While we can’t claim to see into the future, we believe there are some trends which can be observed today that are likely to persist for years to come. We see 7 megatrends that are likely to have profound implications on the outlook for global growth over the rest of this decade, including impacting the allocation of investor capital and investment returns.
Below we outline these 7 megatrends and give examples of how we are gaining relevant exposure to them in the Premier Miton Monthly Income Fund.
1) Demographic changes
We are now at the end of a 70 year tailwind from population growth. 2010-30 sees baby boomers in the Western world reach retirement. HSBC estimate that the working population in Europe by 2030 could have 20m fewer people of working age which is equivalent to losing half of the UK workforce or all of Italy’s workforce. And an older population would be expected to consume less, impacting GDP growth, while at the same time placing a greater financial burden on the state and triggering demand for a higher proportion of low-paid carers. China has already seen a peak in working age population and total population growth will also begin to recede in the next decade, due to the previous one-child policy. Other emerging markets are also expected to experience a significant deceleration in population growth. According to a recent report published in the Lancet, the world population will peak in 2064. As a result the 10 most populous countries in 2050 will be very different to 2020. This drives potential for more conflict over unequal distribution of resources.
- Overall this makes us cautious on global growth in the next 5 years and hence we are currently underweight some of the most cyclical sectors such as the global mining industry.
2) Wealth inequality
Rising wealth inequality is driving ‘populist’ politics and nationalistic agendas. US President Biden talks of ‘rewarding work, not wealth’. China’s leaders have launched ‘common prosperity’ policies. European governments are seeing significant pressure to make housing more affordable. The political landscape is expected to increasingly focus on wealth inequality and progressive wealth redistribution. Reducing income and wealth inequality should boost economic growth through fiscal spending in “productive capital’ areas such as infrastructure, housing, defence, healthcare and work towards net zero carbon. Although it can also lead to more policy instability as governments chop and change tack, and can lead to favouring parts of the economy that create or simply retain jobs. We expect corporate taxes to rise.
- We have made a number of specific investments in residential housing and construction materials which we believe will be beneficiaries of the government’s levelling up agenda.
3) Chinese growth slows
For the last two decades China has grown debt at twice the rate of underlying economic growth and at some point debt growth will need to normalise. We believe we are approaching that point. The Chinese government talk more about ‘stability’ than ‘growth’. An essay by China’s leader, Xi Jinping, in July 2021 on the New Development model talked about ‘genuine’ growth and ‘fictional’ growth. There is a political drive to shift from commodity intensive fixed asset investment to a more services based economy. We see ‘common prosperity’ as a warning to the middle class that property will not continue to be a source of quick profits.
- This trend makes us cautious on the level of global growth in the future and especially material intensive growth, so we are underweight mining companies.
4) Energy transition
Countries representing more than 65% of global carbon dioxide emissions and more than 70% of the world economy have made ambitious commitments to attain carbon neutrality by mid-century. At least one fifth of the world’s 2,000 largest public companies have net zero targets. Carbon markets will put a price on emissions which is an under-appreciated headwind for emitters. Customer, employee and investor demand should accelerate investment in the transition. The 2020’s are expected to be a big decade for the development of new technologies such as carbon capture and storage, and hydrogen.
- We invest in a number of utilities companies with exposure to growth in renewables. We particularly like the outlook for offshore wind where there are higher barriers to entry.
5) US-China defence spending
Chinese spending on defence equipment is set to overtake the US in the next few years and they are looking to exert more global influence. The space race has accelerated with the fall in cost of satellites. Sadly we are likely to see a rise in extreme weather events in the 2020s which will highlight disparate resources, increase forced migration and hence increased spending on border protection.
- We see a significant valuation opportunity in defence companies at the moment as the market worries about defence budget cuts in the near term rather than on the probability for greater geopolitical tensions in the future. We currently have BAE Systems in our top 10 holdings.
6) Supply chain resilience and nationalism
Wealth inequality and the replacement of jobs with technology have been driving ‘onshoring’ and other nationalistic policies. Covid is likely to have accelerated a trend towards greater self-sufficiency and more ‘just in case’ than ‘just in time’ supply chains at governments and corporates. Today the focus is on healthcare but in the future it could include energy and food too.
- There are plentiful opportunities to invest in logistics and warehousing companies and in this area we have invested in Deutsche Post, a multinational package delivery and supply chain management company.
7) Technological revolution
This continues at pace and we expect significant breakthroughs in new technologies but also in novel combinations of existing technologies. The combination of big data, artificial intelligence, 5G and more connected devices, electric and autonomous vehicles, robotics and virtual reality, will continue to transform how we shop, move around, communicate and much more. Corporates will continue to have to invest heavily in technology to progress or even to stand still. Consumers should continue to benefit from innovation at little additional cost.
- One of the less well understood examples of a company with significant exposure to data analytics is RELX, the professional publishing company, which is rapidly transforming itself into a technology business. This is one of our largest holdings.
While these megatrends depict a challenging picture for investors, especially when combined with typically high starting valuations, we think it is a good environment for active fund managers who can selectively navigate these trends. By aligning ourselves with the tailwinds of change and avoiding the headwinds, we are finding plenty of exciting and attractive investment opportunities. This is especially true in the UK market which has one of the lowest valuations of global developed markets. We believe investing in quality companies with sustainable dividends, especially those with pricing power and deep economic moats is likely to continue to be a successful strategy.