Scarce Resources, De-globalization and Service Economies: How to Invest in Pictet’s ‘Megatrends’
The Swiss asset manager presents the powerful forces it’s using to generate investment ideas.
Pictet Asset Management, the Swiss asset manager with $713 billion in assets, is publicly sharing for the first time which of its 21 megatrends — identified with experts at the Copenhagen Institute for Futures Studies and its 13 thematic advisory boards — have the best investment opportunities right now.
Megatrends are the “set of powerful social, demographic, environmental and technological forces that are reshaping our world.” They could drastically alter company fundamentals, either as dramatic tailwinds or existential risks, Pictet says.
“As with any major change to our society or economy, there will be winners and losers; businesses and industries that adapt will be in the former group,” Pictet’s “Megatrending - Opportunities Ahead” report says.
Investors, especially pension funds, endowments and other institutions with long-term horizons, are “yearning for a north star to provide them with much-needed guidance” while interest rates are higher, a recession is looming, and they seek better equity returns.
The first big trend Pictet highlights is resource scarcity. Demand for certain raw materials outweighing their supply and impacting prices is not a revelation. However, the world’s growing population and increasing income per capita is creating pockets of new and more intense scarcity. “Resource scarcity creates pressure for resource efficiency innovation, which is increasingly becoming a driver of economic growth,” Pictet said.
Pictet identified a worsening water crisis 22 years ago and, since then, the quality and quantity of water has decreased. As disappointing as that circumstance is, there are people working on those problems and creating investment opportunities because of it. Today, for example, water scarcity is evident in states like California but new smart infrastructure projects are improving the water systems in the state and providing many investment opportunities along the way, according to Pictet.
Scarcity will also accelerate the development of more efficient infrastructure and businesses in energy storage, timber, food and agriculture, and “machine vision,” on assembly lines.
Another megatrend creating opportunities is de-globalization. Trade and technology are still crossing borders, but overall the world is shrinking. Consequently, re-shoring has become “rife” with investment opportunities.
“Increasingly fractious geopolitics has meant that trade is splintering in some sectors, particularly those of strategic importance,” according to Pictet’s report. “The trade war that erupted between the U.S. and China during the Trump administration was one of the first flashpoints in this story. A change of leadership in the U.S. has done little to reverse the trend. The diplomatic after-effects of Russia’s invasion of Ukraine have only reinforced these divisions.”
Companies headquartered in countries perceived as unfriendly face risks. As a result, others will benefit. For example, as companies moved their production bases outside of China in recent years, other Asian countries have benefited from relocations.
Geopolitics is what primarily shapes global trade. There will be investment opportunities as businesses diversify their suppliers and better insulate themselves from non-geopolitical impacts on trade, too — a lesson from the COVID-19 pandemic that hasn’t been forgotten.
Companies that are onshoring in markets with labor shortages will also turn to automation, presenting other investment opportunities, Pictet says.
Lastly, Pictet highlighted the service economy as a third theme generating investment opportunities.
“The changing nature of services is becoming an increasingly important trend for the global economy. In the broad arc of history, globalization has generally happened when the invention of technologies — steam power, for example — has reduced the cost of transportation and logistics, allowing us to increasingly move goods from one nation to another. That trend is now being repeated in the case of information and services,” according to Pictet’s report.
Services increasingly account for a greater share of the world economy but it’s not universal.
The education sector and e-learning, according to Pictet, are prime examples of service economy opportunities, especially the gamification of learning. Other examples it gave are the finance industry (as it digitizes and artificial intelligence improves it) and hospitality, which is moving away from cumbersome rewards programs and toward subscriptions that guarantee loyalty.
“Service is a human activity. However, rather than replacing humans, digitalization and virtualization are providing new opportunities for the growth in service-based business models,” Pictet says in its report. “The challenges of resource scarcity are further supporting a shift towards a more service-based economy. As a result, we are seeing the service economy broadening, deepening and taking up an increasing share of global economic activity.”