Profit from the trends facing the next generation
Thursday 03 Nov 2016 Author: Steven Frazer

What sort of world will the infants of today experience when they reach adulthood? Will we be flying to work, holidaying on Mars, wearing super-sensory foil suits?

Probably not, but we may well be desalinating huge quantities of sea water for drinking, eating more biologically enhanced super foods grown in urban farms, speeding through the city streets in self-driving cars, and wearing gadgets that monitor our health and predict emergencies.

The megatrends of the future can provide interesting long-term opportunities for parents or grandparents investing for children through a Junior ISA.

Long-term predictions

It's a curiosity of forecasting the future that it can seem easier to take a longer-term view, say 15 or 20 years, than make relatively near-term predictions. Technology analyst Richard Holway
has been lauded as a man who has regularly got it right on the shape of the future, but even he admits that 'predicting what was going to happen in the next one to five years I have found to be extremely difficult.'

'But the next 20 years is a bit easier as everything that will become mainstream in 20-plus years time is around today,' he says.

When you're investing over a 20-year period or more you don’t need to concern themselves too much with volatility, short-term market fluctuations or current market sentiment. More important are the macroeconomic megatrends which will drive commercial activity in the future.

What is a megatrend

Megatrends are the powerful, transformative forces that could change the global economy, business and society. They have the potential to affect all of our personal lives and influence the outcome of our investment decisions.

'These anticipate changes in the world we live in be they demographic, technological, social, environmental or geopolitical,' say analysts at Pictet Asset Management. They believe that megatrends are dynamic systems of change that have emerged from the interaction of multiple, discrete micro-level trends, events and conditions, or in other words, forces of change that have gathered their own self-sustaining momentum.

'Cynics might dismiss megatrends as the stuff of think tanks and policy makers,' says asset manager BlackRock. 'We believe that the use of megatrends in investment processes offers real investment opportunities and the potential for attractive risk and return profiles.'

Some megatrends have been with us for many years, others are at an earlier stage in terms of their impact on the world. Popular themes include conservation, the earth and the steady depletion of basic resources, such as food, water and energy. Others relate to innovation concepts, genetics, automation, machine learning and robotics, for example. Then there are those megatrends that are about us ourselves, global demographics. Ageing populations and better healthcare provision, improved economic equality, emerging economies and growing middle classes.

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Bigger and stronger

Some megatrends promise to be more powerful than others, argue Pictet analysts. They point to changes unfolding in the make-up of the global population. Their data suggests that by 2020 the world will add 475 million people, 83% of them in Africa and Asia. While the European workforce will shrink, the African workforce will grow by 30% 'but the new sources of large scale employment remain to be found,' says Pictet. 'Hyper-urbanisation, meanwhile, will continue at such a pace that by 2050, 70% of humanity will live in cities, some of them sophisticated smart cities and others sprawling slums.'

'By 2030, demand for energy will increase by more than 30%, food by 50%. Water scarcity will affect 1.4 billion people if current trends continue.'

But this may not come to pass. Investment in resource innovation will continue to intensify to capitalise on these fundamental demand patterns with potentially transformative results. Pictet's analysts argue that nowhere is the scale of change more radical than in technology where, for example, the number of devices connected to the internet is expected to grow by more than 25% annually for the foreseeable future.

'This, in tandem with the stunning growth in social data, predictive analytic capabilities and super-computing will fundamentally alter supply chains and business models.'

Shares has highlighted three megatrends that we believe offer the long-run thematic investment potential to suit those with a 15 or 20 year horizon, or even longer, with accompanying investment suggestions within the equities, funds and investment trusts space.

Some investors may want to consider employing the skills of an active fund manager to select stocks that provide exposure to a particular theme, as long as they are prepared to pay the associated costs that come with such investments. Others may want to consider an index approach, investing in funds that offer exposure to themes by tracking specially-constructed indices. (SF)

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HOW TO PLAY SHIFTING DEMOGRAPHICS

Two young kids dressed up as an old people couple are in love many years down the road.

Investors with the ability to think through the implications of a growing – and also ageing society – and an investment time frame long enough to ride out the ups and downs can find the makings of a megatrend in demographics. Biotechnology and infrastructure funds are among the ways to play this through a Junior ISA.

Demographics is a broad trend because many underlying trends like, for example, healthcare, resource scarcity, food and technology feed into it.

Regional variations

Geography is important because population change will vary across regions – for example, by 2050 50% of global population growth is expected to be accounted for by Africa. And the make-up of demographics is also important: the over-65 age group is expected to be a significant driver of overall growth as healthcare improves and life expectancy rises, according to ETF specialists at iShares.

Positioning an investment strategy to capture demographic dividends is not straightforward, according to analysts at investment bank Berenberg.

‘Since publishing our major report on demographics in June, we have met circa 600 investors,’ writes Berenberg analyst Nick Anderson.

‘The idea that interest rates could still be at 0% in 2030 and that valuations will continue to stretch saw almost no pushback. Investors’ main concern was whether our arguments were relevant in the short term. Post-marketing, our conviction that demographics matters, a lot, and that Japan is the playbook has strengthened.’

Anderson says Japan’s two decade long stagnation is in part a result of a static working age population which has dragged on economic growth and pushed interest rates down to zero.

Were Japan to be the playbook in other wealthy countries – lower interest rates for a longer period of time would imply expanding price-to-earnings ratios on equities, other things being equal.

So-called bond proxies – stocks with stable earnings and some growth potential should do well in such an environment: utilities stocks and infrastructure-style investments are natural beneficiaries in theory.

