The Evolving Economy

Understanding investment strategies

What is the evolving economy?

Shifting demographics, technological advancements and the way that consumers behave – and how companies have adapted to serve them – have all radically altered the economic landscape.

We believe there now exists an ‘old economy’ and a ‘new economy’ – with the world increasingly tilting towards the latter.

Companies that operate in the old economy are those that maintain a more traditional approach, and their businesses tend to already be mature.

On the other hand, we believe new-economy firms are ones that have embraced this new environment of evolving demographics and new technologies – and see them as key drivers of growth.

We believe the transition to this new economy will continue, and as such we feel it is key for investors to think about the way they invest.

How are companies classified?

In today’s world it seems obvious that many companies operate across multiple sectors. For example, Apple, the maker of the iPhone, spans technology, communications and entertainment. Vodafone, the mobile phone service provider, isn’t just a telecoms company but also offers entertainment and data services. Several automobile groups are no longer just car manufacturers but also pioneers of clean technology, automation and connectivity.

But traditionally, companies like these would be classified into just one sector, which often doesn’t fully encapsulate what they offer to customers – or the potential opportunities they present to investors. The Global Industry Classification Standard (GICS) was developed in 1999 to help investors understand and sort companies into simple groups.

GICS consists of 11 sectors and within that, 24 industry groups, 69 industries and 158 sub-industries. Companies are assigned a single classification at sub-industry level, according to their principal business activities.

For the last 20 years it has made sense to classify companies in this way but globalisation and the rise of the digital economy have made some of these groupings less relevant. Companies – and markets – have evolved, spanning more than one sector and becoming increasingly difficult to define from an investment universe perspective.

Five key themes

We have identified we what see as five multi-decade growth themes and we believe they will have a radical impact on the way equity investors access long-term capital growth. Collectively these themes make up what we call the Evolving Economy.  These themes are: automation, the connected consumer, ageing and lifestyle, clean technology and transitioning societies.

But while these structural themes are not new, we believe we’re still in the relatively early stages of accessing their investment potential. We outline their characteristics below:

Automation

By automation, we mean the application of robotics and automatic equipment across a variety of industries. Advances in technology are rapidly changing how we live and work today, and how we will do in the future - whether it’s online payments, online shopping with same day delivery, driverless cars and/or robotic surgery. Industrial robots perform highly sophisticated and delicate tasks and work alongside people to drive efficiency and boost productivity. We believe we are still in the early stages of this trend, but the long-term potential seems evident.

 

The connected consumer

Thanks to the internet and smartphones, consumers across the world have unprecedented access and choice when it comes to shopping and using services. It’s not just the younger generation but also the older, wealthier generations, who are increasingly connected and comfortable buying goods and services online.

Companies with traditional business models are finding they must adapt to the digital age and evolving needs – and consumer expectations. Otherwise they risk being disrupted by new entrants to the market and by their competitors who adapt to the new backdrop. Keeping pace with technological advancements will enable companies to engage their customers more deeply in a digital economy. We believe this represents a significant opportunity for investors seeking long-term growth.

 

Ageing and lifestyle

Ageing populations are one of the biggest social, political and economic challenges of the world today. Life expectancy continues to rise, and the over-60 population is forecast to grow more than five times as fast as the under-60s globally, between 2018 and 2030[1].

By 2030 two-thirds of over-60s’ consumption growth in developed markets is expected to be spent across industries dedicated to living well, from beauty and fitness to travel and entertainment[2]. Other industries like real estate and health care will be impacted as well.

Changing lifestyles and the needs of older generations could represent a multi-decade growth opportunity for investors.

 

Clean technology

The demographic, environmental and economic changes that we are seeing are also are influencing the political and social drive to find clean technology solutions. This includes ways to move to a low-carbon economy and manage resources more sustainably.

The clean tech market, consists of companies seeking to have a positive environmental impact by developing new technology across areas such as energy efficiency, smart grids, clean energy and sustainable resources. It is predicted that this sector will expand to $3tn by 2020, up from $601bn in 2014[3].

Consumers are demanding more of companies and governments, and they are increasingly lobbying them to make changes to their environmental policies, on the back of growing concerns over areas such as climate change. Consequently, we are beginning to see a shift to clean tech investing, as more companies embrace the need to minimise waste and maximise resources.

Businesses that are prepared to adapt should have a sustainable, competitive advantage by reducing their input costs over the long-term, and they could see significant growth potential in the decades to come. We believe that this could provide investors with exciting new investment opportunities in businesses that should stand the test of time.

 

Transitioning societies

More and more opportunities are opening up to previously under-served groups of society – though there is still some way to go. This so-called economic inclusion, as well as changing consumption patterns, can be seen in both developed and emerging markets.

The ongoing growth of the global middle class is a historical shift which not been seen for 150 years[4].

It is predicted that almost 90% of the next billion entrants into the middle class will be in Asia[5]. This significant demographic shift is likely to bring a consumption boom in the developing world as consumption patterns move from fulfilling basic needs to more aspirational purchases.

This growth is mirrored by opportunities for investment growth. Equity investors can look to companies serving the changing consumption patterns of societies across frontier, emerging and developed markets – from healthcare companies providing access to medicines, to infrastructure projects connecting people and societies.

 

What does this mean for investors?

Ultimately, companies and the individuals they serve will continue to change over the coming decades. The Evolving Economy is about identifying the best of these long-term equity opportunities, regardless of how companies are defined geographically or from a sector perspective.

By looking at individual companies but factoring in these trends, we are now able to make much more future-focused and well-rounded assessments of investment opportunities.

[1] US Department of Commerce
[2] United Nations
[3] http://www.climateaction.org/news/clean_tech_market_to_exceed_3_trillion_by_2025/
[4] United Nations 2013
[5] Brookings institute 2017 

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