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Thematic investing

megatrends and thematic investing

How megatrends redraw the investment landscape

Megatrends are a discrete group of powerful social, demographic, environmental and technological forces of change that are reshaping our world. Investors can't afford to ignore them.

There can’t be many countries that worship the car as much as the US. Americans’ love affair with the open road has long been one of the nation’s defining features, romanticised in classic movies such as Thelma and Louise and Bonnie and Clyde. But there are signs that the chemistry is not as powerful as it used to be. Since the early 2000s, travelling by car has become a less popular pursuit. Having risen every year since the Second World War, driving among individuals in America has declined by some 10 per cent over the past decade.
Megatrends have the capacity to redraw the investment landscape

On average, people in the US now drive 500 fewer miles every year than they did in 2000, while less than 70 per cent of 19-yearolds now have driving licences, compared with around 90 per cent 20 years ago. The allure of the auto looks set to diminish further over the next several decades.

According to Barclays, US car sales could drop by some 40 per cent over the next 25 years. In time, there could be fewer than 100 million vehicles on US roads, compared with 250 million today. It is a tectonic shift, but what is causing such disruption? At Pictet Asset Management, we can explain this transformation using a framework based on structural forces we call megatrends.

These trends are changing our world

Megatrends are a discrete group of powerful social, demographic, environmental and technological forces of change that are reshaping our world. They evolve independently of the economic cycle, and while they may develop in different ways and at a different pace, they each possess the capacity to redraw the investment and industrial landscape.

Using this framework as our vantage point, we find that the auto industry is being buffeted by three of the structural trends that form part of our model. The first of these is sustainability, or the increased importance that individuals, businesses and policymakers place on protecting the world’s environment and natural resources. As cars cause environmental damage, they are simultaneously subject to tighter regulations and losing their appeal among younger segments of the population.

Fig. 1 0  the megatrends transforming the world
14 megatrends
Source: Pictet Asset Management

The second trend transforming the auto sector is technological development, or the unprecedented pace at which technology is now evolving. In the car industry, this trend manifests itself in a number of ways, most obviously via the development of self-driving and electric vehicles being developed by firms such as Tesla.

The third trend shaping the car industry is the growth of the network economy – the increased inter-connectedness of individuals and businesses that is resulting in the speedier transfer of goods and services from provider to receiver.

Some would describe this phenomenon as the sharing economy, and one company that has harnessed this trend to good effect is car-sharing service Uber. Technological progress, the world’s increased concern about the sustainability of our planet and the network economy are, however, just three of the many enduring trends that will have a profound effect on the interactions between individuals, organisations and the environment over the years and decades to come. There are many others (see Fig. 1).

How to analyse megatrends

What makes understanding and investigating megatrends especially important is the fact that all of these changes are unfolding at the same time. According to Rudolph Lohmeyer, consultant and director at the Global Business Policy Council of A.T. Kearney, a global management consulting firm, the rate of change the world is experiencing is unprecedented.
fig. 2 - interaction between pictet asset management and its advisory boards
megatrends organisational chart advisory board
Source: Pictet Asset Management

At Pictet Asset Management, we have tackled this problem by working in collaboration with several megatrends experts, a distinguished group of industry practitioners and academics – each of whom have developed a deep understanding of the structural trends transforming our world. They don’t dictate which stocks we should hold in our portfolios. Rather, their role is to shed light on megatrend dynamics and how they might shape the prospects of the industries in which our investment managers invest on behalf of our clients.

Having managed thematic investments for more than 20 years, we have discovered that by focusing on megatrends, we have been able to help our clients develop a longer-term perspective. This, they tell us, has not only proved invaluable during times of financial and economic uncertainty and change – it has also been a source of investment success.