According to fabled US stock market trader Jessie Livermore ‘the big swings make the big money’.

Livermore was used by Edwin Lefervre as the basis for the character of Larry Livingstone in his investment classic Reminiscences of a Stock Operator. The bestselling book, dedicated to his memory, was published a century ago but this same truth of the importance of the big picture is evident in the dominant investment themes of the last few decades.

As we start a new year, investors should have as much of an eye on the big structural themes they should be investing in now for 2030 as what’s going to work in 2023.

In this article we examine some of the mega-trends which the experts think could hold sway in the remainder of this decade and beyond as well as ways of playing them.

IDENTIFYING ‘THE BIG SWINGS’

Even for those who have followed markets for a long time, spotting these big themes and understanding the drivers is no easy task.

The 1960s was marked by the rally in the so-called Nifty Fifty, which were US growth stocks with consistently high earnings growth and high price to earnings ratios heavily favoured by institutions.

The early 1970s saw the Nifty Fifty stock bubble burst while the global recovery from the oil crisis of 1973 saw a resurgence of risk appetite with money flowing out of the US and into overseas markets, particularly those considered ‘emerging’ at the time.

The bubble in Japanese real estate in the 1980s, driven by cheap finance and a lack of land for development, was years in the making and gave rise to legendary tales of over-valuation such as the site of the Tokyo Imperial Palace being worth more than the whole of the state of California.

Instead of property, the tech bubble of the 1990s saw company valuations inflated way beyond the bounds of reason with profitless businesses being valued at billions of dollars based on ‘clicks’ and ‘eyeballs’ rather than traditional financial metrics.

The rise of China in the 2000s drove a huge increase in demand for raw materials following a decade of chronic under-investment, largely due to mining companies scrapping their expansion plans because the stock market assigned almost no value to their business during the previous decade.

The reign of the ‘FANGS’ from 2010 capitalised on the trillions of dollars invested in technology during and after the 1990s bubble and the internet ‘revolution’, the crucial difference being that this time the companies which came to dominate the stock market were, by and large, hugely profitable.

Could the theme of the 2020s be energy? As the head of BlackRock (BLK:NYSE) Larry Fink noted in his 2022 letter to CEOs: ‘Every company and every industry will be transformed by the transition to a net zero world. The question is, will you lead, or will you be led?’

As we look out towards the end of this decade, we need to learn the lesson from previous ‘big swings’ and think not just about growth but about profitable growth.

WHAT DOES THE FUTURE LOOK LIKE?

We may only be a couple of years into the decade but already a lot has changed as far as geopolitics, trade and the economy are concerned.

A new global order is emerging, with one bloc dominated by the US and another by China leaving Europe on the sidelines, raising concerns over economic and even physical security for some countries and leading to increased military spending.

The globalisation of trade appears to be being rolled back at pace as the Covid pandemic exposed over-long supply chains, with many companies looking to re-shore or at least near-shore stocks of finished goods and in some cases even move their centres of production.

Big themes for the 2020s and beyond identified by the experts

- Energy transition

- Climate change

- Population growth and resource scarcity

- Automation and robotics

- Space technology

- Shifting demographics

On the one hand this change in trade flows is undoing one of the key benefits of globalisation, namely lower costs, but on the other reducing the amount of goods shipped from Asia to Europe and the US means lower transport costs, so it isn’t clear whether the net effect will be inflationary or not.

However, reducing seaborne and airborne trade is good news for the environment as it means lower carbon emissions, and companies are increasingly having to account for not just the direct impact on the planet of running their business but the indirect impact, or what are known as Scope 3 emissions.

How companies navigate this new world will shape the rest of the decade, and for investors what might have seemed a straightforward strategy in the past may no longer apply, but for those able to identify the correct trends the pickings are rich judging by the past.

The rise of thematic investing

In the last decade, the amount of money managed by thematic funds has exploded from $100 billion to $1.5 trillion according to index and data provider S&P Dow Jones.

Many of the thematic ETFs (exchange-traded funds) available are less than three years old as new technology such as machine learning has enabled firms like S&P to create increasingly specialist indices which the ETF providers can then make into investment products.

As an example, while car-maker Tesla (TSLA:NASDAQ) would be an obvious ‘core’ candidate to consider for an electric vehicle index (and subsequently an ETF), companies which mine the raw materials used in EV batteries may be less obvious but are worth including as ‘non-core’ members because they form part of the EV supply chain.

Increased demand from investors for ‘the next big thing’ and advances in technology don’t always make for sure-fire winners, however.

The theme of ‘disruptive innovation’ promoted by funds such as Cathie Wood’s ARK Innovation Fund (ARKK:NYSE) was a disaster last year with the fund losing two thirds of its value.

Similarly, most US cannabis ETFs lost around 70% despite growing adoption of CBD products and optimism that Joe Biden’s presidency could see cannabis legalised at the federal level.

On the other hand, oil – probably the most low-tech theme imaginable – was the standout winner last year with the S&P Energy Sector ETF (XLE:NYSEARCA) jumping nearly 60% due to energy security worries after Russia’s invasion of Ukraine.

WHAT ARE THE NEXT ‘MEGATRENDS’?

The good news for small investors is there are dozens of investment managers out there whose job it is to think about the big themes which are going to change the world.

