February 09 2024
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At Rest we’ve found five investment megatrends we believe will have a big impact on society and markets. Megatrends are powerful forces that can change the global economy over time by changing what people value, often through big shifts in population demographics and advances in technology.
Our key identified megatrends, that we call our 5 Ds, are:
- Demographics
- Deglobalisation
- Decarbonisation
- Digitisation, and
- Debt and central bank policy.
Why do megatrends matter?
Megatrends are important because they can last for a long time, meaning that they can shape markets for years to come and create long term investment opportunities – a perfect match for a long term investor like Rest!
At Rest, around 50% of our members are under 30 and are a long way from retirement. It’s important to think about what trends and events will shape society and markets in the future when investing today. We think about our members’ futures so that we can invest in a way that will benefit them both now and over the long term.
5Ds in detail
1. Demographics
We know that many developed countries, like Australia and the United States, have ageing populations. By 2050, the global population is expected to stop growing, but the number of elderly people will keep increasing! This trend could affect areas such as:
- Workforce dynamics –There aren’t enough workers now, and with an aging population, it will be even harder to find workers in the future. Older populations mean fewer workers and different spending and saving patterns. When there aren’t enough workers, salaries can go up and this costs more for businesses.
- An ageing population can also increase pressure on aged-care services, healthcare services and lead to greater demand on governments and workers.
Even though lower growth is a potential problem, we can also take advantage of expanding opportunities in health care and “silvertech” – technology innovations that can improve the lives of elderly people.
2. Deglobalisation
Globalisation has helped increase company profits for many years, but since the Global Financial Crisis (GFC), deglobalisation has been on the rise. Experiences during covid have also made people want to buy more from local suppliers. Additionally, geopolitical tensions between countries have contributed to a deglobalisation trend.
Over the longer term, deglobalisation means that growth is likely to be lower and pricing pressures higher, and we are more likely to see higher ongoing inflation.
It is therefore important to be careful about which countries we invest in and to include assets in the portfolio that can provide protection from inflation. This will help us to deliver returns above inflation for our members as they retire.
3. Decarbonisation
The transition to a lower carbon economy and to net zero emissions is a huge and historic investment opportunity. It is estimated that at least $US100 trillion globally will be needed over the next three decades*.
This provides an exciting chance for us as investors to invest in new technologies and infrastructure, as well as companies focused on reducing carbon footprints. Amongst big changes and big problems, we can see big investment opportunities.
As more countries introduce policies to decrease greenhouse gas emissions, there will be a growing demand for renewable energy sources. Clean energy investment is forecast to double by 2030 alone. In Australia, more than AUD$120 billion of spending is needed to finance new solar, wind, and transmission and energy storage projects by 2030. It’s been estimated that a major wind farm needs to be built each month until the end of the decade to help hit Australia’s renewable energy goals**.
The transition to a net zero economy requires significant changes to the way energy is generated, consumed, stored and transported. We see great opportunities across multiple asset classes to capitalise on the investment opportunities while also positively contributing to our members’ futures, given the majority of our younger members will retire into a post net zero environment.
We already have a number of high-quality assets in the portfolio that are linked to the decarbonisation theme – across renewable energy, next generation infrastructure and green data storage centres. These should also help support our target to achieve a net zero carbon footprint for the fund by 2050.
4. Digitisation and technological change
We are currently in what’s being called the fourth industrial revolution – the next step in the digitisation of manufacturing. This is driven by advanced technology and innovative trends including the rise of data and connectivity, analytics, human-machine interaction like artificial intelligence, and improvements in robotics.
Rapid advances in digitisation are expected to impact a broad range of investments. We’ve already seen artificial intelligence advances drive the returns of large tech stocks like Microsoft and NVIDIA in recent years. The next wave is likely to be advances in digital towers and, of course, the data centres needed to store this enormous amount of information.
The speed of adopting new technologies is also increasing. Faster adoption times mean that investment opportunities need to be found earlier and quicker too. Rest believes that choosing the right investment opportunities early in their development will be crucial.
5. Debt and central bank policy
Following the GFC, we’ve experienced a prolonged period of ultra-low inflation rates worldwide. These low inflation rates have helped support economic growth and strong share markets. We believe that inflation will now remain higher for longer – although it’s important to be aware that this is really a return to normal long term levels.
Higher inflation generally leads to higher interest rates which results in higher debt repayments. This environment, of course, creates both winners and losers. Companies with high debt may struggle, unless they can adapt. Companies with less debt will be better placed but will still lack access to cheap funding for expansion. For real assets, like infrastructure, those with pricing power and a competitive edge should be more protected in a higher cost environment. We need to think about how this theme affects companies and assets and find who and what can outperform in a high interest rate environment.
We’re in this for the long haul!
At Rest, the investment team loves what we do! It’s the ups and downs of markets that keep us on our toes and challenges us every day.
And it’s because markets continue to evolve that we need to constantly think about evolving with them. It’s critical that we keep thinking about investing for the future – and the megatrends play a vital role in our strategy. This is a cornerstone of how we look to continue to deliver on our goal – to give you the best possible outcome in retirement.
Source:
*International Energy Agency: Update to Net Zero Roadmap, 2023.
**Clean Energy Finance Corporation, May 2023 and Australian Energy Market Operator (AEMO) ISP, July 2022.
