Keeping track of megatrends is a valuable investment exercise to practice on a regular basis. Megatrends are not often covered accurately or with full context by CNBC or the front page of the WSJ. Daily financial media is incentivized less to broadly inform and more to create an immediate emotional reaction. These trends happen slowly until they become obvious and enormous. Understanding the underlying societal and economic currents that are driving today’s investment world helps provide context as to why prices are what they are.
Instead of shaking your head and thinking, “this makes no sense”, the bigger contextual picture can help open the door to a new world view while reducing uncertainty and confusion. We’ve highlighted three core mega trends below.
Population, demographic changes and policy response
We wrote about population and the Biden Budget a few weeks ago in this article. The US depends on immigration to keep the population stable and to keep the average age of the population from rising as our citizens age. Other developed nations like China and Japan have almost no immigration and therefore will face aging population challenges in the near future. China has addressed this problem recently by changing the one-child policy to a three-child policy.
Without the dramatically growing population that we’ve had over the past hundred years, the US will have to increasingly rely on productivity gains to increase GDP. Productivity gains are directly related to improvements in technology and innovation. Over the previous 50 years, the population of active US workers doubled from 80m to 160m. Although possible, it’s unlikely that we’ll see another doubling over the next 50 years from 160m US workers to 320m.
The recent policy in the US and many global central banks has been to support financial market liquidity, Covid related issues and fight income inequality through stimulus. In the US in 2020 we promised $13T in stimulus of which we spent $8.2T so far. It’s not all that surprising to see the stock market where it is after all of that stimulus was added to a $22T GDP-sized economy. This past year has opened the door for further debt and stimulus increases as a method of instantly alleviating pockets of suffering. We don’t know where this loose fiscal policy will take us and it certainly draws many reasonable critics. We are all far better off in 2021 than without the stimulus package.
Businesses related to clean energy, carbon recapture, battery technology, electric vehicles, etc are aligned with positive climate progress. ESG (environmental, social, governance) used to be a term reserved only for the socially conscious investor class. Today companies that ignore climate change or social and governance issues (like Exxon) are at significant risk for disruption and potential failure down the road. The pressure on Exxon to pivot to clean energy is so great that a few weeks ago a small hedge fund named Engine No 1 was able to replace Exxon’s board members – a previously unheard of accomplishment by a tiny investor. The takeaway here is no investor today can afford to ignore climate change.
Technology and Innovation
If population growth is not going to drive global GDP going forward, then innovative has to pick up the slack. Where is the majority of innovation coming from today?
- Cloud Computing: Last week we wrote about 5G innovation, which is primed to unlock the next phase of cloud computing. As 5G increases overall connectivity, cloud-enabled software will record, process and act on exponentially more data. This is especially true as more iOT devices integrate into manufacturing, agriculture, energy, etc. Google is an obvious beneficiary of the growth in cloud computing innovation.
- Digital Finance: Companies like SOFI (digital banking and investing tools) or Upstart Holdings (AI-enabled loan origination) are leading the way forward in digital banking solutions. Traditional banks are unlikely to win this battle against the disruptors and will likely need to split into two groups: mass-scaled solutions for consumer banking activities and high-cost high-end boutique services like investment banking. In order to successfully adapt, traditional banks will have to adopt as many AI-first strategies as possible. Goldman’s Marcus product is a prime example of a traditional bank successfully practicing adaptation. There is also real potential for cryptocurrency DeFi protocols to disrupt the traditional business models for capital markets, derivatives and lending.
- Semiconductor Production & Innovation: The global market cap for all public semiconductor businesses is roughly $3.1T out of a $100T+ total global equity market. 3% seems oddly low to me given the importance of the industry and the fact that Apple alone is worth $2.1T. Amazon, Google, Facebook, Baidu, and other tech behemoths have started designing their own chips, which may explain why the overall semi market cap isn’t larger. You can expect this industry to continue to grow as cars become more like moving computers, for example.
- You can read about our other investment themes like Digital Health Care, the Battle For Our Attention and E-Commerce in our Major Themes article. Emergent cryptocurrency protocols are worth watching as well.
Not all businesses today are aligned with these trends or acting quickly enough to keep up. Over any given period, asset prices rise and fall based on changing narratives, institutional fund flows, government intervention, industry-wide investment rebalancing or retail meme stock trading. Over the coming years, investments that contribute to our productivity capabilities, have little to no climate impact, and are oriented towards cutting-edge innovation are likely to be the best performers.
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