investment viewpoints
Investment megatrends to watch in 2022
Normally, investment outlooks are all about forecasting economic growth, interest rates, election outcomes and, sadly amid the pandemic, virus mutations and vaccine efficacy. For trends investors, like us, such forecasts are somewhat out of sync with our long-term investment trajectory. We tend to think in terms of decades rather than quarters or years. However, we do see value in providing an annual investment outlook as it creates an opportunity to discuss the progress of forces changing our world.
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Trends in the near future
Trends investing focuses on megatrends and mega-challenges. For us, a megatrend is linked to significant societal changes that companies should embrace, adapt to and try to benefit from. A mega-challenge is something companies need to fight and develop solutions for. At Lombard Odier, we describe the mega-challenges by our CLIC™ framework, that captures the transition to a circular, lean, inclusive and clean economy and eight challenges within it, from zero emissions to zero waste. However, in this outlook we focus on two different megatrends – technology and demographics – and consider what opportunities they might offer investors in 2022.
The fourth industrial revolution has entered its final phase: the digitalisation the global economy and local societies. Digitalisation has already transformed many of our consumption habits, embedded more robots and automation within production processes, and created a new standard for payment methods. And the next sector harness digitalisation to reduce slack, lower costs, improve access to and increase the quality of services is healthcare in our view. Looking across society, how will digitalisation advance further in 2022?
Consumers: welcome to the metaverse
In 2022, we are going to hear a lot more about the metaverse. Not in relation to Facebook’s new name1, but to the technological successor to the internet and the mobile and cloud computing era. Through the metaverse, we will be able to mix our real and analogue lives with our virtual avatars. Virtual and augmented reality devices will allow us to interact in a programmed and developed world via video. So far, this has been a purely generation Z (GenZ) phenomenon, but we expect other generations to embrace the metaverse in 2022. Technology platforms and hardware producers will obviously benefit, but other companies are already seeing the opportunities enabled by the metaverse – especially as some GenZ enthusiasts already see virtual products as being more valuable than physical goods.
Roblox, an online gaming platform, serves as a 2021 case study. It has more than 200 million active monthly users – about half of which are under 13 years old – and hosts hundreds of thousands of virtual games. The Gucci Garden Experience, open only for a fortnight in May, provides a world in which users play the consumer, spending as little as USD 1.20 on collectible and limited-edition virtual accessories from the luxury brand. The goods can be traded in the metaverse and are also known as non-fungible tokens (NFTs): digital objects that are backed by blockchain technology certifying their authenticity and, often, uniqueness. Gucci even issued a special digital version of the Gucci Dionysus Bag, with a bee motif, which was resold for over USD 4,100 (or 350,000 Robux), exceeding the price of the real product and captured a huge premium on the original price of 475 Robux (approximately USD 4.75).
Advertising within Roblox games has also proved to be quite successful. For instance, Warner Media created a virtual world, Wonder Woman: The Themyscira Experience, to promote the action heroine’s new movie. It has been visited nearly 30 million times on the Roblox platform and has been an effective way to attract younger generations unfamiliar with Wonder Woman and do not watch television or surf the internet as older generations tend to do.
Fintech: China to embed eCNY
In recent years, cryptocurrencies, backed by the digital administrative technology called blockchain, have gained massive popularity worldwide. While bitcoin may have initially been used mainly by money launderers and gamblers, it is now being used by some institutional investors as an uncorrelated asset class, alongside equities and bonds. LOIM has no exposure to cryptocurrencies in any of its investment strategies.
In 2021, El Salvador became the first country to officially embrace bitcoin as a national currency alongside the USD. But the Chivo payment system, a government-controlled ‘wallet’ supporting bitcoin storage and payments, has not been the success President Nayib Bukele was hoping for.
The next foray into the digital payments age is greater adoption of DCEPs (Digital Currency Electronic Payment) which are digital coins fully backed and blockchained by central banks. China is making the first move, with its central bank starting to issue eCNY, or digital yuan. About 140 million people have already opened e-wallets and over 1.5 million merchants are accepting eCNY payments, although the project is still officially in a trial phase. It’s rumoured that Chinese authorities would like to use the upcoming Winter Olympics in Beijing to officially launch the eCNY.
This type of digital currency yields ultimate control to central banks and could also give governments the opportunity to digitally achieve what former Federal Reserve Chair Ben Bernanke called helicopter money. Governments could introduce digital versions of food stamps or childcare cheques and control the spending of subsidies and benefits in digital ways.
