The next decade: investor insights into pivotal megatrends

     

    For the past 40 years, our world has been shaped by four megatrends: globalisation, expanding workforces, economic growth over environmental sustainability, and growing wealth inequalities. 

     

     

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    the four megatrends
    the four megatrends·regionalised world·working-age deficit·environmental transition·balancing capitalism·contact us

    the four megatrends.

    The four megatrends shaped economies, generally suppressing input and labour costs while lowering low inflation, nominal and real interest rates, and the cost of capital.

    Times have changed. Inflation is back, rates are higher and capital no longer cheap. In the next decade, we envisage four simultaneous shifts driving a complete reversal of the previous paradigm. These new megatrends are:
     

    icon_regionalisedWorld.svg icon_workingAgeDeficit.svg icon_environmentalTransition.svg icon_balancingCapitalism.svg

    Regionalised world

    Working-age deficit

    Environmental transition

    Balancing capitalism


    Each will be disruptive, generating specific investment risks and opportunities. They will contribute to structurally higher inflation, nominal and real rates, and an increased cost of capital. But this will not necessarily imperil portfolios.

    To understand investors’ perspectives on these megatrends, we surveyed more than 1,800 senior institutional and wealth-management professionals in North America, Europe and Asia.
     

    regionalised world.

    Globalisation prevailed in the last four decades. This has been characterised by a strong alignment of fiscal policies between the main economic powers and relatively little geopolitical tension until early 2022. These factors led to greater economic integration, efficient global supply chains, lower costs and inflation, and reduced currency volatility. 

    However, escalating US-China rivalry, the Covid-19 pandemic, and wars in Ukraine and Gaza have exposed weaknesses in countries’ supply chains in key areas including advanced technologies, energy, food and medicine. Protectionism, nearshoring and friendshoring are now challenging globalisation. In our view, the next decade will see governments and corporates implementing strategies to compete in a more regionalised world.

    Investing in domestic production and reorganising supply chains are likely to drive inflation higher – particularly as this coincides with other megatrends, such as the shrinking of the global workforce and the environmental transition.

    Defining a new era

    For this megatrend, our study found different views about the state of globalisation. Overall, the professional investors surveyed are most likely to believe we are currently witnessing a setback in a continuing megatrend of globalisation (40%). The findings identified key economic risks and opportunities posed by changes in cross-border trade, capital and idea flows:

    34 %

    higher inflation

    31%

    geopolitical conflict

    29%

    lower growth

    28%

    disorderly
    green investment

    27%

    stymied innovation

    46%

    growth of domestic industries

    46%

    development of new or diversified supply chains

    41%

    Talent retention (i.e., no ‘brain drain’)

    Source: LOIM, Censuswide at January 2023. For illustrative purposes only.

    We found professional investors’ views to be evenly split about which industries are most sensitive to reduced cross-border economic activity. This suggests they believe the impacts of a more regionalised world will be wide-ranging and that no industry is immune. With 23% of investors saying they are not adapting portfolios to the current state of globalisation, it is a potential blind spot.

    working-age deficit.

    Over the last 30-40 years, the global labour force expanded on an unprecedented scale. This was driven by the post-WWII baby boom, women’s increased participation in the workforce, and Eastern European and Asian countries – especially China – being integrated into global supply chains.

    This labour boom has supported rising levels of GDP while generally helping to suppress wage growth. However, we predict that over the next five decades, the global workforce will shrink by approximately 4%-5% every five years1 and this working-age deficit is likely contribute to higher inflation. 

    At present, Japan, Europe, the US and China are all forecast to have rapidly shrinking working-age cohorts and large ageing populations. Among investors, the US is perceived as being the most vulnerable, despite its overall openness to immigration and China facing an arguably more precipitous demographic cliff.

    56%

      

    Investing, or planning to invest, in companies geared towards ageing populations – e.g. healthcare firms, private pension providers, tourism and leisure companies

    50%

      

    Investing, or planning to invest, in artificial intelligence (AI), robotics and automated solutions to compensate for shrinking white- and blue-collar workforces 

    35%

      

    Avoiding, or planning to avoid, countries with the most severe population ageing (e.g. Japan, China)

    Source: LOIM, Censuswide at January 2023. For illustrative purposes only.

    Demographics and investment

    When exploring attitudes towards the looming working-age deficit, we discovered that most investors agree that inflation and weaker state-sponsored pension systems would be likely outcomes. However, they also expect the economic adaptation to population ageing will bring some benefits, such as driving technological innovation.

    Looking at the impact of ageing on industries, the professional investors we surveyed believe that the finance (54%) and healthcare (40%) sectors will most likely experience the greatest transformations as societies grey and workforces shrink. In response, the top three ways these professional investors are reducing or gaining exposure to sectors at risk are as follows:

    environmental transition.

