A look at the investment landscape and some trends moving forward
Written 28/04/2020.
This post actually started off as an answer to an examination question which I faced during my final Masters examinations. The question asked us to outline what we thought the most important macro-economic & demographic trends are going to be over the coming decade.
The last decade has seen the global economy go through significant, fundamental changes, with high levels of global turbulence — so much so that the 19th Annual Forbes Global CEO conference in 2019 was themed “Transcending the Turbulence” and focused on the very uncertain global economy. (Karlgaard, 2019) The decade began with the world in recovery mode after having just come through the Global Financial Crisis of 2008. The global economy was at a low point, with GDP’s falling all over the world, stock markets down record amounts, unemployment skyrocketing and more. (Zeleza, 2020) The end of the decade saw a slightly different picture, with the economy having recovered, there was still significant economic uncertainty associated with issues such as Brexit and the US-China trade war to name a few, but there were high levels of innovation and growth. With this innovation and growth, the global macroeconomy is set to undergo another period of fundamental changes over the next decade. Isolating major trends going forward allows for the identification of potentially profitable investment areas, which can potentially be leveraged into profitable investments.
Due to the COVID-19 epidemic essentially bringing the global economy to a sudden halt, the 2020s look to be starting in a similar manner to the 2010s. While the outcome of this period is still very uncertain, I think it is necessary to at least theorize about what trends may materialise as a result of the epidemic. Therefore, I have identified four trends which have been on the rise for a while now and a fifth, new trend which I believe will come about as a result of the current situation.
A major trend over the next decade is undoubtedly going to be the continuation of the ongoing power shift from West to East. Emerging economies have been on the rise for decades now and there are no signs of this growth stopping anytime soon. Considering purchasing power parity, developed economies accounted for 65% of global GDP in 1990. In 2015 this number was down to just 42%. (S&P Global, 2016) Innovation is key in these technologically driven times and emerging markets have been shown to be more effective innovators than developed economies, achieving 56% of their revenues through new products and services (McKinsey & Co., 2018). Another relative trend here, which is discussed later, is the shift in global demographics. The number of people aged between 25 and 65 is growing, and this group generally make up the majority of the work force and consumption. According to PWC, 85% of the global population and 90% of the population under 30 years of age live in emerging economies. (Harley & Belgavi, 2017) This clearly lines these countries up for massive growth over the coming decade.
The second important theme, which I have somewhat mentioned already, is going to be the global demographic change. The global population on the whole is aging. According to Dobbs et. Al. (2016), the second fastest growing population group is China’s working age population. This population group is set to increase by 20% before 2030 (Dobbs et. al., 2016). This ties in well with the earlier trend of emerging market growth. The fastest growing age group in the world is that of people above 65 years of age. (The United Nations, 2020) This lends itself to a growth surge in the healthcare sector, which should therefore be a profitable investment area over the next decade. Additionally, this gives the idea that Chinese firms are going to lead global growth over the next decade.
Technological advances are unquestionably going to be some of the defining features of the next decade. New heights in innovation have led to the start of a “tech cold war.” (Wu & Hoenig, 2019) The winner of this will be dominant in artificial intelligence (AI), machine learning etc., which brings with it massive commercial and national security advantages. (Wu & Hoenig, 2019) According to Castro & Chivot (2019), the US are in currently winning this war. However, with the massive Chinese population being very engaged with technology, this looks set to change over the coming years. The below figure shows how large the difference between the number of American and Chinese mobile users is. Another very large area of potential technological growth where China seem to be the winners, is 5G. 5G is set to be the next big development in the way humans communicate and therefore if China do take this one, they will gain a huge advantage in this “war.” My recommendation off the back of this trend would be to invest in communication and AI based Chinese technology firms, which should experience exceptional growth over the coming years.
The fourth trend which I think is going to shape the global economy is the rise of socially responsible investing. Socially responsible investing is defined as “the integration of environmental, social and governance (ESG) factors into investment processes and decision making.” (Kell, 2018) Consumers have been increasingly focusing on the ESG impact that their investments are having. In 2018, about one quarter of global assets under management were invested in socially responsible investments. (Kell, 2018) Additionally, assets under management of socially responsible investments are growing by nearly 40% year on year. (Kostigen, 2019) This growth is showing no signs of slowing down and any investments made in socially responsible funds should return significant profits in the long run.
The main trend which I think will come about as a result of the COVID-19 epidemic is the substantial growth of the so-called “Four-Comma Club.” (Krauskpf, 2020) The Four-Comma Club refers to the companies which have reached market capitalisations of over $1 trillion. So far, this exclusive club includes only Apple, Microsoft and Alphabet, with Amazon (who did enter the club temporarily before falling out again) hovering on the border line and Facebook edging closer with time.
Alphabet is the parent company of the slightly more well-known Google and had $115 billion of cash on its balance sheet before the virus. (Seessel, 2020) With a large percentage of businesses having to find a way to operate effectively online during and after the global lockdown, Google is perfectly positioned to take advantage of this. With Forbes reporting that 83,3% of Google’s 2019 revenues came through online advertising and an obvious increase in online advertising as a result of COVID-19, Google’s main revenue stream should be set for exponential growth.
Amazon’s operations are also in a clearly ideal position to thrive during this lockdown and this has already been observed so far, with Amazon share up around 30% this year and currently trading at record highs. (La Monica, 2020) With investors and consumers nervous to venture outside their homes, Amazon’s ease of use and access from inside people’s homes makes them an obvious choice for stocks which should perform well during and post-lockdown.
These Big Tech firms definitely offer a very attractive potential investment opportunities as of right now, but who knows where this epidemic is headed.