Aug 25, 2021
Welcome to Finance and Fury. This episode we are going to have a
look at investing in megatrends.
When investing – there are many different approaches people can
take – people have different return requirements – hence, when
constructing a portfolio of investments, you may try to isolate
certain sources of return – such as capital growth or income
focuses
- If you are retired and needing a passive income, then an income
focus is more important – so purchasing share that pay FF
dividends, or owning a property that has no leverage or debt on it
will be the focus
- If you are an accumulator – you may wish to focus on capital
growth, or target sectors of that don’t typically pay out high
level of income returns, but have the potential for higher levels
of capital growth – such as technology or healthcare shares
- As part of this focus on capital growth – one method that is
available to investors is to target specific investment themes – or
“megatrends”
- This is where investors focus on high growth opportunities in
sectors of the economy that are expected to grow at higher rates
than the economy at large
- So in this episode - we unpack what megatrends are, how they
can be identified and invested in, and what they can offer
investors as well as the dangers to look out for
What are megatrends?
- A megatrend is a long-term structural shift that transforms
economies – I studied these trends in a course at Uni, UQ which
offered – Evolution of Economic Systems
- It involves trends of technological and demographic changes –
as well as creative destruction
- To be classified as a megatrend – they have to have defining
characteristic that distinguish them from normal economic cycles in
the way that any changes they create are enduring – i.e. long
lasting beyond a normal business cycle
- One of the biggest examples in the past 100 years is that of
the creation of cars - this ended the industry of horse drawn
carriage industry within 30 years
- This created major economic destruction – as not only did it
displace a use for horses which were seen as a major economic good,
but also those involved in providing carriages, driving those
carriages as well as breeding the horses – ask yourself, who would
invest in horse drawn transportation in the modern era? But go back
to 1850 and this was a major business
- The invention and effect of cars (or automobiles) was dramatic
and long lasting - Creating cars did not just make humans more
mobile, it also created the modern geography of cities, including
highways, suburbs and shopping centres.
- But it did take a number of years to get off the ground – as
initially cars were only available to the wealthy who could afford
the new novelty – but as supply ramped up with many competitors
coming to the market, prices started to drop to the point that cars
started to become affordable
- The introduction of the television is another example – this
was first introduced to Australia in 1956 in a commercial capacity
– and by 1975 there was a television in most households
- Television wasn’t just a revolution for media and
entertainment, it has also had profound social and cultural
impacts.
- We have also had the megatrend of the internet – But this is
where two or more megatrends can combine to create another dominate
force in the economy, which translates into investment
opportunities – In our current world – this would be in the form of
streaming services, like Netflix
- What megatrends all have in common is they are intertwined with
demographic and technological changes -
- However – to take off fully, they typically need to be allowed
to occur by governments – i.e. the legislative power – we saw this
back in England with cotton gins – which are a machine that quickly
and easily separates cotton fibres from their seeds, enabling much
greater productivity than manual cotton separation – this is also
called ginning – but in the UK back in the day, to be granted a
business licence you needed to seek royal assent - so the inventor
of the cotton gin went to the Queen of England for a licence to
start a business using this new technology, but was denied due to
the economic destruction this would have caused – so they went to
France and got granted the right to start their business
- Like all megatrends - the uptake in the use of the technology
or service is usually exponential; at first there is a time-lag for
adoption, then soon the megatrend is everywhere – which is why the
UK soon allowed cotton gins to not fall behind the garment
production of the French
- Needless to day - Megatrends can have implications for
investors who can correctly identifying and act on them
- Those who invested in media businesses in the 1960s, went on to
reap super profits. So too did those buying into computer
businesses like Microsoft, Apple and IBM in the 1970s for the PC
revolution. This is all an exercise in hindsight of course,
however, illustrates the power that megatrends can play in shaping
markets and investment outcomes – but there are also megatrends
that just turn out to be part of a normal business cycle before
creative destruction swallows them up – such as blockbuster
Examples looking forward - Transformative Technology, Society &
Lifestyle, Health & Wellness, and Environment & Resources.
- Transformative Technology - Such as cloud computing, 5G,
robotics, automation and artificial intelligence, and machine
learning.
