Five megatrends for investors to tap into

Finding a good investment idea at the moment is hard – mainly because, in the short-term, there is so much uncertainty. From the possibility of a hard Brexit to a last-minute deal with the EU, a possible general election, signs of a recession… and that's just here in the UK. Internationally we have trade wars, currency wars… the list goes on.

One way of navigating these muddied investment waters is to ignore the short-term noise completely and think about the very long term. And a great way of doing this is to focus on long-term megatrends.

What are megatrends?

Megatrends are powerful, transformative forces that could change the global economy, business and society. They are longer term in nature and have irreversible consequences for the world around us. As the people at BlackRock explain nicely, they have been changing the way we live for centuries - think electricity, cars and aeroplanes, the Internet.

The term was first coined more than 35 years ago by US author, John Naisbitt in his first book ‘Megatrends: Ten New Directions Transforming Our Lives' and, since then, this area has developed to include a wide range of subjects: from robotics, technology and demographics.

Here, we take a closer look at five megatrends and how you can tap into them in your investments.

Rapid Urbanisation

According to PwC, more than half of the population live in urban areas and 1.5 million people are added to the global urban population every week*. BlackRock says this will result in two-thirds of the world's population living in urban areas by 2050**, while PwC estimates 90%* of this rapid urbanisation will take place in African and Asian countries. Space and accommodation will become more of an issue in major cities placing huge demands on infrastructure, services, job creation, climate and environment.

Urban development is key to the drive for growth in India, where its urban population, at 34%*** is currently lagging the rest of the world (55.3%). India has been slow to urbanise, but this is changing fast. In a world of lower growth, India is also forecast to grow by some 7% in 2019, with urbanisation likely to be one of the key drivers. Investors may want to consider the Goldman Sachs Indian Equity fund on the Chelsea Selection, which is led by Hiren Dasani. This is an all-weather India fund with a well-resourced and experienced team, based on the ground in India and Singapore.

Climate change & resource scarcity

Climate change has been well-documented in recent months, but another area of concern is resource scarcity. According to The United Nations, the global population will surpass 9.7 billion by 2050^, at which point they predict the world’s agricultural systems will not be able to supply enough food for everyone.  The UN takes this a step further by stating that demand for fresh water will exceed supply by 40% in some cities.

Unlike many of its peers the Pictet Global Environmental Opportunities fund goes well beyond climate change and addresses a full range of global environmental challenges. The managers identify companies where a minimum of 20% of their activities are actively solving environmental challenges (the aggregate purity across the portfolio is currently around 65%). Examples include resource efficiency, environmental monitoring, pollution control, sustainable packaging, water quality, advanced transportation and alternatives to intensive agriculture.

Shifts in global economic power

Emerging and developing economies now account for around 80% of global economic growth, and 85 percent of growth in global consumption – more than double their share in the 1990s^. China is at the centre of this change, given it is set to replace the US as the largest global economy in the late 2020s – when as little as 15 years ago the economy was a tenth of the size of the US^. As the US has become more concerned that China will overtake it as a superpower, so tensions have increased and trade wars have begun.

Niall Gallagher, manager of GAM Star Continental European Equity fund, told us recently: “I think trade wars will go on for quite sometime. It's more than just trade. It's about how China settles into its position as potentially the largest economy in the world.” First State Greater China Growth fund is an excellent option top tap into this megatrend. It has been a firm favourite of ours for a number of years and has an experienced manager in the shape of Martin Lau.

Demographic and social change

Changes in global demographics will also bring major challenges and opportunities for businesses in the future. For example, in 2018, for the first time in history, people aged 65 or above outnumbered children under five years of age globally^^. By 2050, one in four people living in Europe and Northern America could be aged 65 or over^^, while the number of people aged 80 years or over is projected to triple, from 143 million today to 426 million in 2050^^. Healthcare and automation are likely to become more important as populations age, as will the need for income as life expectancy figures continue to rise and longer is spent in retirement.

Polar Capital Healthcare Opportunities is an obvious choice to tap into this theme, or investors could consider a UK equity income fund such as Man GLG UK Income on the Chelsea Core Selection. Manager Henry Dixon can invest in any UK company, large or small and also sometimes in a company's bond, rather than its equity, if he feels the risk/reward characteristics are more favourable. The fund has a distribution yield of 5.25%^^^, which is paid monthly.

Technological breakthroughs

New technology is essential for all other megatrends to succeed – meaning it has become a megatrend in its own right. We have seen the success the likes of Amazon has had in changing and disrupting multiple marketplaces. According to BlackRock, machines will learn faster than humans, personal data will be a valuable commodity and nearly two-thirds of all occupations could see a third or more of their constituent activities automated.

Investors may like to consider AXA Framlington Global Technology fund as a potential route to tap into this trend. Manager Jeremy Gleeson has run this fund since 2007 and targets ‘new technology’ rather than ‘old technology’ – as he believes it is particularly important to avoid losers in this sector. This fund is high conviction and there is relatively low turnover of stocks. Another option is Smith & Williamson Artificial Intelligence, which 'eats its own cooking' - using an artificial intelligence system to help find companies whose business models are aligned to benefit from this growing theme.

*Source: PWC: A new urban agenda: accommodating 2 billion new urban citizens.
**Source: BlackRock: Megatrend Research Study, An examination of structural shifts in the global economy.
***Source: The World Bank, United Nations Population Division. World Urbanization Prospects: 2018 Revision.
^Source: BlackRock iSharesmegatrends, shifting economic power.
^^Source: United Nations, World Population Prospects 2019: Highlights, 17 June 2019.
^^^Source: fund factsheet, 31 July 2019.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius' views are his own and do not constitute financial advice.