20/20 Vision – Investment Themes Beyond Brexit

2020 promises to be a year of change so as we enter a new decade, we thought we’d be a little different and look at some of the key global business trends over the next decade*.

Population growth, urbanisation, the internet of things

 Global population growth will be a key factor and will in turn drive greater urbanisation. By 2030, there could be 43 mega-cities with a population of over 10million compared to 33 in 2019. The world’s population to expected to increase by close to 1 billion people by the end of the decade.  Greater urbanisation will drive investment in supportive infrastructure. More cities will have to become ‘smart’ using wireless technology to deal with population growth and attract business. This could range from ways to relieve pollution or congestion using sensors and data analysis to smart power grids and metering as well as remote healthcare.

While the population of the Earth will continue to grow, there will be continued demographic changes with ageing populations, particularly in Japan but also many parts of Europe. Ageing populations will require increased investment in health and social care and take a greater share of government spending.

The internet will remain a key factor. The number of internet users is projected to grow from 4.3billion in 2019 to 7.5billion in 2030. More significantly, the number of 5G connected devices is forecast to grow from 5million to between 6.5-7billion by 2030. Meanwhile, the number of ‘Internet of Things’ (internet embedded in everyday objects, enabling them to send and receive data) devices is expected to increase from 10billion to over 40billion by 2030.

What do these trends mean for investors in the new decade?

 Technological change will continue at a rapid pace which is likely to threaten some industries. The stock market still has many ‘deep value’ (very cheap) companies but a high proportion of these lack barriers to entry or are threatened by new disruptive internet-based business models. For example, some traditional high street retailers or the car manufacturers, where the industry is undergoing structural change with new entrants in electric vehicles and driverless technology.

We believe some of the fastest growing technological trends will be 5G or even more advanced 6G related, healthcare diagnostics, genetic therapy, drones, cloud computing, ‘big data’ analysis, AI (artificial intelligence) and fuel cells.

Some of these new technologies such as AI could impact jobs and the new decade could start to see robotics deployed in the workforce on a much greater scale. For example, higher minimum wages in the US has seen the introduction of self-service ordering systems in fast-food restaurants. This trend now appears to be gaining traction in the UK. Robots and automation will impact jobs, taxation and wider trends in society.

 Globally, technology companies have been a major driver of markets over the last decade. In the US, Amazon, Apple, Alphabet and Facebook are major components of the stock market indices while in China, Alibaba and Tencent are dominant. While technology companies are typically much faster growing relative to the rest of the market, the catch is that this is reflected in a sizeable premium valuation. For example, the US ‘tech stocks’ are currently trading on over 7x book value! (to put this in context, UK housebuilders trade on an average 1.7x book value). The greatest risk with premium rated growth stocks is that the market can punish the share price for the slightest slip in delivery against expectations which are usually priced for perfection. Meanwhile, many smaller, tech companies in AI robotics or fuel cells are growing revenue very strongly but are typically loss making.

Climate change and conflict

 We have focused on population growth and technology in the new decade. However, we have not forgotten climate change and the challenges or new technological investment opportunities this presents investors. Likewise, we are mindful that the world is likely to remain a dangerous place as demonstrated by the latest developments in the Middle East with increased tension between the US and Iran.

Climate change may drive more conflicts as nations squabble over Earth’s precious natural resources particularly water. Furthermore, new technologies such as electric vehicles will drive greater demand for some of Earth’s scarcer natural resources such as cobalt (Alpha Bites Blue Nodules). More significantly, the US and China are likely to continue to square up to one another to secure a technological lead and battle for world leadership in the superpower struggle. The battle over 5G has only just begun but has China already stolen a march on America? (Alpha Bites Float Like a Butterfly)

Technology is great but positive cash flow is even better!

 We remain excited about investment opportunities associated with technological change in the new decade but at the same time are mindful of the ongoing risk to many existing business models. Whether its global or regional growth funds with a technology bias or quoted technology companies involved in robotics or developers of green energy solutions, we endeavour to stick to our cash flow driven investment discipline.

No matter what a business does, for us cash flow is king! That is one thing we can confidently say will not change by 2030.

(Source of forecast projections: United Nations, World Bank, Ericsson)*

2019 has typically been a rewarding year for investors, whatever the future holds, we would like to take the opportunity to wish you a healthy and prosperous 2020.

 

Read Last Week’s Alpha Bites – Blue Nodules

 

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This publication is for informational purposes only and should not be relied upon. The opinions expressed here represent analysis by an Alpha Portfolio Management representative at the time of preparation and should not be interpreted as investment advice.

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