GlobalMay 30 2018

Disruption equals future growth

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Disruption equals future growth

Often they failed and the investment was lost. But the ones that worked changed our lives and benefited (nearly) everyone. Investors were rewarded handsomely.

With that in mind, it makes sense to think hard about where human demand will be greatest in the years ahead and avoid being invested in industries that are headed in the opposite direction. When a new or better product arrives, the biggest loser is the supplier of the obsolete product it has replaced.

This is where thematic investing comes in. It looks at societal, demographic and economic changes and chooses long-term investment solutions that should benefit from them. That way investors have their savings at the forefront of the major themes that will drive tomorrow’s world.

Key points

Entrepreneurs that took risks with products that worked changed our lives

There are several global themes to look out for when investing

The tech revolution is an important trend to invest in

 

These strategies go beyond fashionable short-term trends and are resilient to market cycles (consider the fact that we are living longer and how that is not going to go away regardless of what interest rates do). The challenge is to identify sources of growth that are long-term, tangible and meaningful to investors. A true theme is one that resonates with retail investors and institutional investors.

So what are some of the themes facing us all today?

Disruption

The concept of ‘disruption’ was first theorised by Professor Clayton Christensen in the late 1990s. He saw it as an economic development in which an innovative product or service undermines the established order of a market. Think of IBM’s success in democratising the use of computers in the late 1970s. Or Racal’s (now Vodafone) development of cellular communications in the 1980s and 1990s. It became clear that no sector was immune from the fast pace of disruption and reinvention – be it the way we eat, live or how we do business. 

An ageing world

By 2050, the world’s ‘silver generation’ (people aged 65 years and older) will outnumber children under 14 for the first time in human history. To put things in perspective, the US silver economy – economic activity serving the needs of Americans over the age of 50 – is worth $7.6tn (£5.7tn), making it the third largest economy in the world after the US and China, and larger than Britain, Japan, and India. In the past 18 years, companies whose business is exposed to the ageing population have achieved average revenue and earnings growth that has outperformed the global market. This trend is expected to gather strength.

Tech revolution

This looks to capitalise on how the combination of the internet, network-capable mobile devices, data analytics, cloud computing and devices with deep learning capabilities are impacting sectors. The widespread rollout of robotics is already underway, with spending expected to reach $67bn (£50bn) a year by 2025.

It is easy to think that investing in disruption simply means seeking exposure to artificial intelligence (AI) or robotics. But it is wider than that. Investors can find sources of growth across numerous sectors.

This means investing in companies transforming an existing market or creating a new one across the digital economy, life sciences and natural resources. For example, there is a new device on the markets that is often referred to as an ‘artificial pancreas’ for use in people with type 1 diabetes over the age of 14.

The device, made by Medtronic, is called the MiniMed 670G, and it works by automatically monitoring a person’s blood sugar levels and administering insulin as needed – no constant checking and injecting required.

Disruptive opportunities can be found in mature players like Google and Amazon but also in smaller, early stage companies providing a more niche offering, such as a tool called x.ai which provides a personal assistant for busy professionals that works by simply cc’ing an AI named ‘Amy’ on your emails.

The allure of luxury

Luxury goods and the boom this sector is experiencing globally should prompt investors to examine how this theme will develop. As people get richer they spend more on what they want, since they worry less about getting enough of what they need. The expansion of personal wealth paired with globalisation has brought luxury lifestyles to more people than ever before. Expanding middle classes in developing nations are established on the world scene and are demonstrating their wealth through their spending habits: taking holidays abroad, improving their homes and buying branded goods.

Food demand

Global population growth and rising wealth means people will need more and better sources of food. Investors can be guided by the motto ‘from farms to forks’ and invest across the whole value chain: agriculture, water, food products, beverages, food retail and restaurants. It is worth having an environmental sustainability filter to ensure exposure to forward-thinking companies who take a holistic approach and have a long-term future.

As the world continues to change it becomes more and more evident that the megatrends that are emerging are creating opportunities for investors. 

While change is rarely comfortable, few other strategies in the investment universe provide investors with the opportunity to earn themselves a better today by tapping into what will happen tomorrow. In the process, they will fund the growth of new products and services that we all will enjoy in the years ahead.

Vafa Ahmadi is head of global thematic equities and portfolio manager at CPR Asset Management