Many of the best growth stocks of the coming decades will ride some of the major trends, or megatrends, that will shape the economy and society of the future. We have identified seven important trends that many of the top performing companies will ride over the next 10 to 20 years. You can use this list of megatrends to filter investment ideas and ensure there is a good chance companies will have a place in the future.
- Global backdrop for business and innovation
- 7 Megatrends that investors should pay attention to in the coming decades
- How to invest in megatrends
Global backdrop for business and innovation
Before discussing the investment megatrends, it is worth highlighting three major themes that will shape the global economic, political, and social environment. These are not necessarily investable themes, but business leaders will need to consider them as they navigate the future.
- Resource scarcity and climate change – Over the last 100 years, the global demand for scarce resources has skyrocketed. During this period, the most accessible resources have also been depleted. The oil, coal, metals, and minerals that remain are in less accessible places and deeper underground. This means that while demand increases, the cost of accessing resources is also increasing.
- Demographic trends – Several different demographic trends are occurring simultaneously. With birthrates falling and people living longer, many developed countries have aging populations. More countries are expected to join this group in the next decade. Rising inequality will continue to influence political movements in many countries. If automation leads to rising unemployment, some countries are likely to begin experimenting with UBI (universal basic income) grants. Urbanization is continuing in developing countries. There are also early signs of de-urbanization in some developed countries. China’s economic influence will continue to grow for at least the next decade. This is likely to lead to increased uncertainty in the world of geopolitics.
- Tech innovation speed and cost – Moore’s law reflects the fact that while the processing power of computers has grown exponentially, the cost of computers has fallen rapidly too. This phenomenon is now almost universally true for technology and innovation. The implication is that ideas that appear unfeasible can become achievable and profitable in a short space of time. Investors and business leaders need to plan for technologies that don’t exist and can emerge very quickly. Products may also become profitable quicker than they have in the past – this will have implications for valuations and investor expectations.
7 Megatrends that investors should pay attention to in the coming decades
There are lots of different ways to categorize the megatrends that will create opportunities for investors over the next few decades. We have chosen the following seven trends, though in reality there is a lot of overlap between these trends. In fact, the greatest opportunities may exist when different trends align.
- Automation and autonomous vehicles
- Revolutionary technologies
- Fintech and Crypto
- Space exploration
Over the last decade, ESG investing has gathered momentum. There are several reasons to expect this momentum to continue. The effects of climate change are already being felt. Increasing numbers of consumers and investors are becoming conscious about the impact their decisions can make. And the effects of resource scarcity are being felt around the world. Sustainability doesn’t just concern the environment. Business models need to be sustainable.
The social impact a company has can affect its brand. Investors, suppliers, and customers are also beginning to avoid companies with questionable governance. Investors and consumers are both beginning to reward companies with products that solve sustainability problems. Examples include Beyond Meat which produces an alternative to meat made from vegetable protein, and Patagonia, a clothing company on a mission to produce goods in a sustainable and ethical way.
- Energy – It goes without saying that the percentage of energy produced from renewable sources will continue to grow. This goes beyond climate change and other environmental concerns. The cost of producing wind and solar power is falling, while the cost of extracting oil, gas and coal is rising. Transitioning to cleaner energy will create an abundance of opportunities for entrepreneurs, innovators, and investors. Every engine or machine that runs on diesel, gas or coal could potentially be replaced with an electric motor. The fuel cell (battery) industry probably has a long way to go and will continue to offer opportunities for years to come. An often-overlooked aspect of energy is efficiency. When electricity, gas and diesel were cheap, efficient consumption was not a priority. In the new era of energy use, improved efficiency is another way to reduce consumption and costs.
- Water – Water is a resource that many of us take for granted. Yet many parts of the world are beginning to run out of fresh water. There are many reasons for this, ranging from climate change to urbanization and industrialization. There are two approaches to tackling water shortages. The first is to find new sources of fresh water by desalinating salt water, recycling wastewater, or extracting water from the atmosphere. These solutions are all available, but expensive. The second approach, reducing consumption, is often more economical. Opportunities will continue to present themselves for companies that can help industries from agriculture to manufacturing to use water more efficiently.
