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Megatrends
Megatrends are transformative forces that have a deep, profound impact on the future of the global economy. Taking years or even decades to take root, Megatrends often reshape the way societies live, work and play. They can bring about seismic changes that can birth new industries or disrupt existing ones.
Megatrends can offer compelling investment opportunities. Investors should get ahead of the curve by positioning their portfolios to capture the growth benefits offered by these long-term structural opportunities.
Through these following perspectives, we can view the dominant forces shifting the investment landscape and understand what will drive the world of tomorrow. The intersection of these dynamics can lead to the formation of Megatrends.
Technology-enabled Transformations
With Artificial Intelligence (AI), technological advancements and breakthroughs are driving accelerated growth and transformation across all sectors of the global economy. To survive disruption, businesses will need to embrace innovation-driven growth or risk being left behind.
The deployment of smart solutions will also be instrumental in the world’s journey towards a sustainable future. This includes the development of clean, renewable energy to tackle climate change and lower the carbon footprint. Leveraging on technology will help to drive the circular economy so we can reduce, repurpose and recycle as much as possible.
Changing Demographics and Consumption Trends
Changing demographics are leading to shifts in societal values and consumer behaviour, impacting generational spending patterns. An increasingly-affluent middle class in developing economies will lead to demand for better-quality, aspirational goods and services.
Meanwhile, the growing silver generation will spend more on healthcare-related goods and services. As a generational shift takes place, companies will have to reorient their strategies and priorities to cater to millennials – digital natives who value sustainability and social responsibility – and beyond.
The Shift in Global Economic Power
The strategic rivalry between the leading super economies of this century – the US and China – will set the stage for a battle for technological supremacy, spurring innovation as both countries ramp up their technological capabilities.
Given their size and economic dominance, the US and China often exert influence and set global standards over the regulatory frameworks, economic policies and market dynamics of other countries. The breadth and depth of their financial markets provide an opportunity for investors to pursue returns on both sides of the spectrum as part of a diversified portfolio.
Sustainability: Climate Change and the Circular Economy
Combating climate change
Urgent action is needed to tackle climate change and reduce the carbon footprint. According to the United Nations, most countries have announced a peak-carbon target by 2030, while 130 countries have pledged to reach net-zero carbon emissions by 2050. Companies that do not reduce carbon emissions will have to buy carbon credits, which will eat into their profitability.
An additional US$1.8 trillion of investments a year (Figure C1) in renewable energy and other technological innovations is needed to transition to the envisioned low-carbon future. Furthermore, climate-related technological solutions have the potential to drive jobs creation and sustainable growth.
Figure C1. An additional US$1.8 trillion of investments per year is needed to reach net-zero carbon emissions.
Source: World Bank, International Energy Agency, McKinsey, OECD, Goldman Sachs Global Investment Research.
Climate change can be a threat, but also an opportunity. Investors can build a thematic portfolio around the green movement. Opportunities can be found in sectors related to energy transition and climate change, as well as the infrastructure and innovative technologies which support a low-carbon economy. These sectors include the building block sectors, research & development (R&D) and supply chain surrounding decarbonisation efforts.
“Closing the loop” with the circular economy
Countries need to mobilise more efforts to stay on track to meet the ambitious above-mentioned net-zero emission targets. The circular economy is a paradigm shift that offers a more sustainable alternative to combat climate change. It reengineers the way we produce and consume to limit environmental impact and reduce waste. “Closing the loop” (Figure C2) can be done by recycling, reusing, repairing, refurbishing or remanufacturing.
Figure C2. New technologies “close the loop” in the circular economy by effectively extracting and reusing existing materials to reduce waste and carbon emissions.
There is already a broad adoption of sustainable efforts in the circular economy. For example, aluminium from aircraft bodies can be stripped and reused as raw material for the construction of newer, fuel-efficient aircraft or upcycled into circuit boards, computers and TVs.
The recycling of electronic waste is an example of the circular economy’s value. Lithium-ion batteries, usually found in mobile devices and electric cars, have been notoriously difficult to recycle. But the recovery of all metals from these batteries is now possible due to the advancements in technology, which reduce the need for metals mining and lower carbon emissions by five times per amount of metals recovered.
Creating loops in the food chain also helps to reduce greenhouse gas emissions associated with food waste that ends up in landfills. New technology has increased organic waste collection rates and found alternative uses for food scraps. The conversion of edible food waste and discarded food by-products such as fruit peels and shavings into organic fertilisers is an industry worth US$700 billion.
