Megatrends: An index approach to thematic investing

What are megatrends?

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

Some megatrends have been with us for many years; others are at an earlier stage in terms of their impact on the world.

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

In this article, we will highlight five key megatrends, outline how those megatrends relate to four investment themes, and explore how you might implement the investment themes we have identified in the context of a portfolio.

Five major megatrends

Changing economic power The growing economic strength of emerging economies, such as China and India, is changing the balance of power in the global economy. In the February 2015 report, The World in 2050, PwC predicts that, by 2050, seven out of ten of the world’s biggest economies will be emerging economies.

Climate change and resource scarcity An expanding global population is increasing the demand for energy, food and water, putting pressure on finite global resources. Demand for fossil fuels, in particular, leads to higher carbon emissions and a more volatile world climate. The United Nations World Water Development Report 2014 estimates that global energy demand will increase by one-third over the period to 2035, with the majority of that demand coming from China, India and the Middle East

Demographics and social change

The increasing age and size of the world’s population is fundamentally changing the needs of its inhabitants. In the 2015 revision to its World Population Prospects report, The UN Population Division expects there will be an additional 1.2 billion people on the planet by 2030. However, the distribution of those one billion people will not be equal across age groups or regions – 30% of the increase is predicted to consist of those aged 65 or over; by 2050, 50% of population growth overall is likely to come from Africa.

Technological breakthrough

We are in the midst of a technological revolution that is having a profound impact on the global economy, the extent of which is yet to be truly understood. 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).

Rapid urbanisation

In a 2012 report, the UN Population Division predicted that by 2030 almost two-thirds of the world’s population will reside in cities. As strong population growth puts increasing pressure on the infrastructure and social welfare of cities, its forecast that New York, Beijing, Shanghai and London alone will need $8 trillion in infrastructure investments over the next 10 years

Investing in themes

We believe there are a number of investment themes that emerge at the intersection of the five megatrends that we have outlined.

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 may come with such investments. Others may want to consider a rules-based approach to thematic investing, whereby a set of rules – rather than a fund manager making an active decision – determine whether a company is connected to a theme or not. Today, investors can benefit from this new, low cost, approach to thematic investing.

Source: Blackrock iShares