- Technological breakthrough is the most obvious and has been a
defining megatrend since the industrial revolution, which created
factories and modern mechanics,
- But investing in disruptive technology is easier said than
done. With many investors missing out even when the opportunities
stare them in the face.
- The better question to ask is where might technological
breakthroughs come from this decade? One possibility is robotics,
automation and artificial intelligence (RAAI), or “industry 4.0”.
- There was Industry 1.0 – this was the Mechanization and the
introduction of steam and water power
- Industry 2.0 Mass production assembly lines using electrical
power, Industry 3.0 – was about automated production, IT systems,
and robotics
- Industry 4.0 is about looking forward – it includes smart
factory, Autonomous systems, IoT (or the internet of things),
machine learning - Industry 4.0 is the increasing automation of
manufacturing and services, such that machines manage other
machines—via “machine learning”. In concrete terms, industry 4.0 is
where businesses use modern robotics, the internet, and big data to
create remotely controlled factories, self-driving cars, and
self-programming computers and more.
- When looking at existing businesses as an example - Amazon’s
giant warehouses come to mind
- Historically, warehouses consisted of static shelves. Workers
would come and add or remove items to and from the shelves as
supplies and demand came in – each industrial revolution has
increased the capacity of this economic environment – from people
having to carry the goods through horse and buggy and manually lift
the goods to shelves – to having trucks transfer the goods and
machines like forklifts doing the heavy lifting
- However – looking forward – In an Amazon warehouse, the shelves
are all mobile and moved by robots. The robots move items as
customers buy them via a complex barcoding and computer system.
Thanks to machine learning, the robots holding trending or popular
items, have learnt to move nearer delivery points. In this picture,
much of the work done by humans, has been replaced by machines
- This trend once introduced will likely not decline – so there
is potential for further investment growth in this market
segment
- Society & Lifestyle – This comes in the form of demographic
changes like aging populations, the growing middle class in
emerging economies and the further expansion of social media
- This is one of the more complex megatrends due to the tie into
other megatrends – as an example -in emerging markets, especially
India, the population is getting younger – however - in developed
countries, especially Japan and North Europe, populations are
ageing – so in some areas of the world – there is an ever-greater
amount of social life that moving online where millennials’
purchasing power is increasing, but in others the older population
make up more of the social fabric of economic spending – what they
spend money on also differs – however – across the board, online
spending is increasing as well as socialisation online as well as
working environments and socialisation
- The major winners of social life moving online have been
Facebook, Apple, Netflix, Google and the other so-called “FANG”
stocks. Facebook and Google have replaced newspapers as the primary
distributors of information and cannibalised their business models
(selling audiences to advertisers)
- As part of a work demographic trend - Women entering the
workforce has caused a booming day-care industry
- Demographic changes promise to create winners and losers,
however, investment opportunities at this stage are less
straightforward. India and China collectively have 1 billion young
people, most of which are heavy internet users thanks to smartphone
availability. This creates a strong runway for the digital economy
in emerging markets. Meanwhile, aging populations have meant Japan
buys more adult nappies than children’s nappies.
- Aging populations have consequences for robotics and automation
which will be required to meet labour shortfalls and likely
consequences for healthcare – this brings up the next trend
- Health & Wellness – this includes biotechnology, genomics and
gene editing technologies of the future
- the healthcare megatrend has been in play for a number of years
where as there in an increasing demographic of wealthy older
population across developed nations, there is naturally an increase
in the money spent on medicines and longevity technologies
- Healthcare spending is growing faster than GDP in most
countries, data from the World Health Organisation indicates. This
means that that the healthcare sector is taking an increasingly
large share of the global economy. Most of the growth owes to
government support, which is substantial and increasing.
Governments’ hands have been forced into greater healthcare
spending.