The circular economy can lead to a more sustainable future. Companies that can build the technologies and infrastructure to support this will be instrumental in the race to net-zero emissions.
Innovation, Millennial Consumption Patterns and Social Responsibility
Millennials accelerating the digital way of life
The shift from baby boomers to millennials as a prominent spending force (Figure C3) will drive innovation and transform business models. Brands will have to rethink how they can appeal to this group of principles-based digital natives.
Figure C3. Millennials are expected to spend 17% more by 2025 and more likely to pay more for sustainability than earlier generations.
Source: Goldman Sachs Asset Management, Left: BofA Merrill Lynch, Javelin Research (2015). Right: Financial Times (October 2018).
Changing consumption patterns
As the largest demographic, millennials are pushing new frontiers in the consumption landscape. They are more likely to shop online, stream content and adopt digital payment methods. With rising incomes, they will also dominate demand for luxury goods compared with other generations.
That said, millennials also value experiences over material goods and are more likely to spend on entertainment, travel and dining than earlier generations. They are also more likely to embrace healthy living and eating. As digital natives, it comes as no surprise that they are leading the adoption of wearable technology to track and monitor health.
Millennials are the driving force behind the shared and collaborative economy. On-demand live-streamed fitness workouts, co-living communities, ride-sharing platforms and peer-to-peer exchange of goods are just some examples of how they have embraced the sharing of assets and services.
Considered the most technologically-savvy generation, millennials are also influencing the attitudes of earlier generations towards technology, where an increased use of smartphones and social media has been observed among Baby Boomers.
To thrive in this changing consumer landscape, companies will have to transform their business models to cater to the shifting values and preferences of millennials.
Social causes matter
Millennials are more loyal to brands which support social and environmental causes they care about, while avoiding those embroiled in socially-irresponsible acts (Figure C4). Social media plays a role in amplifying their social and environmental preferences.
Figure C4. Millennial investors are placing more emphasis on sustainability when it comes to investment choice.
Source: Sustainable Brands Survey: Millennials and Women Leading the Sustainable Investing Charge.
Brands will need to realign their values with those of socially-driven millennials or risk alienating them. Hence, more companies will have to adopt corporate social responsibility (CSR) initiatives such as reducing the carbon footprint, championing diversity, conducting ethical sourcing or donating to worthy causes to better engage millennial customers. This increased CSR emphasis will boost the global sustainability cause, providing additional opportunities for investors.
Innovation a necessity and an opportunity
As millennials hit their prime spending years, more markets will be disrupted to serve new needs. Companies must innovate and capitalise on technology to offer a redefined consumer experience to win over them.
To achieve scale, companies will need to invest in hardware such as servers and data centres, as well as more efficient operating systems and applications. A shift towards subscription-based software models can help companies build more sustainable revenue streams.
In particular, software or infrastructure as a service (SaaS and IaaS) allows businesses to expand easily with more flexibility and lower capital outlay. Investors can look out for opportunities to invest in these cloud-service businesses.
Figure C5. “What is SaaS?”
The China-US Innovation Race
Redefining the technological landscape
As the super economies of tomorrow, China and the US are competing for technological supremacy.
China is pushing forward with enormous political will to build capabilities in strategic sectors, which include developing self-sufficiency in semiconductors, accelerating artificial intelligence (AI) capabilities, building 5G connectivity and constructing smart cities.
Meanwhile, despite political disharmony in the US, it is not likely to derail the country’s technological ambitions as US corporates are taking the lead in developing green infrastructure.
China is adopting a strategy of short-term pain, long-term gain
In 2021, China unleashed regulatory reforms as part of its “common prosperity” model to reorient growth towards strategic national goals and build up self-sufficiency in key sectors. Tightening regulations to weed out bad corporate behaviour will also help China companies to better compete with their US counterparts in the long run.
Many of the changes are aimed at addressing China’s three main economic vulnerabilities: the dependence on (1) semiconductor imports, (2) energy imports and (3) the USD as a global trade currency.
- China plans to strengthen its technological capabilities and pursue greater autonomy in semiconductor production. Spending US$30 billion on semiconductor imports a month, China has realised the need to reduce its dependence on foreign imports following painful lessons from US sanctions to restrict chip supply.
- China spends US$290 billion on oil imports each year and is also keen to move away from its dependence on foreign energy sources. It has announced a peak-carbon pledge by 2030 and is supporting the use of electric vehicles as less carbon-intensive mode of transport. At the same time, it is doubling down on energy security by investing in pipelines to Pakistan, Russia and Kazakhstan and developing a blue-water navy to keep sea lanes open for energy imports.
