18 September 2024
As we look toward the next decade, several megatrends are set to significantly shape global economies and possibly frame the sources of returns for investors. A comprehension of these trends will be crucial for navigating the evolving economic landscape.
As Glacier Research, we conducted a survey of eleven asset managers in order to gather their views on the trends that are likely to dominate the investment industry over the next decade. We also sought to identify which regions, asset classes, and companies they believed would benefit from these trends.
In this article, we focus on the top five megatrends identified, which, based on the survey responses, resulted in a list of six trends (due to ties in the number of votes). The leading megatrends, ranked by the highest votes, are:
- 82%: Technology and Artificial Intelligence
- 73%: Energy transition
- 64%: Geopolitical instability
- 64%: Monetary policy regime change: Inflation and Interest rates
- 55%: Demographic shift: Ageing population
- 55%: Climate change
Technology and artificial intelligence
The period of extreme technological disruption dates back to the introduction of the internet in the mid-1990s. This profoundly altered the corporate landscape, boosted the margins of companies across sectors and underpinned a continuing era of disinflation. Technology will continue to develop at an exponential rate and the impact thereof in our lives will continue to increase.
Artificial Intelligence (AI) development and implementation has been signalled across sectors as a growing theme. AI promises to have a broad-based impact but, contrary to current market expectations, technological dispersion within individual economies and globally takes time. A massive investment in computing capacity must occur before the full effects of large language models will be broadly felt. While this may lead to disinflation in the long term, it could cause inflation over the next decade due to the substantial investments required.
Energy transition
The energy transition over the next decade will focus on achieving affordability, availability, and sustainability, but this process will likely be prolonged due to rising global energy demand and continued reliance on fossil fuels. Significant infrastructure investment is needed to reshape transmission grids and secure necessary commodities. This presents challenges due to the finite nature of key commodities like copper and the concentration of rare earth minerals in regions such as China. Underinvestment in new capacity, driven by expectations of declining future demand and long-term project paybacks, adds to the complexity.
There are significant opportunities across a range of industries essential for the energy transition, including electric utilities, industrial components, high voltage cabling, and more, beyond just electric vehicle companies. Advancements in green hydrogen and fusion technology offer potential productivity gains and environmental benefits. Significant progress in battery technology and renewable energy is also expected as part of this ongoing transition.
The worsening geopolitical relations globally emphasize the importance of energy security, leading to increased spending on renewables. Governments are prioritising the energy transition to combat climate change and enhance energy security, making it more prevalent and accessible for both large-scale operations and individual consumers.
Geopolitical instability
The move to more extreme internal politics across the world’s democracies combined with the growing power of countries not aligned with the developed western powers has given rise to increased geopolitical tensions. An example of this is the ongoing tensions between the United States and China. In the US, there have been stark disagreements on domestic and foreign policy, while China's rise as a global economic and military power has challenged the dominance of Western countries. An important factor contributing to the rise of geopolitical risks is that the world is shifting from one of unipolarity (the US as a sole superpower) to one of multi-polarity (with the US, China, and others all vying for spheres of influence). This shift has led to conflicts over trade, technology, and territorial disputes.
Another example can be seen in Europe, including Russia’s annexation of Crimea in 2014 and the ongoing conflict in Ukraine. The EU has imposed economic sanctions on Russia, leading to retaliatory measures and a strained relationship. Many EU countries rely heavily on Russian energy supplies, particularly natural gas, which has created vulnerabilities, most evident with Russia using its energy exports as a tool for political leverage.
Monetary policy regime change
Identified megatrends like geopolitical instability, deglobalisation, an ageing population, and the energy transition are driving inflation. Combined with rising national debts and high fiscal spending in developed economies, these factors are intensifying inflationary pressures. As a result, the coming decade is expected to be marked by structurally higher inflation and, consequently, higher interest rates, leading us into a "new normal."
This shift represents a dramatic change from the era of zero interest rates and quantitative easing, marking an inflection point in both inflation and interest rate regimes. While there will be cyclical variability, the world is now characterised by generally tight labour markets and diminishing savings surpluses, setting the stage for persistently higher nominal and real interest rates. The new monetary landscape demands that businesses, investors, and policymakers alike adapt to a world where the cost of borrowing is higher, and the financial environment is more restrained. In this evolving landscape, businesses that can navigate the complexities of higher interest rates and inflation will emerge stronger, fostering a more disciplined and sustainable approach to economic growth and capital investment.
