Megatrends That Pay Off in Any Market
Someone recently asked me which trends I was betting on long-term when it came to my investments. I was quick to explain that “betting” might not have been the right word to use.
I tend to think of myself as a rational, fundamentally-driven investor. I’m not a speculative trader, though I suppose when you’re talking about multi-decade trends, there has to be a fair bit of guesswork involved. With that said, I still think it’s important to attempt to peer into the future and attempt to align investments with the changes that one expects to occur.
When I think about long-term investments, I think about secular trends. In other words, I think about “megatrends” that aren’t likely to be changed or disrupted by the health of the U.S. or world economies. I want to put my money into companies that will do well, regardless of economic growth.
Now, this is no easy feat. Furthermore, once you identify a megatrend you believe in, it’s difficult to pick and choose the individual companies that will likely benefit the most. However, it’s a worthwhile pursuit because when one is able to do this, fabulous returns are at hand.
We’ve seen the market-beating success of the “FAANG” names — Facebook (NSDQ: FB), Amazon (NSDQ: AMZN), Apple (NSDQ: AAPL), Netflix (NSDQ: NFLX), and Alphabet’s (NSDQ: GOOGL) Google — over the last five years or so. These companies were probably best positioned to benefit from society’s shift to mobile. FAANG helped to usher the world into a digital era and investors have made handsome returns.
There are dozens of long-term trends that I think about when managing my portfolio, but here are a few of my favorites.
Urbanization and Globalization
These are two of the strongest secular trends I see in the world today. The United Nations recently released a report saying that by 2050, it expects two-thirds of the world’s population to live in urban environments. This trend isn’t just global. It’s happening in the United States as well.
Source: United Nations
The U.N. expects to see megacities (urban areas with more than 10 million inhabitants) on the rise as well. An extra 2.5 billion people moving from the countryside to the city in the coming decades might not seem all that important, but this population shift will have long-lasting impacts for investors.
This trend is bullish for companies that participate in the construction associated with the expansion of these cities. Increased spending on infrastructure projects will be necessary for cities to grow. Transportation links between these megacities will be increasingly important as well, for both people and freight. New forms of transportation within these crowded cities will be necessary for them to function properly.
Also, with fewer people living in rural areas, it is likely that farming practices will have to be further automated to meet the dietary needs of city dwellers.
Artificial Intelligence and Automation
Future farming practices is the perfect segue into another secular trend that I’m investing behind: automation. The rise of artificial intelligence (AI) is all over the news. Collecting and analyzing big data is big business these days. I suspect that governments are going to have to step in and regulate these practices at some point in time, but either way, it seems clear that “smart” machines are going to be the next big trend in technology.
We’re already seeing this with digital personal assistants like Siri and Alexa. Self-driving cars are disrupting the auto industry. Goods are manufactured in factories with robots, not human hands. Heck, automated kiosks are taking orders for burgers and fries at fast food joints and big box stores are working on concepts to get rid of the checkout lines altogether.
The goal of this automation is to increase efficiency. I think it’s still unclear how this will affect the workforce. I’ve read research claiming that robots will steal millions of jobs and others claiming that they will create millions more. The one thing I do think is clear is that a more efficient society will lead to more free time.
Because of this, I’m bullish on media companies that create content. No one likes to be bored and I suspect that the demand for content will increase right alongside improving efficiency. And, assuming that we’re not all poor and out of work, I’m also bullish on companies focused on travel and other fun, meaningful experiences.
AI is both fearful and exciting. Some very smart people have predicted that singularity will be the end of mankind, while others have said that AI will be the biggest boon to society since the invention of the steam engine. I don’t know if the future will look more like the Terminator or WALL-E, but of the choices, I’ll choose to focus on the latter.