By Zehrid Osmani, head of global long-term unconstrained at Martin Currie
Recognising and understanding the megatrends at work in the 21st century is essential for a long-term investment strategy, but it is only the starting point. Investment based on sentiment or as part of herd can lead to buying into over-valued assets as not every company linked to a trend will succeed.
Most importantly megatrends do not function in isolation – they overlay and interact with each other to create focal points of value creation. Capturing value means identifying these interactions and the companies that are genuinely monetising them.
Megatrendy
The three megatrends of the 21st century are the future of technology, demographic changes and resource scarcity. These trends will be familiar to most investors, but it is important to recognise that each one encompasses more than just the obvious.
Technology naturally includes artificial intelligence (AI), but it also includes robotics, automation, life sciences and genomics, to name but a few. Demographic changes include ageing populations and migration, but also changing expectations of lifestyle such as work-life balance.
Resource scarcity refers to the supply of raw materials, but also resources from energy to infrastructure and education, because human resources are among the most valuable. It can also refer to types of resource accessibility, captured in the issues of sustainable and secure supply chains and the acute geopolitical tensions that are reshaping trade.
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From these descriptions it should already be clear that these megatrends overlap, and it is in those overlaps where the greatest investment potential lies.
For example, energy scarcity and the need for decarbonisation overlaps with future technologies in renewable energy and electrifying transport. The megatrend of demographic changes overlaps with the future of technology in robotics and automation which can meet shortages of labour. Demographics and technology overlap in areas such as healthcare and life sciences.
Thus, understanding the megatrends is about recognising and analysing these overlays of forces. Through this approach it is possible to identify key themes and, within those themes, specific companies that occupy valuable positions where the megatrends intersect.
Beware sentiment and the herd
This sophisticated approach to the megatrends and the themes within them is essential to avoid the risk of sentiment or herd investing.
We track a basket of over 50 companies linked to AI – one of the themes within the technology megatrend.
We compared the rising value of these stocks with their revenues and profits over a 12-month period and found that while their value shot up by 35%, earnings rose by just 4% on aggregate. In other words, the valuation multiple was expanding. Simply following the theme is therefore not the same as following value.
By applying a range of metrics including price earnings to growth ratios (PEG) and return on invested capital (ROIC) it is possible to distinguish between those companies that are riding the trend and those that are genuinely monetising it.
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One simple illustration of this can be found in the so-called ‘magnificent seven’ US tech stocks, which in our view can be trimmed down to the magnificent two – Microsoft and, even more so, Nvidia.
Nvidia’s share price has been one of the standout performers in any global market, but what is truly remarkable is that its capital value has not risen as fast as its revenues and earnings. Over the last 12 months Nvidia shares rose 191%, but the company’s earnings rose by over 70%.
In other words, the key valuation multiples for Nvidia have not expanded as much as the broader basket, and the share price has been supported by strong positive earnings revisions.
Thematically investing to capture the megatrends does not necessarily mean investing in the US giants at all. Europe for example has notable companies in the semiconductor sector, such as ASML and BE Semiconductor, which for European investors also means they are capturing the resource theme of supply chain security and addressing geopolitical risk.
Combining an analysis of megatrends and their intricate overlaps with a rigorous financial analysis reveals the genuine focal points of value where two or more megatrends overlap to create even greater value opportunity. Then a rigorous financial analysis identifies the specific companies that are generating real return on investment.
The three megatrends and their themes are set to be features of the global economy for decades to come. The companies that best reflect the investment opportunity within those themes are less fixed and predictable. They cannot be identified by tracking benchmarks but rather require unconstrained and targeted investing, guided by the strategic framework.
That is the way to ensure your portfolio captures the real sources of value in the megatrends rather than just following the fashion.