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Ways to play

Investment themes to benefit from demographics may also include areas like natural resource or water scarcity, healthcare and biotechnology funds or technology.

Themes including biotechnology and genomic research can be accessed through the AXA Framlington Biotech fund (GB00B784NS11), among a number of options in the healthcare arena. Investors looking for diversified utilities or infrastructure investments could look at iShares Global Infrastructure ETF (INFR).There also a range of open-ended funds and investment trusts which invest in infrastructure assets.

In water, iShares Global Water ETF (DH20) invests in the world’s 50 largest companies involved in water-related business, while Pictet Water (LU0448836600) is also well respected in this area. (WC)


FEED THE WORLD’S EXPANDING POPULATION

agriculture

The anticipated surge in the world population from 7.4bn to 9.2bn by 2050 presents a major challenge – and opportunity – for the agricultural industry. Food producers and agriculture companies could therefore be interesting additions to a Junior ISA.

Patrick Dixon, author of The Future of Almost Everything, believes we will see more genetically modified crops in many regions, with crops resistant to disease, drought, and able to grow in salty soil.

Dixon also believes many African nations will embark on a ‘green revolution’ similar to India in the 1970s and 1980s, given added momentum by China which is buying huge areas of fertile African land to secure food supplies.

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Time to go fishing

Demand for fish is anticipated to grow faster than for meat, reflecting increasing wealth as well as the battle against obesity and heart disease. Genetics group Benchmark (BMK:AIM) has salmon breeding expertise. AquaBounty Technologies (ABTU:AIM) recently secured permission to sell genetically-modified salmon in Canada.

Citizens in emerging markets are becoming richer too. Consultancy firm McKinsey estimates that, in China and India alone, about 1.1bn people will have joined middle class income groups between 2005 and 2025. This will drive a huge increase in meat consumption and a dramatic expansion in demand for grazing pastures and animal feedstock.

Carr’s (CARR) is one of our top picks for playing the food theme. The Carlisle-based group is investing in its R&D-backed international animal supplements business in the UK, Europe and US.

While feed block sales volumes in the UK are under pressure due to well-documented challenges in the agriculture market, Carr’s is seeing excellent volume growth in the US, reflecting continued market growth and market share gains.

We also like agricultural inputs supplier Wynnstay (WYN:AIM). Its agricultural activities span the manufacture of feeds for farm livestock to the supply of seeds, fertiliser and agro-chemicals as well as grain trading.

Bangers and mash

Devro (DVO) supplies collagen casings for sausages, salamis and hams. Each year it produces enough collagen casing to stretch to the moon and back several times. We believe Devro offers a compelling long term play on burgeoning global demand for collagen casings linked to higher protein consumption in emerging markets.

Investment funds relevant to the food theme include Sarasin Food & Agriculture Opportunities Fund (GB00B2Q8L643). Fund manager Henry Boucher seeks to achieve long-term capital growth through investments in food and agriculture companies from across the world. (JC)


THE FOURTH INDUSTRIAL REVOLUTION

A young IT professional happily looks over a large pile of tangled internet cables on his desk. He is dressed in a blue shirt, tie and glasses while looking over worked and tired in front of light blue backround. Retro styling.

‘We stand on the brink of a technological revolution that will fundamentally alter the way we live, work, and relate to one another.’ So wrote Klaus Schwab in January 2016, the founder and executive chairman of the World Economic Forum. ‘In its scale, scope, and complexity, the transformation will be unlike anything humankind has experienced before.’

Schwab was referring to what he calls the ‘fourth industrial revolution,’ a combination of digital technology, super-connectivity and human behavioural change that has far-reaching implications for everyone.

This new digital industrial revolution has the potential to raise global income levels and improve the quality of life for populations around the world.

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Unprecedented processing power

The possibilities of billions of people, businesses and organisations connected by mobile devices, with unprecedented processing power, storage capacity, and access to knowledge are, seemingly, unlimited.

Emerging technology breakthroughs in fields such as artificial intelligence (AI), robotics, the Internet of Things (IoT), autonomous vehicles, 3-D printing, nanotechnology, biotechnology, materials science, energy storage, quantum computing are coming thick and fast and, as with past seismic changes to how we live, are creating enormous opportunities to design, build, use and invest.

‘Technology can create significant disinflationary pressures, increase price discovery, reduce labour costs and create operational efficiencies,’ explain analysts at investment manager BlackRock.

Ordering a cab, booking a flight, buying a product, making a payment, listening to music, watching a film, playing a game - any of these can now be done by almost anyone, almost anywhere today.

Winners and losers

Importantly, rapid technological development ‘also differentiates losers and winners and encourages the formation of asset-light businesses with low overheads,’ add BlackRock’s experts. According to PwC analysis of Facebook data from 2014, if Facebook were a country, it would be the second most populous in the world (after China).’

Accessing such vast potential market opportunity is perhaps done most efficiently through funds, providing entry to a swathe of technological opportunities through the expert eyes of an experienced and proven manager. Investment trusts such as Allianz Technology Trust (ATT), run by Silicon Valley-based manager Walter Price, and the Polar Capital Technology Trust (PCT), managed by London-based Ben Rogoff, are good options.

An emerging alternative is the Neptune Global Technology Fund (GB00BYXZ5N79). It has been running for a little less than a year so there is a limited track record to judge it by.

Investors looking for an even greater top down approach might consider using trackers. BlackRock has collaborated with STOXX and Factset to set up several megatrend indices of shares. Options include iShares Healthcare Innovation (HEAL), iShares Automation & Robotics (RBOT) and iShares Digitalisation (DGTL). (SF)

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