Investors have been well rewarded for identifying the rise of artificial intelligence (AI) as a dominant investment theme but AI is not the only game in town. Other mega-trends will come to the fore during the next 10 years as geopolitical risk rises, populations in developed countries age and healthcare systems around the world become overstretched.
Below, experts highlight the themes investors should monitor in the coming years.
Future economic security
The pandemic brought to light the interdependence and over-concentration of global supply chains, making them vulnerable to external shocks. For instance, 80% of industries suffered from supply chain disruptions during the Covid-19 pandemic.
Moreover, recent geopolitical tensions have highlighted the risks to supply chains in critical technologies and resources, such as semiconductors, energy and key basic materials.
As a result, the US, European Union and Japan have already invested more than $190bn in semiconductor research, development and manufacturing to diversify and onshore supply chains.
Based on those dynamics, Luke Barrs, global head of fundamental equity client portfolio management at Goldman Sachs Asset Management, identified “future economic security” as the investment thematic of the coming decade, which he divides into three sub-themes: supply chain security, resource security and national security.
He said: “With security threats growing in magnitude and complexity, this is driving the need for the latest defence and cybersecurity solutions.
“As a result, there is an opportunity to invest in the beneficiaries of governments and corporations investing in their future economic security.
“We are seeing the upside of this investment reflected in the earnings of companies in critical industries, such as chip manufacturing, as well as companies benefiting from increased investment in domestic manufacturing capacity.”
This theme enables investors to combine value sectors such as industrials and energy with growth-oriented companies in areas such as technology, he added.
Defence
The surge in geopolitical tensions has put an end to the ‘peace dividend’ that the world – including investors – had benefited from since the end of the Cold War.
After the fall of the Berlin wall, governments made large-scale cuts to their defence budgets as geopolitical risk subsided.
Since the outbreak of the war in Ukraine, however, they have been ramping up military spending.
Tom Bailey, head of research at HANetf, said: “From Europe to Asia, new big spending packages have been announced, while national defence strategies have been rewritten.
“One particular area of focus is European NATO members. The declines in European defence spending post-Cold War resulted in many European countries falling short of the 2% of GDP defence spending target, set by NATO. These cuts have left European military inventories troublingly low.
“Following the 2022 invasion of Ukraine, the need to address this has become apparent to governments across the continent.”
To tackle this issue, Germany has announced a €100bn spending package to accelerate its modernisation, while Poland has committed to spend over 4% of GDP on defence.
For Bailey, key beneficiaries of this uptick in spending will be the big European defence firms such as Rheinmetall, Leonardo and BAE Systems.
Demographic divergence
Around the globe, life expectancy is increasing while birth rates are declining in most developed markets as well as in China. This means that populations are getting older while the number of people of working age is shrinking.
Wei Li, global chief investment strategist at BlackRock Investment Institute, said: “This poses an economic challenge; all else being equal, a shrinking workforce means an economy cannot grow as fast.
“Demographic changes – and their effects – will vary across countries, and the dispersion of outcomes will create plentiful investment opportunities.”
In many emerging market countries, the working-age population is still growing, giving them an economic advantage that could lead to outperformance if they can capitalise on demographic trends by improving workforce participation and investing in infrastructure.
“We think higher returns could be on offer in countries with greater demand for investment, such as India, Indonesia, Mexico and Saudi Arabia,” she said.
Another area Li pointed to is healthcare in the US and Europe.
Affordability of healthcare
Chris Eccles, portfolio manager at AXA Investment Managers, highlighted the issue of affordable healthcare, as medical systems around the world are stretched and in many cases at “breaking point”.
He referred to recent figures from the US Treasury Department showing that the unfunded liability for Medicare – the federal health insurance programme in the United States – over the next 70 years stands at $175trn.
He added: “To bring this into more immediate terms, Medicare Part A – which is the part of the US Social Security healthcare system that pays for hospital bills for Americans over age 65 – is unfunded beyond 2028. That's four years away.”
However, this issue does not only affect the public side of the healthcare system, but also the private and commercial sectors.
Referring to research from the Kaiser Family Foundation, Eccles pointed out that nine out 10 employers in the US believe their healthcare costs will become unsustainable in the next five to 10 years.
Meanwhile, he noted that patient outcomes are “far too often sub-standard”.
“Something has to be done, it's an absolute imperative. The healthcare system must do better for less,” Eccles said.
“In that sense, affordability and innovation are at the centre of how we think about opportunities and risks across our investment space.
“We're trying to select companies that are either solution providers or beneficiaries as we shift towards a more sustainable healthcare system.”
While this thematic affects the healthcare system as a whole, he stressed that it is manifesting itself in different ways through the different sub-sectors.