HealthTech: Germany rolls out eRX
Covid-19 turbo-boosted the digitalisation of the healthcare sector. Telehealth, the use of connected health-monitoring devices and online pharmacies are now common. In China, Alibaba and JD.com launched online pharmacies in 2020 that grew rapidly, assisted by regulatory support. In Europe, online pharmacies are poised to tap the large German market now that electronic prescriptions, called eRX, will become mandatory in 2022, once the domestic healthcare system completes its onboarding of the required software. All prescriptions must be written electronically and/or have a QR code, making ordering pharmaceuticals online far simpler. Online pharmacies in Germany, today, capture about 1% of the total annual market of EUR 50 billion. With the introduction of eRX there is immense scope for growth. Sweden provides a precedent: it introduced similar mandatory eRX in 2015 and online pharmacies now represent 10% of the market, although their market share is substantially higher for refill prescriptions.
Sources
1 Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or securities. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the securities discussed in this document.
Two demographic trends will impact the global economy in the coming decades. On the one hand, populations in developed countries are ageing, while on the other, in emerging countries – especially in Sub-Sahara Africa and South Asia – populations are growing and are young.
The upcoming retirement of our workforce
During the last 40 years, most economies have benefitted from a major demographic tailwind: the combination of the outsized baby-boomer generation entering the workforce, a more than doubling of women taking on paid work, and the outsourcing of labour to emerging economies in Eastern Europe and China created 10% annual labour growth for large economies. This tailwind ended in 2020, issuing in a significant headwind for the next 40 years.
In 2020, prior to the pandemic, the United Nations (UN) forecasted the world’s population of people aged 20-64 years to grow 25% in the next 40 years, at around 0.6% per year. However, this growth will not be evenly distributed. It will take place in large emerging countries such as Nigeria, Pakistan, the Philippines, and India (see figure 1). In contrast, the working-age populations of all European countries will shrink, with Italy’s decreasing by 40%, Switzerland’s by 30% and the Netherlands’ by 20% in the next 40 years. The biggest decline will happen in Asia, where South Korea will need to adjust to its working populations almost halving in the next 40 years. In addition, China, which benefitted from its young and growing population that urbanized to new mega cities in the last 40 years, will need a different approach in the next 40 years as its workforce is expected to shrink by 25%.
FIG 1. Growth in people aged 20-64 years from 2020-2060
Source: UN World population prospects 2019, zero migration variant as at December 2021. For illustrative purposes only.
The UN’s forecasts are based on the current demographics of countries and do not include future migration which, as history has shown, can immensely relieve the problem of shrinking workforces. Therefore, if South Korea allowed more Filipino immigrants to settle it could partially relieve its imminent labour shortages. In Europe, such immigrants would need come from outside the European Union, since Eastern European countries like Poland and Romania, which have been the main source of migrant labour in recent decades, see their working-age populations shrink even faster than those in Western European countries. Yet support of immigration to combat the coming workforce decline is not on the political agenda for most of the countries expected to be impacted – in fact, opposition is often the norm.
More governments are considering key questions brought by ageing populations: how will pension systems be funded if the declining number of workers pay taxes to pay for the growing number of retirees? Should people invest more in their own pensions or pay more taxes to finance the pensions of current retirees? The pay-as-you-go financing of pensions, still used by many countries as main source of pension income for retirees, seems unsustainable in rapidly ageing economies. Should the retirement age be postponed, for example from 65 to 70, given increased life expectancy? Political and societal debate about the shrinking workforce has started in some countries – such as China, France and Italy – and we expect this rather necessary debate to expand into more countries in 2022. Perhaps stimulating immigration to boost labour forces should also be considered, in our view.
The ageing of western societies
The declining headcount of Western workforces has two causes: the number of young people is no longer growing while the number of retirees is rising rapidly. The ongoing wave of retiring baby boomers will dramatically change the demographic profile of many societies – especially China, South Korea and Australia (see figure 2).
FIG 2. Growth in people aged 65 years or older, 2020-2060
Source: UN World population prospects 2019, zero migration variant as at December 2021. For illustrative purposes only.
With their numbers of retirees more than doubling, both China and South Korea will need to strengthen the aged-care sectors of their health systems. In Europe, the surge in retirees varies from 68% in Switzerland to 26% in Italy, whose population started ageing 10-15 years earlier, just like Japan’s.
A year ago, the UN declared the 2020s to be the decade of healthy ageing. It strongly advises countries to prepare now for ageing societies by adapting infrastructure, expanding primary and nursing care and making laws more inclusive of the elderly. Without a scientific breakthrough in curing Alzheimer’s Disease, demand for nurses in dementia-care facilities will be enormous – especially in countries with shrinking workforces. This makes labour-cost inflation a near certainty. We believe employee shortages may not the not be sole driver of inflation in 2022, but it certainly will be an important one in the following years.
