The consequences COVID-19 has unleashed on the world are far-reaching, to say the least, and so much still remains to be seen. Yet as investors we still do need to try to chart a course.
One particularly useful lens to survey the landscape through is that of megatrends. By taking due note of the trends shaping how we live our lives, we can stand on much firmer ground to position our portfolios for the future – particularly when we observe that in many cases the pandemic has accelerated trends which were already well in motion.
The global shift to digital is of course foremost among these. The health emergency means many years of progress have been crammed into just a few, and the cycle between a new tool’s launch and mass adoption has been compressed immensely (just think of how popular video conferencing became, really from nowhere). However, though there is undoubtedly huge potential for investors to seek rewards from technological disruption, experts are warning that selective stock-picking is still the order of the day. Investors should also be cognisant of concentration risk, which is a knock-on effect of tech giants’ wild success.
Related is healthcare, and it is not just in COVID-19 vaccinations that the pace and scale of innovation is at unprecedented levels. Exciting developments are happening in cancer diagnosis and treatment, immune therapies and more. Yet valuations still seem cheap given the sector’s long history of outperformance: the MSCI World Healthcare Index has been trading at a 15% discount to the MSCI World Index. Choosing names in this highly esoteric area will likely call for some really heavy lifting in research, however, and some interesting advice here is to seek the supporting firms that supply the innovators with materials.
No discussion of megatrends could neglect Environmental, Social and Governance investing. The over $50 trillion now estimated to be invested in stocks that rate highly on sustainability and societal measures confirms this is undoubtedly one of the great movements of our time.
Yet here again, care is warranted. As experts have pointed out, that figure amounts to half the world’s entire stock market capitalisation. Regulators all over the world have already had to move against “greenwashing”, the practice of putting an ESG label on questionable investments, but of equal concern is the difficulty of finding true quality in a sector awash with state subsidies and little to no track record.
ESG questions are thorny ones, in any case. It could well be that an environmentally aware investor owns big oil companies, on the basis that these are now big investors in renewable energies. Engaging with the ESG zeitgeist is about far more than just positive or negative screening today.
It may not capture the imagination in quite the same way, but tax is another key theme that should be highlighted.
As readers will no doubt have heard, the Group of Seven Countries recently agreed to reform the global tax system, laying the ground for a minimum corporate tax rate (15% has been proposed) and ramping up efforts to stem tax avoidance by multinationals.
This might play well to electorates, but investors should bear in mind that in the US, for instance, companies have been enjoying a corporate tax rate of just 13%, with dramatically falling rates thought to have accounted for almost a third of profit growth since the millennium. Revenues are going to need to be ramped up or margins made bigger for many companies’ profitability to be maintained. Widespread changes to how businesses are run, and where they book profits, could well be the result.
Investors will already be watching inflation and interest rates keenly, and likely pondering portfolio construction amid an ongoing battle for yield. Complete overhauls are in motion, fuelled by a general rotation from growth to value stocks too. Being proactive is certainly a good thing, but beware the bite that transaction costs will take out of your returns and avoid unnecessary “churn”.
There is certainly a lot for us all to mull over this summer, and more than a few megatrends to be mindful of as we contemplate the years ahead.
This piece is for informational purposes only, and is not intended in any way as financial planning or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.