- Taking steps to counter the USD’s dominance as a global trade currency, China is shoring up the Chinese Yuan (CNY) and building up its bond market. A stronger CNY will support commodity prices as China uses a lot of raw materials but this could lead to exported inflation due to China’s position as the world’s factory. Investing in Chinese government bonds is an alternative portfolio hedge against US inflation (Figure C6).
Figure C6. Chinese government bonds offer higher and more stable yields than comparable US Treasury bonds, making them a better hedge against US inflation.
Source: Bloomberg (30 November 2021).
As China continues to fine-tune its policies and companies adapt to the new environment, there are reasons to be optimistic on China’s equities (Figure C7).
Figure C7. Regulatory uncertainty has been a drag on Chinese equity performance, but earnings growth remains strong.
Source: Bloomberg (30 November 2021).
Opportunities in the US remain
Despite the US’s moderating economic growth, there are still investing gems to be found. Investors should seek out companies with sustainable revenue growth, strong return on equity, low leverage and innovation-driven characteristics which have greater potential to deliver outperformance.
Figure C8. Equities with high quality factors such as sustainable revenue growth and strong return on equity have outperformed global equities in seven out of the past ten years.
Source: Bloomberg (30 November 2021).
Hedge your portfolio by not picking sides
While the US and China face their own challenges, both will lead the world economically for the foreseeable future. With the intensifying competition, investors should take a pragmatic approach by tapping into opportunities on both sides.
Asia ex-Japan Equities To Gain From Reopening
Vaccinations facilitate reopening and the return of consumption
Asia is poised to be the world’s fastest-growing economic region in 2022, driven by growth in China and India. In the medium term, the economic reopening will help low-income households to work towards the middle class and bring middle-income consumption back to the region.
The Asian structural growth story hit some speedbumps during the COVID-19 pandemic. However, the region’s vaccination rates are fast catching up (Figure C9) which will enable further economic reopening, particularly in Southeast Asia. A strong recovery in demand will keep India on the growth path, even as its vaccination rates lag other Asian economies. However, China and Hong Kong are the outliers. China can afford to keep its borders shut because of its resilient domestic growth and dual-circulation economic model. It is enjoying a boom in domestic tourism as Chinese consumers turn inward amid tight travel restrictions. With less impetus for China to reopen its economy, Hong Kong’s position as the gateway to China is under considerable strain, hence there is priority for Hong Kong to reopen its borders to the mainland.
Figure C9. The pace of vaccinations has increased rapidly in Asia, allowing countries to reopen.
Source: Bloomberg News, Johns Hopkins University (latest as at 30 November 2021).
Taiwan and South Korea vital to global chip industry
We see continued opportunity in semiconductors in 2022, which have remained in short supply as demand surged due to greater global economic activity. The semiconductor shortage underscores Taiwan and South Korea’s critical roles in meeting supply (Figure C10) and both economies will likely remain as cornerstones of the global semiconductor industry for the next 10 to 15 years. Continued buoyant demand will benefit these two leading global chipmakers.
While the media has played up cross-strait tensions between China and Taiwan, an armed conflict is not expected as the Taiwanese dollar, equity and fixed income markets remain unruffled. Although South Korea has struggled to contain COVID-19 infections, it has fully vaccinated more than 70% of its population and is seeking a gradual return to normalcy by February 2022.
Figure C10. Global chip production is 15% above trend; chipmakers for Autos and Consumer Electronics are operating near full capacity, showing strong demand for semiconductors.
Source: Goldman Sachs Global Investment Research, Company data, IHS Global Insight, Department of Commerce, Bloomberg LP.
Gradual recovery in Southeast Asia
The Delta variant has hit Southeast Asia hard and the region continues to face challenges. But improving consumption and manufacturing activity will be positive for Malaysia and Indonesia while returning tourists will benefit Thailand. You can read more about the outlook of these countries here.
Valuations to improve
Southeast Asia’s elusive earnings recovery and challenging reopening conditions have made valuations appear expensive in 2021. Improving vaccination rates hold the key to reopening and post-pandemic growth.
Valuations elsewhere in Asia have become less expensive following China’s regulatory crackdowns (Figure C12). Business sentiment should improve once the positive, longer-term impact of China’s reforms can be seen. The growth outlook for Asia remains strong and investors should take advantage of this catch-up opportunity.
Figure C11. Asia ex-Japan equities are trading at significant discount to global equities.
Source: Bloomberg (30 November 2021).
