«There is only one war that the human being can afford: the war against his extinction«. It is one of the most famous phrases of the science fiction writer, Isaac Asimov. What he didn't know is that, as time has progressed on the calendar, his words have been making more and more sense.
The world is in full revolution. It is not a taboo. It already happened in the industrial age at the dawn of the 19th century. But now technology is turning everything upside down. Again. Few personalities no longer talk about the transformations that are coming: from artificial intelligence and robotics, to big data, autonomous vehicles, and 5G. They are the so-called megatrends.
The investment environment is not turning its back on this transformative change that is gaining more and more strength. In recent years, what are known as thematic investment funds have emerged. Some products that drink from these great future trends and which are expected to accumulate significant returns derived from this revolution that is already underway.
The strategy of investing in tomorrow goes through now. This is how fund managers and experts of all kinds linked to asset management see it. The fundamental thing is to bet from now on what will generate returns in the decade that opens in the post-Covid era. "As far as investor behavior is concerned, decisions with a thematic focus tend to be easier to endure over time," says Diego Fernandez Elices, General Director of Investments at A&G Banca Privada.
In other words, exposure to secular growth trends in the markets has the potential to outperform the broader market. The reference is that funds, in particular, are experiencing a strong resurgence of interest due to huge demand from clients – especially retail clients – who generally have a good understanding of investment policy.
“Also, by enjoying greater freedom of movement, it avoids the constraints of strictly sector investing, thereby giving active managers the opportunity to demonstrate that they are capable of creating value,” says Andreas Fruschki, team manager for Thematic equities of Allianz Global Investors and manager of the Allianz Thematica fund.
The wind blows in favor
Focusing on these big issues of the future has its advantages. And it is so because of catalysts or drivers that act as a springboard for the coming years. It is like the ship that travels on the sea with the wind blowing from the stern. Well, the same thing happens with the big trends.
“All of them are rapidly gaining relevance as humanity consumes an ever-increasing proportion of the earth’s resources, while their challenge is being met by rapidly accelerating innovation that is driving a technological transformation in virtually every world. all sectors and industrial groups“, describes the Schroders team.
In short, it offers advantages such as stability and predictability of cash flows, preservation of capital thanks to the intrinsic value of the assets, low correlation with other asset classes, protection against inflation, or low volatility. "This translates into a very attractive risk-return profile," say Altamar experts.
Investing in thematic funds provides diversification, since it allows you to participate in the financing of innovative companies that are well positioned to face the challenges of the future and benefit from those tailwinds of secular growth. “We are convinced that this type of business will probably be above the rest of the market,” says Jacques-Aurélien Marcireau, co-head of equities at Edmond de Rothschild Asset Management.
The story makes you think about what are those great megatrends that are clearly behind the deep structural changes that we are experiencing and that can make money grow by investing through funds. The list is almost endless.
Schematizing seems like the most important task. Not all innovations are the same. The experts agree on the areas that bring together a greater growth capacity and that drag a wider range of products in which to invest: robotics, artificial intelligence, 5G, electrification, autonomous vehicles and green energies. The potential is almost unknown for its magnitude.
Identifying these winners within a fund requires an active, research-driven approach. It requires experience, according to Nabil El-Asmar Delgado, Country Head of Vontobel AM in Iberia: "Active funds offer an attractive way to take advantage of these opportunities to invest in the trends that will shape the world of tomorrow."
The rise of AI, robotics and 5G
Going deeper, technology and related sectors, especially Artificial Intelligence (AI) and robotics, offer investment opportunities in thematic areas through the most important investment funds. The best stocks of these companies use processes like machine learning and neural networks on a daily basis.
The growth of AI is enviable. A 2020 report by Grand View Research estimated the global market size to be $39.9 billion in 2019 and projected a CAGR of 42.2% between 2020 and 2027. Truly spectacular.
The projected impact is gigantic: the widespread use of these technologies could double the economic growth rates of many advanced countries by 2035. Artificial intelligence is expected to drive an increase in global GDP of $15.7 trillion by 2030, making it the biggest business opportunity in today's economy.
The IMF found that increasing robot density in the manufacturing sector is associated not only with higher productivity, but also with higher job satisfaction, as it frees up time for more satisfying tasks.
The Artificial Intelligence space is too diverse to focus on investment strategies. But preferences can be drawn. Chris Gannatti, Head of Europe Analytics at WisdomTree says they see excitement in areas like generative design, robotic process automation, natural language processing and computer vision.
“The accelerating pace of AI innovation means that companies will need to identify and implement new AI-related business strategies or they will find themselves at a disadvantage against their competitors,” Gannatti elaborates.
"The impact of AI is vast, it will be adopted horizontally across all industries and drive new levels of productivity, time savings and improvements, in a way that could have an even greater impact on society than the advent of the Internet." », points out Fruschki.
In this space, companies such as Roku, Tesla, Amazon, General Electric, Zoom Technologies are some of the preferred bets by fund managers, occupying a significant weight of the portfolios. All, with a great link with this space and with the realization of large investments in terms of the development of artificial intelligence.
To all this, we must add that 5G and the new wireless communication networks theoretically allow latency problems to be solved and could also allow the introduction of AI in the cloud, to further boost new robotics markets.
Furthermore, as innovations become more widespread, economies of scale will mean that the cost of producing and purchasing these robots will come down. "Consequently, they are likely to become more widely used across a wider range of industries, as economics make them much more affordable," Schroders experts extol.