At LOIM, our range of trends strategies target companies that can outgrow competitors as they harness the commercial opportunities generated by megatrends and adapt their business in response to mega-challenges.
World Brands
Our consumer-trends strategy, World Brands, covers both digital consumption and the sales growth generated by the emerging-markets middle class, with the latter emphasising China. In 2022, we expect the arrival of the metaverse on main street to benefit a range of portfolio holdings from the technology and consumption sphere: enabling platforms like Snap2, Meta, Tencent and Kuaishou; and fashion and sporting brands that provide virtual accessories via NFTs, like Moncler, Louis Vuitton, Lululemon and Li Ning. Also, Nike, a long-term holding, is striding into the metaverse. The company recent acquired RTFKT, a leading brand focused on merge culture and gaming by selling next-generation collectibles in a virtual environment.
Global FinTech
Our FinTech strategy is all built upon the digitalisation of financial services, which began with digital payments some two decades ago and now encompasses lending, insurtech and regtech. We focus on high-quality companies driving the latest trends, with a strong focus on valuations, implying that we differentiate between mature technologies and early-stage technologies.
The strategy features high-conviction positions in companies advancing mature technologies and applies a picks-and-shovel approach to those bringing early-stage technologies to market. As a result, exposure to newer technologies like blockchain, cryptocurrencies and buy-now-pay-later services is mostly achieved via the enablers of those technologies as parts of a diversified basket.
The strategy is not directly invested in cryptocurrencies, but has a roughly 20% indirect exposure through blockchain and the crypto-enabling technology achieved via high-quality, profitable and attractively valued FinTech companies. We do not invest directly in cryptocurrencies, especially since such exposure is not eligible in UCITS products.
Golden Age
Focused on the slow but sure transformation to an aged society, our Golden Age strategy is guided by some simple questions. How will wealthy and retired baby boomers in regions like Europe, North America and China spend their money? How are they staying healthy and active? After all, no one minds reaching 100 years of age – but no one wants to do so fighting cancer.
The answers have directed us to a series of secular growth trends: home care, active and outdoor lifestyles, pension provision and greater self-care. We see Japan as a clear harbinger of what an ageing society can mean for investors – from health-monitoring technologies and advanced aged care, to nappies for the elderly outpacing sales of those for babies by 2.5 times.
Our Golden Age strategy has roughly equal exposures to high-quality consumer, healthcare and financial companies, built and fine-tuned when underlying companies are trading at attractive valuations.
Global HealthTech
The conviction driving our HealthTech strategy, launched in September, is that digitalisation can empower healthcare systems to provide better care at lower costs for more people.
Use of online pharmacies, which will develop in Germany in 2022 and have operated in China during the pandemic, will provide an initial wave. More connected care through telehealth and remote patient monitoring, plus better prevention and earlier diagnostics will come next. Then greater automation and artificial intelligence usage in hospitals, labs or doctor’ offices will follow.
Other innovations will also come to market. In 2022, something close to the first artificial pancreas could be developed. And by connecting the latest continuous glucose-monitoring (CGM) devices with new smart insulin pumps, diabetes patients should no longer need to intervene every hour, transforming their quality of life.
The strategy is investments include two leading European online pharmacies, Zur Rose and Shop Apotheke, and two key enablers of a potential artificial pancreas with CGM producer Dexcom and the insulin pods from Insulet.
NextGen BioTech
Our NextGen BioTech strategy aims to identify small and mid-sized companies that are developing potentially disruptive technologies that address incurable diseases, helping to solve societal issues.
This year established the breakthrough of messenger RNA (mRNA) treatments as Covid-19 vaccines from Moderna and the Pfizer-BioNTech partnership. The mRNA technology is not only new and disruptive but also much faster to produce and adjust, which we believe will help societies in 2022 to fight Covid-19 variants. On a slightly longer horizon and the beyond the pandemic, the technology might also help fight cancer and several trials testing its effectiveness in fighting melanoma, prostate, ovarian and lung cancer are in progress. NextGen Biotech has invested in different mRNA companies throughout recent years.
Even as the world remains focused on fighting Covid-19, we also expect 2022 to deliver a breakthrough in gene-editing technology – more precisely, the CRISPR/Cas9- technology that is currently being tested to cure a genetic and fatal heart disease, called ATTR amyloidosis.
Developments in 2022 will serve as rich catalysts investments made by the NextGen BioTech strategy, as scientific innovation, once again, proves to be vital for our most important asset: our health.
Sources
2 Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or securities. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the securities discussed in this document.
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