Several global ‘mega-trends’ in investing are set to shape the industry for the foreseeable future.
Satrix CIO Kingsley Williams told Classic Business that ‘mega-trends’ refer to long-term structural shifts impacting the global economy and, by definition, the financial markets, which reflect the global economy and move around the global economy.
He identified four trends set to shape the global economy and, therefore, the financial market in the next few years –
- Ageing populations
- Technology and artificial intelligence (AI)
- Environmental, social, and corporate governance (ESG)
MSCI defines thematic investing as a top-down investment approach that relies on research to explore macroeconomic, geopolitical and technological trends.
“These trends encompass long-term, structural shifts arising from new business models, disruptive technologies and changing consumer tastes and behaviours – mega-trends that have the potential to change whole industries and shape the way we will live, work, travel and treat disease in the future,” the company said.
“The investment process aims to identify companies that may be well-positioned to benefit from these trends and offers an alternative to analysing companies beyond cycles, region, country or sector.”
Below is an overview of the four mega-trends Williams highlighted.
Ageing populations refer to the fact that there is a long-standing trend of increased longevity among humans – in other words, people are living longer.
At the same time, and particularly within developed markets, people are also having fewer children.
“For example, the fertility rate in 1963 was 5.3 births per woman, and that’s projected in 2050 by the UN to fall to 2.1,” Williams said.
“These two forces are resulting in ageing populations, which ultimately creates the structural shift of having, in time, a smaller working population with a much older segment of the population.”
Williams said this has several interesting implications for the future of financial markets.
Firstly, it influences the economy around retirees and the ability to provide goods and services to that population segment.
Secondly, it significantly impacts how much technology is required to enable an economy to function when it has a smaller workforce.
“You see this when you walk into a supermarket in the UK or somewhere in Europe – you self-checkout, you pack your bags yourself, you fill the car up yourself when you pull into a fuel station,” he said.
“That’s a function of having a much higher employment rate and the cost of labour being high.”
“But I think it speaks to this long-term trend also playing out as populations are going to need to become more efficient at what they do because you won’t have the luxury of being able to employ people to fulfil those types of jobs and roles.”
Thirdly, and related to the technological impact, this trend will influence the medical industry and likely influence health innovations in the future.
As people live longer, they will need more medical treatment over a longer period of time.
There are, therefore, multiple investment opportunities to capture how technology can be used to unlock more medical innovation.
This trend can already be seen playing out in the biotech industry, particularly in the US.
Technology and AI
Technological innovation is another crucial mega-trend that will play a significant role in the future of the economy and financial markets.
Williams said consulting giant McKinsey recently forecast that more tech innovation will occur in the next ten years than has occurred over the last 100 years.
“The pace of innovation and the way in which technology plays an increasing role in our lives is only accelerating,” he said.
However, he specified that this trend is not exclusive to technology businesses but is more broadly applied to innovative businesses.
He used Satrix’s Nasdaq 100 ETF as an example.
“The biotech industry and the healthcare industry are big segments of what makes up the NASDAQ 100 in addition to your mainstay technology companies as well,” he said.
Another important trend is rapid urbanisation, as an increasing number of people are moving to countries’ urban centres, mainly for more economic opportunities.
Williams said investors can capitalise on this trend through investments related to infrastructure projects.
For example, global infrastructure and smart city infrastructure investments could capitalise on this trend.
“Infrastructure projects would be ports, airports, transport nodes like toll roads, for example, but it also includes things like oil pipelines, anything that would be deemed infrastructure,” he explained.
Williams said those types of businesses also tend to be a relatively “stable play” in an investment portfolio.
“Because if you think about infrastructure projects, once you’re running those infrastructure projects, you typically have a long-term contract in place often pegged to where the revenues are and pegged to the inflation rate within the economy that that infrastructure asset is operating.”
“So you have a natural long-term hedge against inflation typically associated with higher yields and more defensive properties than you would find from other sectors available in the equity market.”
Smart city infrastructure often refers to service-oriented businesses that supply their services to infrastructure assets that enable them to employ technology to provide services more cost-effectively or to be more technologically enabled and connected.
This sector operates more in the service space but has a very strong technology underpinning and innovations to make cities more environmentally friendly, find new ways to treat water and waste, be more efficient with energy and electricity, etc.
ESG and sustainability
Williams identified the fourth major trend as ESG and sustainability.
This trend has been growing for the past few years and is set to grow even further as an increasing number of countries and companies transition to more sustainable and environmentally friendly models.
Williams used the examples of Satrix’s MSCI World ESG and MSCI Emerging Markets ESG ETFs to show how investors can capitalise on this trend.
This first provides developed market equity exposure, while the other provides emerging market equity exposure.
“Both those ETFs aim to exceed the minimum requirements laid out by the European Union’s climate transition benchmark regulations,” he explained.
“There are some standards that have been set in terms of what you can invest in to meet those requirements from a net-zero perspective and ultimately achieve some of those climate targets that were agreed upon in Paris.”
However, he said they also incorporate ESG dimensions into the index’s design and consider risks relative to the broad universe of MSCI World or MSCI Emerging Markets.
“So that you’re not achieving one objective at the expense of market performance,” he explained.