The rise of robotic capabilities is gaining more and more attention. There is a lot of connectivity between robotics and the systems that control the robots, which in many cases can benefit from different artificial intelligence and machine learning techniques. "Robotic systems that augment human capacity, such as those used in surgery as an example, are also very interesting at the current time," Gannati deepens.
With these catalysts, highly relevant firms such as Alphabet (Google's parent company), Siemens, Lam Research, Synopsis or Intel prevail in the portfolios of robotics funds. They are firms that dedicate a large part of their budget to robotic innovations and that, in the face of a dazzling advance in this technology, have a much smoother environment to grow.
On the other hand, investments in the cloud and in data security will be more relevant. "Currently, only $1 in every $100 spent on cloud services is spent on firewalls and security, so in the long run this percentage should increase considerably," says Jan-Christoph Herbst, fund manager at Main-First Global. Equities Fund, MainFirst Global Equities Unconstrained Fund & the MainFirst Absolute Return Multi Asset.
“We believe that the total amount of data globally will multiply by 10 in just five years, driven by artificial intelligence, the availability of faster processing power, cryptocurrencies, consumer platforms like Netflix or Facebook, systems of video conferencing, the slow replacement of television and radio by streaming services“adds Herbst.
The potential of electrification
The change towards a new mobility model is another notable point in the trends of the coming years. Proof of this is that Spain has announced its intention that the bulk of vehicle sales by 2030 be electric. "All of this is going to promote the creation of a new ecosystem of new companies around the electrification of transport," highlights the Altamar team.
The outlook remains strong: recent years have been pivotal in all the disruptive dimensions of mobility such as autonomous driving, connectivity, electrification and shared mobility. According to a McKinsey study, sales of electric vehicles (EVs) have broken records worldwide and these have become much more important in the public consciousness of the main automotive markets, such as Europe.
A key aspect of a more sustainable world will be the electrification of cars. By 2030, Norway, Israel, India, Belgium, the United Kingdom and Denmark will ban the sale of new cars with these characteristics. “Energy demand in the transport sector is expected to grow thanks to additional charging demand from electric cars,” says Martina Macpherson, Head of ESG Strategy, ODDO BHF Asset Management & Private Equity.
Many countries are indicating a certain future point, such as 2030 or 2040, after which internal combustion engine vehicles will no longer be available for new sales. "Investors may choose to focus on actual vehicle manufacturers," Gannatti notes.
The trend towards electrification requires an electrical network based more on renewable sources to develop its full potential compared to cars with combustion engines. It's undeniable. Therefore, there is a long highway to go.
Regarding the autonomous vehicle, the horizons of maturation are somewhat longer, although steps are already being taken to achieve it, first in technology and second in strengthening the telecommunications infrastructure referred to in the question previous to have network capacity so that all vehicles are connected.
In this segment, companies such as Alphabet stand out in the portfolios with the Waymo project, or Tesla for the efforts towards autonomous driving. They are names to target and that have the capacity to lead future growth.
"While we don't have truly autonomous cars in many cities yet, beyond more limited cases like Waymo in Arizona, we've seen a lot of new technologies that could be incremental steps toward autonomous driving that could make driving safer." Gannatti.
The future of green energy
The evolution towards a more sustainable economy is another of the points that receives the light of the spotlights of the experts in megatrends. In fact, Bill Gates paid a lot of attention to green energy with his recent book How to Avoid Climate Disaster. He was notable that he separated the concepts of solar and wind energy, from nuclear or geothermal energy.
This is probably the sector that will attract the most private investment in the coming years. Spain, together with the rest of the countries of the European Union, has committed to ensuring that by 2030, at least 32% of the energy consumed comes from clean energy. It wants to go further and has set itself the goal of reaching a 42% share. These objectives imply installing 30,000 MW in solar projects and 22,000 MW in wind projects, which offers opportunities.
"Despite the enormous progress that has been made in Spain, if we compare these figures with the current installed power, it implies building a wind farm that is practically the same as the one that exists today and twice the installed power in solar", the Altamar experts explain. The use of coal in electricity generation alone accounts for nearly a third of global energy-related CO2 emissions. Europe is a pioneer in clean energy and has the most mature market.
The United States has great potential for recovery, especially with the support of the Democrats. For Marcireau, the goal of carbon neutrality by 2060 is also very supportive. And not only that. So is the US investment of $2 trillion in clean energy and the full decarbonization of the electricity sector by 2035, in order to reach a larger goal of net zero carbon emissions by 2050.
“The potential for increased demand for renewable energy, globally, as well as the electrification of the transport and industry sectors and plans by oil and gas companies to increase their participation in the electricity value chain , they are accelerating the convergence of the energy industry“, describes Macpherson.
Hydrogen is a fairly new segment and the growth rates will be impressive. However, investors need to be aware of the uncertainty surrounding the potential market and highly competitive landscape for fuel cells and electrolysers.
Therefore, these trends alone require a significant increase in renewable energy. "But for heavy transport and shipping, industrial processes such as steel production, long-term energy storage for the grid, and some forms of heating, the technological solution seems to be green hydrogen, another of the future revolutions," Schroders' team argues.
MYR Group, Livent, Ameresco, Albe-marle, ChargePoint Holdings or Daqo New Energy are examples, some of the companies best positioned to move towards an energy transition from brown to green. The present is clear, although the future is yet to be written.