The bad news is they all have different ideas about what those themes are and how we should be investing in them.

US investment giant BlackRock believes there are five ‘megatrends’ which will shape the future: technological breakthrough, rapid urbanisation, demographics and social change, climate change and resource scarcity, and emerging global wealth.

It offers five separate funds so investors can tap into each of these themes individually, with each fund investing in other BlackRock-managed products such as the BGF Circular Economy Fund (BHNMYS7) or the iShares Ageing Population ETF (AGED).

Fellow US investment firm Fidelity has a few ‘megatrend’ funds of its own.

With a third of the world’s population having no access to safe drinking water, the Fidelity Sustainable Water & Waste Fund (BHR44F6) invests in companies helping to deliver safe, reliable and accessible water as well as waste management.

With the world turning away from fossil fuels, the Fidelity Clean Energy ETF (FRNW) invests in companies which produce or support the production of energy from solar, wind and other renewable sources.

Not to be left out, UK fund management firms Abrdn (ABDN) and Schroders (SDR) also have a clutch of thematic funds ranging from climate transition and sustainable development to food and water and social impact investing.

MORE ‘FUTURISTIC’ THEMES

For those looking for the ‘blue-sky’ themes of tomorrow, there are some fascinating funds and ETFs available.

Automation and robotics is a popular investment theme, with machines already playing an essential role in many industries.

As technology improves and computer chips get ever more powerful, the potential applications for robots keep growing.

With no fewer than four indices and six ETFs to choose amongst from providers such as BlackRock and Legal & General (LGEN), investors are well catered for.

Also, Swiss investment firm Pictet runs the open-ended Pictet Robotics Fund (BDB6DB9) with nearly $6 billion of assets invested in technology companies around the world.

Another popular theme is space, which thanks to lower costs and technological advances is no longer the exclusive domain of governments but has become a business for companies and private individuals.

Rob Desborough, chief executive and managing partner of the world’s first listed space fund, Seraphim Space Investment Trust (SSIT), believes space offers ‘decades of opportunity’ for investors.

Thanks to its industry connections, the trust has ‘first-mover’ advantage as it sees three quarters of global deal flow in privately-owned space-tech which means it can invest in the best ideas at an early stage.

WILL THE METAVERSE TAKE OFF?

If space technology isn’t cutting-edge enough, an even more futuristic investment theme is the metaverse which uses AR (augmented reality) and VR (virtual reality) to create a virtual 3D universe where users interact with each other.

Underlying the metaverse is blockchain, which consists of blocks of information held on a series of interlinked computers connected to an upgraded version of the internet known as Web3.

The most well-known advocate of the metaverse is Mark Zuckerberg, the founder of Facebook who has doubled down on his vision by committing 20% of overall spending at Meta (META:NASDAQ) to augmented reality and virtual reality hardware this year.

So far, the market doesn’t seem to have bought into the metaverse concept and Meta shares themselves have lost 70% of their value or more than $700 billion since the start of 2022 as the firm continues to rack up large losses.

Investors still interested in the metaverse have a range of alternative ways to play the theme. For example, there are several ETFs listed on the London Stock Exchange which invest in metaverse-related companies.

This group includes Franklin Metaverse ETF (METU) which has stakes in such companies as payments-to-audio streaming provider Block (SQ:NYSE), phones and laptop giant Apple (AAPL:NASDAQ) and gaming group Electronics Arts (EA:NASDAQ).

Consultancy McKinsey estimates that companies in general spent around $120 billion on metaverse-related developments in the first half of 2022 alone, a significant amount of money.

A DIFFERENT APPROACH

Unlike most active funds managers, who approach thematic investing by picking stocks on a top-down basis, Steve Wreford and the team running the Lazard Global Thematic Focus Fund (BK6V4Y8) look to identify the big structural themes of the future from the bottom up.

‘Structural change tends to cut across industries, styles, and geography, blurring the boundaries between them and creating a high degree of commonality among the challenges facing companies today,’ says Wreford.

The team speaks regularly with companies, discussing the challenges facing them and where they intend to allocate capital on a 10-year view, to work out ‘where the profit pools lie while avoiding areas where returns are at risk of being competed away’ adds Wreford.

The result is a fund which is diversified across six proprietary themes, each consisting of between eight and 12 ‘best ideas’.

‘Asset efficiency’ looks at the impact of technological and regulatory change driving companies to operate more sustainably and efficiently in terms of energy use, carbon emissions, water conservation, supply chain waste and so on.

Technology inevitably plays a key role in future trends, and the fund splits the sector into ‘Bits of chips’, which focuses on the increasing digitisation of industries from car-making to telecommunications and healthcare; ‘Software as a standard’, which taps into the transition from selling software licences to cloud and subscription services; and ‘Data, networks and profits’, which capitalises on the trend for business service companies to analyse complex datasets to add value to their end customers.

Lastly, ‘The empowered consumer’ theme invests in companies in media, travel, video games, cosmetics and apparel which are tuned in to the needs of future generations of consumers, while ‘Digital runway’ looks at the opportunities for fintech companies in emerging markets.

‘Truly transformative shifts tend to unfold at a non-linear pace, surprising markets in terms of both size and duration, and the majority of an equity’s value is derived from understanding these shifts over the long term,’ concludes Wreford.

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