Megatrends: An introduction to long-term thinking
Fall 2022
Megatrends are transformative economic drivers in sectors undergoing rapid innovation. They often offer solutions to urgent societal challenges. We believe that the energy transition, artificial intelligence, next generation medical breakthroughs and socially responsible investing represent drivers of economic change that may provide exciting opportunities for long term investors.
This year has been a difficult one for investors, especially when put in context of the relatively solid returns of the last few years. While we had a very rapid and deep recession in 2020, the recovery also occurred extremely fast, meaning that the angst suffered by investors passed quickly. The bear market we have endured so far in 2022 has been more traditional, with a slow march downward, broken up by positive weeks here and there giving us hope. The effect is that this tends to weigh more heavily on the psyche of investors. We have written about the difficulties of investing through these times over the past couple of newsletters. However, in recent weeks some reports have started to show signs of capitulation which commonly coincides with the market bottom, suggesting there are reasons for long-term optimism.
We should remember that there is a difference between long-term investing, and day trading. Many investors have become accustomed to almost instant gratification over the past few years, where an investment in a high growth company could regularly see assets grow significantly in a short time. However, it is pertinent to keep in mind that this was more a result of the abnormal market conditions during the pandemic, and does not represent a good long-term strategy. On the other hand, true investing is taking a long-term position in a company, or group of companies, that we believe are going to grow over time. Investing means sharing in the growth and profits of companies which we expect are going to do well over years or decades, not days or months. While it is always tough to have money in the markets during these turbulent times, volatility does work itself out over the long term when you invest in good companies with positive outlooks.
It is an incredibly exciting time to be alive. Our world is changing rapidly and while many find change frightening, it does not need to be scarry. The way we live our lives, interact with the world, and do business is evolving; while we cannot stop progress, we can certainly benefit from it. In the investing world, we call these long-term trends ‘Megatrends’. Megatrends are sectors or themes in the market that are likely to be growing stably for the next five to ten years or more. Often, these megatrends represent solutions to address current or urgent societal need. For investors, recognizing market segments that have long-term potential for stable growth is an important aim of any investment planning process.
When discussing megatrends, it bears remembering that investing is a long-term process, and sometimes we do need to have patience. Even if we correctly identify a megatrend, investing today will not guarantee returns next week, or next month. True investing is believing in the company, it’s business strategy and growth potential for the future. Considering the current market, there are a number of market segments that we believe have the characteristics of a megatrend. For example, see four of these trends below that we would like to highlight, although many more megatrends exist.
The Energy Transition:
With countless countries and corporations vowing to get to net negative carbon emissions in the coming decades, the energy transition is here and real. The trend to decarbonize the economy is not going anywhere, and thus we see companies involved in the energy transition benefitting greatly over the next few decades. This is a big field, including not only energy generation companies,but energy storage as well. There is also a large overlap with the transportation sector as our cars, busses, planes and trains will all be evolving in the years to come.
Artificial Intelligence:
While the term AI might bring to mind science fiction movies of humanoid robots, the field of AI is actually very broad. Computers are capable of processing data many times the speed of any human brain without bias or errors in calculation. For this reason, AI is revolutionizing everything from commerce and advertising, to city management and how we drive our cars. It is safe to say that AI will significantly impact how we experience the world around us over the next few years and decades.
Next-Generation Medicine:
Personal views of the recent pandemic aside, the last three years has provided proof of concept for next-generation medical therapies. On the whole, RNA vaccines have proven safe and effective. Pharmaceutical companies are now using similar RNA technologies to create targeted treatments for conditions such as different cancers; as well as further vaccines for diseases which have thus far eluded traditional therapies, such as HIV/AIDS. These therapies have the potential to revolutionize personalized medicine in a way not seen since the development of antibiotics almost 100 years ago.
Socially Responsible Investments:
This last megatrend is less a sector of the economy, and more an investing theme. Nonetheless we see this as a theme which will only be gaining steam in the future. Investors are beginning to expect that their hard-earned money is being invested in companies that are having a positive impact on the world around them, and who operate their business responsibly in an environmental, social and corporate governance fashion. Gone are the days that simply providing investors maximal profits gave companies a pass on how they impacted the community at large.
It should be noted that there is a great deal of overlap between the above four megatrends, and we believe that the lines between economic sectors will continue to blur in the coming years. While we expect that the above sectors will continue to grow throughout the 2020s, that is not to say that all the companies in these fields will benefit equally, inevitably there will be some companies that exceed expectations, while others do not last. This is why we believe that a role for active investment strategies will remain important in future financial portfolios.
Over the next few newsletters we will be exploring the above megatrends in detail, and how these trends may impact future financial positioning. Investing in any one of the above trends may not be suitable for every investor as they represent differing levels of risk, but they may present opportunities for those wanting to invest in innovation, and benefit from long-term change. If you would like more information about incorporating some exposure to these megatrends into your investment portfolio, please do not hesitate to reach out and schedule a meeting.
1This newsletter is solely the work of Morson Deimling Financial Services for the private information of our clients. Although the author is a registered mutual fund representative with Investia Financial Services Inc., this is not an official publication of Investia Financial Services Inc. The views (including any recommendations) expressed in this newsletter are those of the author alone, and are not necessarily those of Investia Financial Services Inc. 2If you prefer not to receive these Newsletters in the future, please contact your advisor and we will happily remove you from the list. 3Mutual funds and/or approved exempt market products are offered through Investia Financial Services Inc.4Insurance products are provided through multiple insurance carriers.
Our mutual fund dealer is Investia Financial Services Inc.
Insurance products are provided through multiple insurance carriers.
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