Pictet's Denis Schmidli says megatrends can help the discerning investor find opportunities in long-term growth sectors
In investments, just as in life, there are precious few certainties. Events of the last few years have clearly demonstrated just how hard it can be to predict the path of financial markets.
Identifying what we call ‘megatrends’, secular trends in the population, in the environment and in society, we think is a somewhat easier task. Some of these ‘megatrends’ have, in effect, been running for hundreds of years. Since they are phenomena that continue with a relatively high degree of certainty, they can help the discerning investor find opportunities in long-term growth sectors.
Secular trends
Rising population is an example of a secular demographic trend that allows such opportunities. According to the United Nations, there will be a 40% increase in the Earth’s population by 2050. Booming global population will severely stress the supply of several resources, for instance, food and fresh water. Given it is already a considerable challenge to provide enough of these two vital resources for the world today, providing for future generations will require a dramatic improvement in farming and water distribution technologies.
Some think a food crisis looms, partly because arable land is now shrinking at an alarming rate as the pace of urbanisation, particularly in emerging nations, quickens. Simple calculations show present farming yields need to double over the next 40 years to only maintain the average per capita daily intake of calories, and this can only be achieved through innovation-driven advances in farming productivity.
Revolution
Through the course of history, humankind has often managed to avoid famines because of discoveries that drastically improved yields. For example, without the post-second world war ‘green revolution’, large areas of Asia would have been afflicted with appalling famines. Now, arguably, a ‘new green revolution’ is underway, driven by farming companies that are developing methods to boost farm yields and improve chains of distribution.
Water may be the most abundant resource in the world, but a surprisingly high portion of the world’s population still does not have sufficient access to fresh water. Demand for fresh water has historically increased at twice the rate of population. So if current trends continue, one-third of mankind will, by 2025, face chronic water shortages. Therefore investment both from the public and private sector into those firms developing improvements in fresh water distribution will be required to avert a distinctly ugly turn of events.
Healthcare
Populations in developed worlds are ageing, and therefore healthcare is another theme investors should find opportunities in. In particular, biotechnology companies and generic medicine manufacturers look well placed to deliver new medicines that are more effective and cheaper respectively- over half of new drug approvals now come from the biotech industry.
The long-run performance of stocks in the biotech sector has been strong, and the NASDAQ Biotech index has convincingly outperformed wider global equities over the past 10 years.
Another potential investment theme comes from the luxury goods sector. Rising purchasing power of individuals in emerging countries has also unleashed a wave of radical social and economic changes.
For instance, there has been a marked shift in consumers’ spending habits, particularly in emerging Asia. Chinese sales of Moët Hennessy Louis Vuitton (LVMH) multiplied eleven-fold between 2003 and 2008, and evidence suggests China will become the most voracious buyers of luxury goods in the world by 2011 – a significant boost to the premium branded goods industry.
The environmental megatrend
As protecting our environment is fast becoming more of a global priority, the ‘environmental megatrend’ is benefiting many sectors, notably, clean energy, a sector that last year saw an unprecedented level of support for from both China and the US. Some $150bn have now been earmarked for clean-energy projects in the USA over the next 10 years. China has also allocated a hefty amount of state money for clean energy, and is set to inject some 218 billion into the sector over the next few years. Europe too will have to commit money to the sector if they want to meet the European Commission’s target of 20% of energy coming from renewable sources by 2020.
Timber, a resource used since the dawn of civilisation is once again becoming a key strategic resource. The supply of wood is dwindling – we lose an area of forestland equal to the size of Greece every year. Moreover, as a carbon-neutral energy resource, timber is becoming increasingly recognised by supra-national organisations as integral to combating climate change. Unlisted timberland investments have long been a sound investment, and historically have provided both steady returns and attractive diversification properties. While a relatively new concept, listed timber investments, such as the stocks of firms who own timberland, is therefore a promising theme.
Evolution
However, megatrends by their nature are ever-evolving, and so must be viewed with a degree of flexibility. A prime example is how the communications megatrend has evolved in recent years. Developing modes of communication have defined the progress of human civilisation over the past few centuries, and until recently, the telecoms sector was our way of gaining exposure to this important theme.
A few years ago we decided the digitisation of communication was the future of this particular megatrend, and altered our investment philosophy accordingly. With the advent of the YouTube generation and wide-scale consumer adoption of devices such as the iPhone, this strategy shift has proved correct.
So, although themed investment plays have often been caricatured as being an investment strategy geared towards jumping on the latest market ‘fad’, nothing could be further from the truth.
Our experience has shown investing in megatrends is a straightforward, but effective way to discern key investment themes and long-term growth sectors. Investors must invest in a diversified range of themes so as to minimise the risk of ‘thematic bubbles’ forming in their portfolios. Thereafter, the key to success lies in disciplined investment management and rigorous stock-picking in the sectors that benefit from the various megatrends.
Denis Schmidli, senior product manager, PF (Lux) Global Megatrend Selection, Pictet Funds
