markets China and South Korea, will account for more than 50 per cent of global 5G capital expenditure and almost 75 per cent of global 5G smartphone shipments in 2020. The region's supply chains should get a 5G boost as soon as 2020." He expects the e-commerce sector to average 15 to 20 per cent annual growth, fuelled by AI and other technologies.
BofA Securities divides the tech umbrella into two key megatrends - the rise of AI machines (robots and automation) and the "Smart Everything" trend.
Industrial robotics, it says, is advancing fast, diminishing the importance of manual labour and making processes more effi cient. This shift could materially impact global supply chains, compared to the past decades when cheap EM labour was the biggest driver of globalisation.
"Now, advanced industrial automation can enable local production, unintentionally playing into rising nationalism and trade protectionism themes but also helping to reduce environmental footprint."
Investment opportunities include exposures to companies in AI and related processes; industrial robots; autonomous vehicles and fi nancial services that deploy robots and AI. In the "Smart Everything" megatrend, BofA Securities points out that we enter 2020 with 30 billion devices connected to the Internet.
This could grow to 500 billion by 2030, driven by the growth of "smart cities", which include smart mobility, 5G, smart buildings and big data solutions. "The smart city theme, by virtue of its broad defi nition and many sub-themes, represents one of the biggest investible universes," it says.
The "Smart Six" subthemes include smart infrastructure investments (projected to reach US$1.7 trillion by 2025); smart buildings (global market to grow from US$61 billion in 2019 to US$106 billion by 2024; and smart home devices which can control, automate and optimise household functions.
RECESSION, QUANTITATIVE FAILURE
Opportunities: Real assets, hedging bond bubble
BofA Securities says 90 per cent of investors in its global fund manager survey believe the global economy is in late cycle.
Despite historic levels of monetary accommodation, economic growth and infl ation have been low. It reckons the biggest vulnerability to markets lies in the "bond market bubble" where over US$13 trillion of bonds is negative yielding and global bond yields are just off record lows of 19 basis points. "In the coming years, a policy mistake ... and/or the start of policy impotence (central banks pushing on a string) will likely cause a jump in interest rate volatility, end the decade-long bullish combo of minimum rates-maximum profi ts, and signal the big top in asset prices. A disorderly rise in bond yields would likely cause extreme pain as Wall St deleverages, inevitably leading to pain quickly thereafter for the real economy."
It says there is already evidence of quantitative failure in Europe and Japan where households and corporates are saving more, not less, and debt is being repaid and not utilised. "Investors should also rotate into gold & real assets if the dollar leadership cracks. Meanwhile, the more the debt universe becomes negative yielding, the more likely it is we see another leg higher for bond ‘proxies' in the equity world." W