    Despite its immense worth to the global economy, natural capital has not been properly valued. Nor have the damaging impacts – such as emissions, biodiversity loss or plastic waste – of environmental exploitation been accounted as costs. This has kept input costs low and externalised the expenses of environmental damage, helping to suppress inflation. 

    But the free ride is over. For planetary and economic sustainability, the economy must be rewired to a net-zero, nature-positive model. At LOIM, we believe the scale of change needed makes the environmental transition a serious question of asset allocation for investors, rather than a niche exposure in select asset classes.

    According to our research, this view is shared by many professional investors. Almost nine in 10 (88%) investors surveyed say that the environmental transition is important  in their asset allocation decisions, with those in Italy, the UK and Switzerland showing the greatest conviction.

    Sustainable-investment opportunities

    For professional investors, there is a perceived abundance of opportunities aligned with the shift to sustainability, with all (100%) saying they see prime opportunities in the environmental transition. But there are also real risks to manage. We highlight both below.

    Overall, the top four areas in which the investors we surveyed see such opportunities are:

    47%

    Listed equities of companies offering sustainable solutions that are economic and scalable

    44%

    Physical commodities needed for green infrastructure and technologies

    44%

    Financial markets for externalities (e.g. carbon)

    42%

    Investment in land/forestry projects as carbon sinks

    45%

    Trade friction or disputes over essential resources

    44%

    Weakening of environmental policies or commitments by governments

    41 %

    Countries’ non-compliance with climate/nature targets

    40%

    Economic recession, and a related fall in capital expenditure

    Source: LOIM, Censuswide at January 2023. For illustrative purposes only.

    Amid increasing regulatory impetus for sustainability disclosures, investors also ranked their favoured approaches for aligning the industry to the transition. The popularity of mandated corporate disclosures on nature use and environmental footprints indicates that transparency is critical. Other preferred methods include supportive policies (e.g. subsidies and tax breaks) and trading credits with a financial value (e.g. carbon credits). 

    balancing capitalism.

    Over the past decade, we’ve seen a substantial increase in corporate return on capital employed while wages have remained stagnant. In Western economies, the difference between the highest and lowest levels of wealth and pay is the greatest since WWI.

    This skewing of profits to capital over labour is unsustainable, in our view. We therefore anticipate heavier taxation on high levels of individual and corporate wealth, combined with better wages for the low and middle classes. This would likely impact corporate tax rates and the consumption power of the wealthy, while providing a boost for middle-class consumers.

    In contrast, professional investors do not expect the balance between capital gains and wages to achieve a more equal balance in the next decade, although the disparity between capital gains and income is expected to impact the political landscape over the next decade. 

    Populism and unionism

    More than 80% of investors agree that income inequality will increasingly drive populism and trade-union power in the coming years. This is likely to lead to policies addressing the balance of economic reward claimed by capital and labour.

    85%

    Taxes on corporate profits will likely increase

    81%

    Taxes on individual wealth (beyond income) will likely increase

    77%

    Policies for lower and middle-class ages growth are likely

    Source: LOIM, Censuswide at January 2023. For illustrative purposes only.

    Italian and Swiss investors show the strongest conviction that income inequality will lead to greater populism and trade unionism, that taxes on corporate profits and individual wealth will rise, and that wage growth for lower and middle-income workers will increase to combat capitalism’s excesses.

    investing in the next decade.

    As four megatrends – a regionalised world, the working-age deficit, environmental transition and balancing capitalism – shape economies and markets over the next decade, we believe professional investors need to prepare for a starkly different world.

    In a reversal of the previous paradigm, inflation, real and nominal rates, and the cost of capital are likely to rise to structural levels above those seen in the past 40 years.

    Portfolios will need to adapt to mitigate risks and capture the opportunities as this economic transition impacts sectors and influences asset-class returns.

    In our survey, investors identified a number of risks – such as potentially high inflation or disorderly green investment resulting from economic regionalisation – and pinpointed a wealth of opportunities, like the growth of sustainable solutions provided by listed companies or financial firms poised to cater to retiring baby boomers.

    But their answers also convey the challenges faced by investors, such as the adapting of portfolios to the current state of globalisation.

    As global supply chains are restructured, sustainable solutions gain scale, sectors are transformed by ageing populations and tensions between capital and labour persist, we hope the data in this report helps investors think ahead about changes already in play.
     

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    important information.

    For professional investors use only

    This document is a Corporate Communication and is intended for Professional Investors only. 

    This document is a Corporate Communication for Professional Investors only and is not a marketing communication related to a fund, an investment product or investment services in your country. This document is not intended to provide investment, tax, accounting, professional or legal advice.

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