By Andy Gardner
An alternative approach to filtering investment opportunities may not be to choose a particular geography or sector but to identify stocks that are highly exposed to secular investment themes.
Many of the world’s challenges, such as education, aged care and waste management, are undeniable because they relate to secular forces such as population growth and productivity. As such, they are expected to grow at rates well in excess of gross domestic product (GDP).
This realisation is supporting the growing trend towards thematic investing, which identifies companies that are exposed to themes offering solutions to the challenges of a rapidly-transforming world.
We believe the following themes provide some of the best opportunities for investors over the long term.
Education
Education is one of the most pressing socio-economic challenges today. It is a major component of well-being and a key measure of economic development and quality of life.
Education spending is already very large, accounting for around 5% of global GDP. Expenditure is expected to continue to grow by at least 7-8% to 2017. Factors driving this growth include higher enrolment targets, more women in education, the rise of the middle class in emerging markets and increasing global mobility.
Energy revolution
Renewable energy will constitute the vast majority of new capacity added during the coming decades as the likes of solar and wind are now cost competitive on an unsubsidised basis in many locations around world.
Despite this, renewable companies account for less than 0.1% of global market capitalisation. As it will take some time for renewable technologies to achieve the necessary scale and infrastructure to challenge fossil fuel, the short to medium-term focus will be on solutions increasing the efficiency of existing uses (cars, batteries, lighting and buildings).
Ageing demographic
Despite fears that obesity and global warming would reverse the trend, life expectancy in rich countries has grown steadily by about 2.5 years a decade or 15 minutes every hour. Falling birth rates mean some countries are heading towards a potentially catastrophic decline in population.
The spending habit of the aging cohort increases demand for a range of products and services such as healthcare, aged care, and specialist travel. The US longevity sector alone is currently estimated at US$7.1trn.
Obesity, health and wellness
The obesity epidemic may be the most pressing global health challenge because of its direct and ripple impacts on chronic diseases such as diabetes. More people now die from overweight/obesity-related illness than from starvation.
More broadly, the rapidly rising demand for and cost of providing healthcare is spawning innovation in areas such as DNA to use an individual’s genetic makeup to better tailor medical treatment.
Technological change
Technological development is accelerating as academic research and commercial enterprise become increasingly intertwined. Themes include mobile connectivity, cloud computing, ‘smart city’ development and big data. 3D printing has the potential to rewrite the rules of localised manufacturing while automation is driving a substitution from labour to machines given rising wages and the need for productivity and safety improvements.
There is also a growing focus on long-term solutions to the ever-growing and changing array of safety and security threats against people, governments and infrastructure.
Urbanisation
In 2008, for the first time in history, the human race became predominantly urban. By 2025, there will be 37 cities with more than 10 million people in them and only seven of them will be in the developed world.
Increased urbanisation in emerging markets raises living standards and causes a shift in the consumption habits of the population, but requires significant investment in core infrastructure. At the same time, much of the urban infrastructure in the developed world is in need of upgrade.
Andy Gardner is a fundamental equities portfolio manager/analyst at AMP Capital
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