- Rare commodities – Minerals and metals like lithium, cobalt and rare earth metals are essential materials for fuel cells, semi-conductors, and other hardware. As the number of battery powered motors and smart, or connected, devices increases, demand for these minerals and metals will continue to increase. These are all relatively scarce, or very scarce, and companies with access to deposits will continue to benefit.
2. Automation and autonomous vehicles
Automation is one of the most visible and interesting megatrends already underway. Autonomous vehicles are already at an advanced stage of development. The next phase in their deployment will likely involve the legal implications of having driverless vehicles on public roads. But the implications of autonomous vehicles and e-mobility go far beyond drivers being able to read a book while their vehicle drives them from A to B. These are vehicles that can communicate with one another and with traffic control systems.
Autonomous vehicles will also change urban planning and accelerate the development of smart cities. Smart cities use data gathered from connected devices, including vehicles, to manage resources efficiently and optimally. So, where will the opportunities lie? As is often the case, intellectual property will have value, and the value of IP will increase as more vehicles and devices are connected. Examples include mapping software (like Google Maps), operating systems for autonomous vehicles and software used to manage cities.
Manufacturing around the world is also being automated – with the result that numerous jobs are disappearing. While companies increase their margins, fewer jobs will lead to lower consumer spending and more pressure on social safety nets. Ultimately the way out of this will be effective collaboration between humans and machines. Machines and robots may be cheaper and faster than humans, but they lack creativity.
The more productive and creative solution is a combination of people and robots, sometimes referred to as “coboting”. For this to work, education will have to adapt – see below. Regardless of the impact on jobs, the trend toward automation is likely to gather momentum. This means there will be ongoing opportunities in robotics and the software used to power automated manufacturing.
The healthcare industry is already in the middle of a revolution. For proof of the potential for technology to disrupt the healthcare industry we need look no further than Microsoft, Apple and Alphabet, all of whom are investing in the sector. Many of the opportunities lie in more efficient use of data. If data can be gathered sooner, interventions can be made sooner. Early interventions are both cheaper and more effective. This type of data can be collected and transmitted by devices like smart watches and other medical devices worn by patients.
Medical data can also be more effectively organized and shared. Just imagine what researchers could do if hospitals and doctors shared all the data they gathered to a central database? Doing so doesn’t need to jeopardize a patient’s privacy as data can easily be anonymized.
Better data is also likely to narrow the gap between alternative and mainstream medicine. It’s also likely to result in a more holistic approach to medicine. Combining better lifestyle choices with early screenings will result in fewer medical conditions reaching advanced stages. This may do more than anything else to reduce healthcare costs. There are lots of other areas of healthcare in which there will be opportunities for investors – but data collection and management will be universally relevant.
4. Revolutionary technologies
Almost any list of megatrends for the future will include the revolutionary technologies currently being developed. These include technologies like virtual reality, augmented reality, artificial intelligence, 5G and the IoT (internet of things). Rather than simply considering these technologies as industries in their own right, it is worth looking at how they converge with the other trends in this list.
For example, 5G technology will be a game changer for autonomous vehicles and autonomous devices. 5G allows more devices to communicate with low latency, meaning vehicles travelling at speed will be able to communicate with one another. Augmented reality may have major implications for the healthcare industry if surgeons can perform procedures on patients on another continent using robots. Once again 5G will provide the connection speeds required for this. 3D printing is another new technology already being used in the healthcare industry
The COVID-19 pandemic has already proved that remote working offers several overlooked advantages. It is now expected that many workers will continue to work from home beyond 2020. This in turn – along with autonomous vehicles – will change urban environments.