Demographic shift: Ageing population
The demographic shift towards an ageing population will have significant implications over the next decade. Demographic forecasts indicate that both developed and emerging economies will face an ageing population due to falling birth rates and increasing life expectancy. An ageing yet productive population will need to work longer, and their retirement investments will need to provide for longer periods. In most developed markets, an ageing population can lead to reduced consumption and lower inflationary pressures. The trend of ageing populations will drive significant changes in government policies, particularly regarding retirement reform, healthcare, and insurance.
Climate change
According to the US National Oceanic and Atmospheric Administration (NOAA)[1], climate change is affecting our planet from pole to pole. NOAA monitors global climate data and here are some of the changes recorded:
- Global temperatures rose about 1.8°F (1°C) from 1901 to 2020.
- Sea level rise has accelerated from 1.7 mm/year throughout most of the twentieth century to 3.2 mm/year since 1993.
- Glaciers are shrinking – the average thickness of 30 well-studied glaciers has decreased more than 60 feet (~1.8m) since 1980.
- The area covered by sea ice in the Arctic at the end of summer has shrunk by about 40% since 1979.
- The amount of carbon dioxide in the atmosphere has risen by 25% since 1958, and by about 40% since the Industrial Revolution.
- Snow is melting earlier compared to long-term averages.
The real impacts of climate change are becoming increasingly evident and will continue to intensify, driving a greater sense of urgency and resulting in more extreme weather. One major area of impact is food production, which will face challenges due to shifting weather patterns and increasing temperatures. Further challenges include freshwater availability and food security, habitat destruction for humans and other species, increased costs associated with extreme weather events, and rising insurance and energy costs.
[1] National Oceanic and Atmospheric Administration, ‘Climate change impacts’, in U.S. Department of Commerce. 13 August 2021, https://www.noaa.gov/education/resource-collections/climate/climate-change-impacts
Which geographies are set to benefit the most from these trends?
The exponential growth of technology and AI is transforming economies worldwide. Advanced economies, particularly the US and China, are at the forefront of this technological revolution. However, emerging markets are also poised to benefit through a growing demand for raw materials. Countries such as Vietnam, Bangladesh and Mexico, specifically, will continue to benefit from China's 'move up the value chain' resulting in less competitive Chinese wages in lower cost areas such as clothing and assembly. The broad applications of AI (from enhancing automation and productivity to advancing sustainability), despite the potential for short-term inflationary pressures, are expected to drive disinflation over time as technology evolves.
Developed markets like the US are expected to be more resilient to geopolitical risks due to strong economic and political frameworks, while less stable regions may face increased challenges. As global monetary policies shift, regions with stable macroeconomic fundamentals, such as low inflation and positive real interest rates, will be better positioned.
Developed markets investing in climate resilience will better mitigate the effects of climate change, with those less geographically vulnerable to extreme weather events faring better. Countries that swiftly adapt to sustainable energy sources and have abundant commodity resources for this transition will benefit significantly. Specifically, developed European and North American markets will gain from the investments needed to advance the energy transition. Many Asian economies, on the other hand, will benefit from a shift in manufacturing to lower-cost jurisdictions. Regions with favourable and youthful demographics, such as India, will stand in contrast to those facing demographic challenges and aging populations, like China. The US may address similar demographic issues through increased immigration. Meanwhile, Africa has yet to capitalize on its favourable demographics.
Which asset class(es) will benefit the most from these trends?
Equities and certain commodities are set to benefit the most from these megatrends. Geopolitical instability favours safe-haven and commodities, while climate change boosts infrastructure investments, real , and equities linked to renewable energy. The energy transition will benefit equities, hard commodities, and traditional energy sources like oil and natural gas. Technology and AI advancements will favour equities, particularly those leading in AI-enabled solutions and infrastructure. Fixed interest asset classes will benefit from changes in monetary policy, with declining interest rates positively impacting other asset classes. Reliable inflation hedge , such as inflation-linked securities and gold, will attract higher allocations for protection against inflation uncertainties.
