For those looking for the antithesis of tweet-driven investing, Bank of America Merrill Lynch strategists are offering an answer.
The equity thematic investing team developed a blueprint for what long-term investors can own to take advantage of 10 so-called “megatrends,” such as peak globalization and demographic trends like “peak youth.”
In a note to clients this week, the strategists predicted a new paradigm in the coming decade that will “disrupt the status quo.” Part of that disruption comes from record-low interest rates, making monetary policy less effective. The changing backdrop could also lead to new economic theories, the death of globalization, and an accelerated geopolitical race for technological supremacy. “Unprecedented strides in innovation” will come as global data knowledge and interaction with connected devices soar—in turn challenging governments and creating privacy issues even as it creates economic value.
Here is a snapshot of the 10 megatrends the strategists see over the next decade and how to play them:
Peak Globalization
Markets have been moving on the latest developments—or setbacks—for a possible trade deal between the U.S. and China, with the hope that the two countries can form some sort of pact.
But BofAML’s team predicts the unrestricted free movement of goods, capital, and labor will no longer be a guarantee over the next decade. Already, global trade growth this year is up just 2.5%, below global gross domestic product growth—a rare event outside of a recession. Bilateral trade battles are replacing multilateral structures. These shifts suggest that economic volatility from trade tensions could become more of the norm.
What to own, according to BofAML: real assets like commodities, farmland, precious metals, and real estate over financial assets, which benefited from three decades of globalization. They also suggest owning aerospace, defense, energy, and water—along with infrastructure—as national security and economic sovereignty dominate policy.
In terms of stocks, the strategists say look to small-cap stocks and cyclical value sectors—rather than tech and health care.
Recession
Today’s bond market and more than $13 trillion in debt yielding negative rates pose the biggest vulnerability to markets in the 2020s, according to the strategists.
“Monetary policy largess of the 2010s induced significant upside in asset prices, but the economic spoils went to holders of capital not workers,” the strategists say. “The policy response to next recession will seek to correct the excesses of the 2010s that led to widespread wealth inequality and financial engineering.” That will likely mean higher interest rates, lower earnings, or both.
What to own: Gold and gold miners, monopolies like utilities that have pricing power, and the 30-year U.S. Treasury. T-bills, real assets, and high-quality bank stocks could also offer a hedge against the bond bubble popping. Meanwhile high-quality companies with pricing power—that are out of political crosshairs—could weather an equity deleveraging. Think defense, waste management, industrial gas, data processing and payments, and global beverages.
Quantitative Failure
The possibility that central bankers are unable to reflate the economy as monetary policy loses its effectiveness is a mounting concern for investors.
What to own: Gold and real assets if the leadership of the U.S. dollar cracks. As the heap of negative-yielding debt grows, the more likely bond proxies in the equity world—high-yielding stocks like utilities or dividend payers—should see another move up, according to the strategists.
Demographic Trends
•The middle class continues to swell in emerging markets. Citing research by the Brookings Institution, BofAML says roughly every second five people enter the middle class.
What to own: new middle-class households mean more shoppers for refrigerators, washing machines, and motorcycles, but also for services such as tourism, education, health and entertainment.
• The aging boom: The number of grandparents are set to outnumber the world’s children in the 2020s. Overall, the aging population means more saving over spending, which is deflationary instead of inflationary, the strategists write.
• Move over millennials, here come Gen Z. They care about: Sustainability, tech-savvy, focused on experiences and the sharing economy, not conspicuous consumption.
Likely losers: bricks-and-mortar retailers.
Climate Change
BofAML sees a nearing inflection point in the fight against climate change and expects the 2020s to be the decade of clean energy solutions and bold actions in a “make earth green again” strategy.
What to own: clean energy, electric vehicles. Losers: fossil fuels, diesel cars, single-use plastics.
Robots and Automation
Robots may not replace humans soon but half of jobs are at risk of automation by 2035. As more activities can be automated, processes can become much more efficient, but the shift could change global supply chains from when cheap emerging market labor was the big driver of globalization, the strategists write.
What to own: Investments that play into automation, local production, big data, and artificial intelligence, while those tied to global supply chains are among the losers.
Splinternet
BofAML strategists are in the camp that the trade war is going to transition into a tech war in the 2020s as the U.S. and China fight for leadership in technologies ranging from quantum computing, big data, 5G, artificial intelligence, electric vehicles, robotics, and cybersecurity.
The strategists expect global defense, tech, and cybersecurity companies to benefit over the next decade in this race. While the U.S. technology sector could be hampered by regulation and hardening sentiment, Chinese companies are pouring more resources into becoming less reliant on the U.S. and other foreign technology suppliers.
What to own: BofAML says look to emerging-market assets, while developed markets could lose out as China becomes more self-reliant.
Moral Capitalism
Asset managers are rushing to get onto the environmental, social, and governance, or ESG, investing bandwagon. BofAML expects $20 trillion of assets in ESG strategies over the next 20 years—nearly the market value of the S&P 500.
The strategists see strong demand for thematically-driven investing, especially among GenX and GenY, which total 4.4 billion people and represent about $21 trillion of income globally. By 2020, millennials will account for 16% of global private wealth and 87% of millennials believe ESG factors and impact investing are important in their investment process, according to last year’s BofA U.S. Trust survey.
What to own: ESG strategies, while “business-as-usual” investing and companies focused solely on maximizing profits could lose out.
Smart Everything
The Jetsons come to life. By 2030, BofAML says there will be 500 billion connectable devices, killing privacy. What to own: Shares of companies involved in the Internet of Things, connectivity and smart cities, as well as “big brother” surveillance technology.
Space
Tourism and nanosatellites are the next frontier for an industry that could be worth about $1 trillion by 2030, according to the strategists.
Winners: aerospace and defense companies. Losers: legacy satellites.
Write to Reshma Kapadia at [email protected]
Source: impact investing
