Investing for the future

Learn from the past and look for tomorrow’s long-term winners

Structural trends can be extremely powerful in the long term, as we have seen over the past decade or so. For example, since the iPhone kickstarted the modern mobile digital era in 2007, the technology-heavy Nasdaq 100 Index has delivered a total return of more than 700%, easily outpacing broader equity markets and powering through major global crises as if they were just small speed bumps.

The performance of some technology stocks was even more spectacular – Netflix shareholders have enjoyed total returns of more than 16,000% since 2007.

We believe winners get bigger in a digitally connected world as they are able to develop larger ecosystems and stronger moats. For example, in terms of market capitalisation, the top 10 US technology stocks of today now account for 29% of the S&P 500 Index versus just 5% in 2007. Together they are almost as big as the market value of all the companies in Europe’s Stoxx 600 Index, highlighting this “winner takes all” trend. The power of ecosystems and network effects is hard to ignore – Apple now sells more watches than the whole Swiss watch industry combined, even though watches represent less than 10% of Apple’s sales. Despite such big winners, new services can also emerge in this rapidly changing tech-enabled world via themes such as big data, software-as-a-service, the platform economy, digital payments and cybersecurity.

Concepts like cost reduction through scaling up and innovation are very important too – technologies like renewable energy and electric vehicles have developed so much over the past decade that they are now economical or more sought after than legacy fossil fuel alternatives. Popular sentiment, which ultimately drives regulation and consumer trends, can also have a big impact. For example, the increasing focus on climate change is leading to greater clean energy investments, more support and demand for clean mobility, and growth in social media. In other areas, long-term trends such as ageing populations can drive themes like robotics and future health.

Faster innovation could mean wider gap between “winners” and “also-rans”

Innovating is getting easier, faster and more disruptive as a growing ecosystem of angel, venture capital and private equity investors incubate and scale start-ups at a higher pace every passing year, making them ready for global domination. The flip side of disruptive innovation is the likely drag for old-economy industries. We see the greatest headwinds for fossil fuel-linked sectors, bricks and mortar retail and potentially even traditional finance. The gap between the few “winners” and many “also-rans” could become even more acute this decade as disruptive innovation and digital ecosystems take control of markets.
 

Our approach to thematic investing

Thematic investing allows investors to think about the future in our changing world. The objective is to invest in sectors, industries and companies that are expected to become structural winners. Future winners are likely to be the businesses that anticipate and understand how the future will be drastically different from the past. Thematic winners can not only be the innovators of new products or services but also work towards solving major problems like climate change or an ageing population.

Themes are secular growth trends expected to exponentially expand over multiple years. Their effects tend to be recognised but still underappreciated by the wider market.

We use five megatrends in our analysis:

• demographic change;
• regulatory waves;
• social shifts;
• sustainability;​
• technological progress.

These structural drivers can operate with a degree of independence from the broader economic cycle.
 

Key themes this decade: digital ecosystems, disruptive innovation, climate solutions and future health

We believe digital technology themes could further increase their dominance this decade as the long-term structural supports are compelling including likely advancements in foundational technologies like artificial intelligence (AI), further growth in the global online user base and leaps in global data volumes. Together with improvements in physical technologies such as robotics, 3D printing and space tech, the pace of disruptive innovation is likely to increase this decade, in our opinion.

In planet themes, we see long-term opportunities for growth and commer-cialisation as the focus on climate change intensifies. Themes such as clean energy and electric vehicles have established their credentials in recent years, so this decade might be about scaling up and share gains from fossil fuels. New planet-friendly themes like vertical farming, meat alternatives and hydrogen are trying to prove their credentials too.

As for people themes, digital health solutions could benefit from high growth while we also see disruptive potential from genomics and biotech. The global health industry was able to deliver Covid vaccines within a year of the pandemic start using new technology such as mRNA, which points to the longer-term possibilities. In addition, a rapidly ageing population and rising healthcare costs provides strong tailwinds for innovation in future health themes.