While the asset managers do not have specific views on future asset class returns, select equities are expected to be primary beneficiaries of these trends, except for geopolitical instability where gold serves as a solid hedge. Overall, equities and real with pricing power should thrive, while nominal may struggle to maintain real growth.
Are portfolios positioning to capture these trends?
The majority of asset managers surveyed have positioned their portfolios to capture some of these trends. Managers position their portfolios in accordance with their mandates and the areas that they cover. Some managers believe it is hard to time these themes. As such, their portfolios can only partially capitalise on these megatrends through occasional tactical bets.
Some have invested to varying degrees in each of these megatrends. As an example, a multi-asset portfolio will hold a sizeable position in gold to hedge against risk (e.g., geopolitical risk), hold equities that will benefit from the energy transition, ageing demographics, technology, healthcare and/or biotechnology, or hold certain commodities such as copper, lithium and rare earth materials to benefit from the energy transition. Meanwhile, an equity-only mandate takes sector bets – some managers maintain a high allocation to healthcare, focusing on companies set to benefit from AI efficiency gains and advancements in healthcare technologies, while others tilt their allocations to resources. Others keep liquidity high to seize opportunities and manage risk, focusing on bottom-up stock picking to identify the best risk-adjusted prospects.
Those managers who have not aligned their portfolios with specific trends believe these trends do not apply to their areas of focus. Additionally, some managers are bottom-up stock pickers and therefore avoid constructing portfolios based on macro-economic themes expected to materialise in the future. The overarching trend pertaining to positioning showed a bias towards equities and more so those that operate in sectors and industries with pricing power (the ability to pass inflation onto their consumers and clients) as well as the inclusion of gold for diversification and risk management.
Which companies will benefit the most from these trends?
Companies that are set to benefit from these megatrends span various sectors. In the context of climate change and energy transition, firms such as Vinci, Siemens, and Canadian Pacific are well-positioned to gain, alongside those in developed market renewable energy sectors. Regulated electric utilities like SSS Plc and Edison International, and electrical services contractors such as Quanta Services, are also expected to see growth. In the energy transition space, firms that effectively integrate new energy technologies will see gains, while those with exposure to traditional energy sources may also benefit as extraction costs rise and supply decreases. Resource and materials companies involved in renewable energy production, such as those working with copper, lithium, and rare earth minerals, are also expected to gain.
In healthcare and aging demographics, companies like BioRad and ThermoFisher are well-placed in the life sciences equipment sector, while UnitedHealthcare Group and BioLife Solutions stand to benefit from trends related to aging populations and innovative medicines. Geopolitical instability is likely to benefit firms with exposure to resources and conflict infrastructure, as well as gold miners and oil sector companies.
In technology and artificial intelligence, leading firms such as the Magnificent Seven – Nvidia, Alphabet, Amazon, Apple, Microsoft, Meta, and Tesla, along with Asian tech companies like Tencent and Alibaba, are positioned to thrive. Semiconductor companies such as TSMC will also benefit. With the shift in monetary policy regimes, high-quality companies with pricing power, like Roche and Nestle, will perform well.
Overall, select tech stocks, biotech firms, and companies with strong economic moats and sustainable returns are well-positioned to capitalise on these trends, offering opportunities for growth and resilience in a rapidly evolving global landscape.
Conclusion
These megatrends have already begun to shift how world economies grow and prosper, impacting consumer behaviour and prompting companies to adapt. With their demonstrable disruptive impacts, these trends can create disorder and cause short-term asset price dislocations, forcing businesses to evolve to stay relevant. Over the next decade, these megatrends will shape the global economic landscape, presenting unique challenges and opportunities. Investments in technology, infrastructure, and human capital will be crucial to navigating and capitalising on these transformative shifts. Understanding these trends will help investors and policymakers better position themselves for a rapidly evolving global economy, where resilience and innovation will be key to thriving amid change.
Glacier Research would like to thank the following managers for participating in the Glacier Research Global Mega Trends Survey:
- Allan Gray
- Aylett & Co
- Coronation Fund Managers
- Fairtree Capital
- Foord Asset Management
- Granate Asset Management
- Matrix Fund Managers
- Ninety One
- Sanlam Investments
- Terebinth Capital
- Veritas Asset Management
