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A number of mega trends are set to shape our world as it emerges from the pandemic, including disruptive forces that were already in place before Covid. For investors, this is a time to pay close attention: Uncertainty creates opportunities and to capitalise on disruption, you must be able to identify the long-term beneficiaries.
In our new white paper, we set out our expectations and list the main trends that investors should take into consideration.
The pandemic has left investors with questions such as: Have central bank and government attitudes to managing the economy changed permanently? What about household and corporate behaviour? With new strains popping up, are we really on top of Covid? Will the health sector have to be on constant alert, permanently adjusting capacity, permanently updating vaccines?
In summary, Covid is still a huge source of uncertainty and investors may need to learn to live with it. For example, bond yields will need to adjust to an uncertain path of monetary policy. We will need to build back in the term premium that compensates investors for taking on risk for longer.
Globally, the era of loose monetary policy, low inflation and low interest rates is not over yet. However, we do expect markets to question this outlook repeatedly, meaning the road ahead could be bumpy.
We see China as both an investment theme and a geopolitical mega trend. The country has become too big to be seen as just one part of the emerging market complex.
With China likely to see growth rates at around 6% while the West likely struggles to achieve 2% once the recovery is complete, China is set to become a major force.
That means there are potential opportunities for those investing in China itself. Even if you have no direct interest, China’s relevance is clear through its role in commodity super-cycles, for example, or its impact on the outlook for German manufacturing.
Even before the pandemic, healthcare was a key theme.
On the demand side, spending on healthcare relative to GDP has been growing on the back of ageing and increasingly unhealthy populations, as well as rising incomes in the emerging economies. Innovation is driving demand by creating new markets for previously untreatable conditions.
On the supply side, the pressure on budgets as a result of this rising demand is being met by new technologies creating efficiencies and improvements in product offerings.
Covid has made the investment case for healthcare even more compelling. The past year has forced rapid and widespread innovation in the sector. One note of caution: It is now more than ever important to differentiate between those driving or benefiting from innovation and those at risk of disruption.
For investors, understanding both the scope of the technological disruption and the policy changes that might lie ahead is vital to being able to position portfolios.
Governments have so far shown little appetite for tackling monopoly power. Public pressure may force politicians to act through windfall taxes or more rigorous implementation of antitrust policies. Investors in the tech superstars need to look out for such an outcome, as well as for regional differences in approach.
The pandemic has accelerated two themes: teleworking and telemigration.
Attitudes to teleworking have shifted. Companies have realised that they can get more hours from their employees while economising on expensive city centre rents. Workers have seen that they can save both the cost and the time of commuting, while having more flexibility about when and where they work. This looks like a win-win.
There’s a sting in the tail for developed market workers. If employees can do the job at home, why can’t it be done from Delhi? Teleworking may unlock telemigration. It will be interesting to see how companies and governments address this because it is now starting to come about rapidly thanks to the pandemic.
As a result of the existential threat from Covid, public policy is focused squarely on the climate crisis. Major initiatives from carbon border taxes to Green New Deals could have significant macroeconomic and market implications.
Since it is responsible for almost three quarters of global emissions, the energy sector will face significant pressure. Eliminating greenhouse gas emissions over the coming decades will require multi-billion dollar investments, as well as a wide range of efforts to electrify and decarbonise processes, and nurture alternative fuels to economic viability.
What’s next? To accelerate the shift to renewables, we need further innovation in technologies such as long-duration battery storage. In addition, low-carbon electricity will need to penetrate as many sectors as possible through electrification. For areas that cannot be electrified, other technology will be needed, such as hydrogen or capturing carbon emissions.
Significant investment in clean energy technologies will be crucial if countries are to hit their net-zero targets. This should create opportunities for investors to be part of the transition. It is important to note that such opportunities could become crowded as demand outstrips supply, especially in the near term.
Beyond tackling emissions, the pandemic reminded us of the far-reaching consequences that can come from our interactions with the natural world. The drivers of the urgent need to invest in restoring ecosystems are compelling: 50% of the world’s GDP depends on natural resources.
For investors looking to capture this theme, we see opportunities across a diverse universe covering land-based, marine and urban ecosystem repair and improvement.
EQUALITY AND INCLUSIVE GROWTH
The pandemic has highlighted the issues around equality. Workers keeping the economy running during lockdowns were overwhelmingly from lower-income households. People from ethnic minority backgrounds faced a greater health risk from the disease.
On diversity and other social and governance issues, companies will need to do better. For those that do not, there are reputational and financial risks including stakeholder litigation.
Until we achieve more inclusive growth, our economies are likely to remain fragile and our political systems unstable, making us more vulnerable to the next risk lurking in the wings.