- On top of this, you have the wellness movement - Wellness
refers to the growing concern with diet, exercise and lifestyle
that has developed in developed countries – This predominately is
within the younger generations which represents a different market
share from that of the aging population
- But perhaps more problematically, obesity is climbing in many
western countries. According to the WHO, the percentage of
overweight adults is approaching 40% globally. Healthcare problems
stemming from obesity are manifold – or in other words, obesity
leads to many different health conditions - including heart
conditions, diabetes, and some cancers – so health care providers
have no shortage of demand for their services – both from the
elderly population but also from younger portions of the population
that require medical treatment due to obesity or other antithetical
health behaviours – such as alcoholism or obesity
- however, healthcare technologies are also improving, tying into
the first megatrend. Biotechnology has been a major area of
development
- Environmental & Resources – this is part of the global
political trend in the west to transition away from fossil fuels
towards renewables and technology like battery storage – however -
countries that we export our production to, such as China or India
aren’t beholden to the same regulations, which is why we see the
trend of any energy or pollutant heavy industry being outsourced to
these countries –
- This brings out the next megatrend – the western developed
nations are focusing on sustainable energy and emissions when it
comes to production of economic output - Batteries are essential
for sustainable energy, as they store the electricity produced by
wind, solar and hydro. Renewables are receiving renewed attention
and government policies and subsidies – weather efficient or not –
this is where hundreds of billions of dollars are anticipated to be
spent in this industry
So these are the four main areas of megatrends - The criticisms
of investing in thematic trends – you are buying overpriced growth
shares –
- Purchasing into thematic ETFs can result in buying expensive in
vogue share, where their valuations have stretched too far due to
people over purchasing these shares – i.e. they can have a negative
earrings but be overpriced
- This is due to the market likely being already aware of the
megatrend and hence has already “priced it in” to a shares price –
which can often occur overoptimistically
- Tesla is an example - featured prominently in criticism to this
effect in recent years, with many investors saying that Tesla is a
“bubble”. This line of criticism is often extended to argue that
investors are better off buying into “value” stocks, which are
companies that trade on lower price-to-book or price-to-earnings.
Or simply buying a passive market weighted index fund like the
S&P 500 and not taking any long-term views.
- This brings up another point - that just because a company’s
share price looks expensive, does not mean it cannot rise further –
this is based around traditional metrics – where if a company has a
PE of 40+ it is considered growth – but this could mean that other
people still want to buy and the PE rises further
- As an example - the rise of Afterpay is an example of this
dynamic – a company with no PE due to having lost 10s of millions
of dollars each period can be valued at the same market cap as
Telstra
How to access – you can try and select the share you think is
going to do well yourself
In my opinion – the better way would be to buy a basket of
shares in a megatrend – through an ETF - there are many ETF
providers for this form of investment thematic
- Megatrends can offer investors a lot - But trying to guess what
the next trend is and accessing them has not always been
straightforward.
- Previously, investors would have to research and identify the
trend themselves, do all the work identifying potential winners,
then go buy them
- With the rise of thematic ETFs over the past few years -
megatrend investing has become more readily available
- Thematic ETFs are a new arrival in Australia and have become a
popular tool for investors
- Thematic ETFs work like the familiar ETFs and index funds: they
follow indexes. However, the indexes they track are devised
specifically to target megatrends - They can in some instances be
built by research houses or consultancies with specialist knowledge
of a megatrend.
- How to select a thematic ETF - When selecting thematic ETFs,
investors need to ask a series of questions.
- First and foremost is about the megatrend the ETF aims to
target. Do investors find the megatrend convincing? How sustainable
is the growth? And what does the evidence and data say about the
theme?
- You can select an EFT for each specific megatrend – AI to
demographics – so do you purchase one, or split between each?
- Secondly, investors must ask how the thematic ETF targets the
megatrend. Does a thematic ETF offer true to label exposure to this
megatrend? How does it go about identifying the companies driving a
trend? How are they weighted when they are purchased? What is the
overlap between this fund and any other funds or ETFs an investor
might already have? A good thematic ETF should give true to label
exposure, have a process for picking the right companies, and not
hug a famous benchmark.
In summary – these investment trends can provide additional
growth for the future – but only if the trend continues
Getting the right selection is important – historically this has
been hard for an individual to achieve – but in recent times with
the increase of professional managers providing these services
through ETFs – accessibility has increased – but the issue comes
back to identifying the correct megatrend and then relying on the
ETF to purchase the correct companies to capitalise on this
trend
A google search can give you a list – let you come up with you
own decisions – this isnt advice – but some of the major providers
are ETF securities, Blackrock with ishares and statestreet are just
to name a few reputable providers to look at
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