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Next Generation megatrends: islands of growth

Next Generation megatrends as islands of growth

In a world where economies are faltering, today’s long-term megatrends continue to transform the economy and society. Supported by shifts in technology, energy use, demographics and the rise of Asia, they still provide companies with exceptional opportunities for profitable expansion.

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It’s easy to forget today’s megatrends amid the rocketing inflation fears that have unseated financial markets this year. Yet, megatrends are intertwined with exceptional societal and economic change, and they remain as powerful as ever.

Regardless of hesitating GDP growth in much of the world, they will continue to develop rapidly in the years ahead. In fact, they may be among the few bright spots in a world where growth becomes increasingly hard to find.

Think of structural megatrends like digital disruption, energy transition and the burgeoning global population’s insatiable appetite. Just a few of the consequences can be seen in a shift in IT spending to the cloud that appears unstoppable; evolving energy markets; and a laser focus on water use and better ways to produce food.

“These are areas of structural growth at a time when there will be a growth scarcity going forward,” says Warren Kreyzig, Portfolio Co-Manager in Julius Baer’s Next Generation Investment Management team.

While he notes that ‘growth stocks’ generally have been amongst the biggest losers in 2022’s equity market shock, he also explains that by taking a low-octane approach it has been possible to dampen the risk. “Our strategy has been to smooth out that volatility and pick out high conviction calls,” he says.

Five big themes

The five big themes identified by the firm’s Next Generation team cover many of the megatrends transforming the world. Returning to the first of three themes already mentioned, Digital Disruption covers everything from 5G and cloud computing through to digital content. Secondly, Energy Transition encompasses not just clean energy but also Future Mobility. Feeding the World digs into how people will be nourished without degrading the environment – from overcoming water scarcity, to fertilisers through to food technology.

Beyond these three megatrends, the team explores two more: Arising Asia and Shifting Lifestyles. Looking to Asia, the region is heralded as home to today’s fastest growing economies, a place where new middle-class wealth is increasingly spent on things such as sportswear. As for the change in lifestyles, there’s no stopping the surging demand for healthcare as populations age, nor the innovation in genomics for personalised medicine.

When investing, the team distinguishes good growth from bad, selecting companies that generate returns above the cost of capital and have a solid competitive edge with multiple expansion options. Further, it has not got caught up in paying very high valuations for companies with uncertain futures.

“We don’t want to over-pay for high growth companies,” explains Jiazhi Chen Seiler, Julius Baer’s Head of Next Generation Investment Management. “We don’t invest in the early stage companies or invest in the hype. This has helped us to avoid 2018’s big downturn and is doing the same today.”

Resilience through turbulence

This prudent approach to growth investing is rewarding. In the four years since the Next Generation UCITS Fund version of the strategy was launched in early 2018, its K share class (net of fees) has far outperformed the MSCI AC World Index, rising by 32.2% as of 30 June 2022, versus the index’s 23.2%. To a degree, that’s due to the resilience in 2022 when it has declined by 22.0% – only a little more than the index’s 20.2% and far less than many growth strategies.

In part, this resilience results from diversification. The strategy’s five themes have differing dynamics. For instance, Feeding the World stocks have risen by 8.3% year-to-date , while Digital Disruption stocks have fallen by 28.3% as of 24 June 2022.

For Julius Baer’s intermediary partners, the Next Generation strategy has the additional appeal of exclusivity. It’s not marketed outside the Bank and is only available to direct clients and intermediaries’ clients. What’s more, the team makes itself accessible: intermediaries can call any day for a performance update and the management team is generally available to discuss positions.

As for when to invest in turbulent markets, it’s hard to judge with such long-term themes. “It’s really difficult to time the markets,” explains Fabiano Vallesi, Next Generation Portfolio Co-Manager. “It’s best to gradually invest the full amount to avoid peaks and troughs.”

So great is the short-term fear in financial markets surrounding many growth stocks – technology especially – that it’s worth recalling Amara’s Law, coined by the US scientist and futurist Roy Amara: “We tend to overestimate the effect of a technology in the short run and underestimate it in the long run.” This well-known adage has proved true for technology and seems likely for today’s structural megatrends more generally.