5. Fintech and Crypto
The banking and insurance industry has yet to really be disrupted by technology. While many industries have been fundamentally changed, banks and insurers operate in much the same way they always have. Business may be conducted online, but behind the scenes not much has changed. It now seems inevitable that change is on the way. In many ways the banking system is still very inefficient, and fees are relatively high. That means there is room for improvement and a financial incentive to do so.
Tech giants like Apple and Google are slowly but surely creeping into the online payments space. And China’s tech giants have made even deeper inroads into finance. In addition, legislation around the world is removing the control banks have traditionally had over client data. These large tech companies are likely to benefit as the banking industry continues to be disrupted. But the multibagger returns are likely to come from fintech companies.
Fintechs use technology to solve specific problems related to finance. Many of these companies are privately held but may become large enough to IPO in the next few years. The role of cryptocurrencies and Bitcoin in all of this is controversial. So far, the cryptocurrency revolution hasn’t lived up to its promise of changing finance. On the other hand, cryptocurrencies and blockchain technology may well still form a part of the banking system of the future. It may be worthwhile for investors to look for the fintech companies successfully using blockchain technologies and digital assets – rather than focusing on the value of the cryptocurrencies themselves.
The fund management industry has evolved more than the banking industry. Robo advisors are now an established part of the wealth management industry – but their evolution is far from complete. The use of artificial intelligence in fund management is also relatively new. Catana Capital is one company pioneering this approach with the Data Intelligence Fund, by using AI and Big Data to generate trade signals.
Another industry that has been relatively slow to change is education. Online learning is now fairly common. But, the basic structure of educational institutions, from primary school through to tertiary education has changed little since Victorian times. The one size fits all approach may work for some students, but for many it does not. It is also becoming apparent that the education system in many countries doesn’t prepare people for the modern job market.
Technology offers the opportunity to tailor teaching methods for each student. It also offers the opportunity to create short courses that give students skills that are in demand as soon as they finish the course. When technology is used like this, it can be scaled around the world, making it more affordable as more users are added. The good news for investors is that you can invest in technologies related to education, unlike most educational institutions. There are EdTech companies all over the world, with innovative startups joining the list each year.
7. Space exploration
Space travel and tourism may seem like a novelty right now. But there are several reasons to keep an eye on the industry. The idea establishing a colony on Mars is gathering momentum. Space is particularly important for satellite communication systems. Inevitably, mankind will look to space for certain resources, and perhaps energy too. Space exploration is obviously very expensive, and innovative ways of funding development are required. Development at Elon Musk’s SpaceX is funded by delivering satellites, cargo and now people into space.
Another source of funding is likely to come from space tourism. Virgin Galactic is pioneering this now but will be joined by other companies. The price of a flight ($250,000) means few will be able to afford a ticket in the initial years. But, like everything else, prices will drop, and the market will grow over time.
How to invest in megatrends
Many of the winning companies of the next few decades will ride the megatrends described here. And many of them will have the potential to be multibaggers. However, just because a company appears to be in the right industry doesn’t make it a good investment. A company needs to have growing sales and a route to profitability. For tech companies, stock valuation metrics are often less relevant – but they should still be somewhat realistic.
Even the stocks of companies performing well will not move in a straight line. Investing in the future always involves a certain amount of speculation. And, as the study of behavioral finance shows, bubbles tend to develop wherever there is a good story to tell. Good stock picking and investment strategies will always take this into account. And, as always, all the usual warning signs should be seen as possible red flags.
There are also plenty of exchange traded funds designed to track these investment themes. But, if you do use ETFs, its best to invest gradually over time or after a market decline. Market timing is risky with high growth stocks given the levels of speculation and high valuations. Investments made gradually over time will reduce the risk of buying into bubbles, but still benefit from the power of compounding over the long term.
Conclusion: Investing in megatrends of the future
The term unprecedented change is probably overused when it comes to discussions about the future and potential megatrends. However, there is a lot to suggest we are at the beginning of yet another period of unprecedented change. The combination of new technologies, climate change and economic challenges will create big changes, and big opportunities for astute investors. What do you think will be the next megatrend?