Position for structural growth
There may be near-term volatility for growth stocks, but the long-term earnings growth story remains unchanged. It’s key that investors diversify globally to make sure they maintain exposure to the structural winners of the decade ahead, across ideas like “The Next Big Thing” including 5G, fintech, greentech, and healthtech, stocks linked to the future of humans, and investing in stocks linked to digital subscriptions. Private markets can also offer better access to innovative early stage companies.
All of the net wealth generated by the global stock market over the past three decades can be accounted for by just 1.33% of companies, according to a 2019 study of the more than 62,000 companies traded on global stock markets since 1990.
There are two key lessons from this. First, investors must diversify: full global diversification is the only way to guarantee investors can capture that 1.3% of value creators. Second, tilting portfolios toward stocks and sectors with the highest likelihood of long-term wealth creation creates the potential for significant excess gains.
In the near term, higher inflation, fiscal stimulus, and accelerating growth could create uncertainty about the path for interest rates and generate volatility in growth stocks. However, with the long-term earnings growth story of these unchanged, we think longer-term investors should consider how to use a period of potentially elevated volatility in growth stocks to build up strategic positions.
If the last decade was about investing in the technology sector itself, we think the next decade will reward investing in the disruptors in sectors undergoing technological transformation. We expect “The Next Big Thing” to materialize within the fintech, healthtech, or greentech spaces, or to be enabled and accelerated by the global rollout of 5G technology.
In fintech, we see strong growth potential in digital payments, which saw a boost from the surge in online shopping during the pandemic. According to a Mastercard survey, almost seven in 10 consumers say the shift to digital payments will likely be permanent, and nearly half of consumers plan to use cash less.
Healthcare is one of the largest yet least digitized sectors today. The pandemic served as a reminder of the need to have robust, efficient and accessible healthcare services in the future. We see investment opportunities in telemedicine, wearables and digital platforms for the management of chronic diseases such as diabetes.
As more industries undergo digital transformation, a next generation of IT infrastructure is emerging, with 5G at its core. We believe 5G will enable a massive internet-of-things network and power applications such as autonomous driving and remote surgery. According to Ericsson, the number of IoT devices is set to grow from 12.6bn units in 2020 to 26.9bn units in 2026.
We see a sustainable revolution underway as well. We have a positive view on green technologies or “greentech” which will aid carbon emissions reduction efforts worldwide. After such a strong rally in greentech stocks, it is important for investors to take an approach which is well-diversified globally, across sub-industries, and along supply chains, and to focus on companies with strong earnings growth prospects and established business models.
In the decade to come, growing and aging populations, alongside improving technology, will contribute to lifestyle changes, giving individuals greater autonomy and freedom of choice. We see particular opportunities related to this trend in two key areas: education—what, when, and how we learn; and healthcare—particularly the rise of preventive care, health technology, and telemedicine; and wellbeing—including digital entertainment and fitness, as well as socially conscious brands.
Gaining exposure to those companies contributing most strongly to global wealth generation has become more challenging in recent years, as some companies have chosen to remain private for longer. According to Goldman Sachs, the average age of technology companies going public has jumped from 3 years in 2001, to 13 years by 2018. In this environment, private market investments can sometimes provide better access than public markets to innovative early stage companies, and particularly in areas like genetic therapies, healthtech, food systems, e-commerce and fintech.
Key investment takeaways:
- The pandemic has accelerated structural change, and while there may be near-term volatility for growth stocks, the long-term earnings growth story remains intact.
- This period of volatility could be used to build up strategic positions, in our view.
- We think the Next Big Thing will be about companies using technology to disrupt other sectors rather than technology itself. We also see opportunities in stocks linked to the future of humans and private markets.
Healthcare (66%), green recovery (56%), 5G (62%),were cited as the thematic investment strategies surveyed investors would most seriously consider implementing over the next six months.
What does the future look like?
Our flagship report series "Future of…" provides a deep dive into some of the major issues that we think will drive society, the economy, and financial markets in the Decade of Transformation.
“Future of waste”
From food and energy waste to the proliferation of plastic packaging, waste reduction is a key issue for consumers, companies, and the environment. Our report shows how investors can capture long-term returns by investing in waste reduction, which also aligns with some of the opportunities identified in our greentech theme.
“Future of the tech economy”
The fourth industrial revolution, where technology meets economic forces, is just beginning. Yet it has already reshaped entire industries. Meanwhile, the COVID-19 pandemic has accelerated key trends including e-commerce and digital data penetration, with ramifications for enabling technologies such as 5G and disruptive technologies like fintech.
“Future of humans”
The application of technology will transform the future of healthcare and education, particularly in the context of an aging and growing global population.
“Future of Earth”
This, coming in 2021, report will focus on the investments that need to be made to balance planetary sustainability, economic development, corporate profitability, and human needs, while addressing the impact of limited resources and the changing natural environment on our economies, livelihoods, and communities.