Finger on the future
Being able to spot mega-trends and the companies that exploit them puts investors ahead of the game. Barbara Drury looks at tomorrow's winners.
Being able to spot mega-trends and the companies that exploit them puts investors ahead of the game. Barbara Drury looks at tomorrow's winners. Today, Apple releases its iPhone 5, which is bound to cause ripples of excitement around the globe and reinforce Apple's stature as the world's biggest company based on sharemarket value. That's great news if you own Apple shares and a valuable lesson if you don't.If you had been prescient enough to buy $1000 worth of Apple shares 10 years ago, your shares would be worth more than $500,000 today.The challenge for today's long-term investors is to identify market sectors and companies that are well placed to be tomorrow's winners.Steve Jobs was famous for being ahead of trends and designing products consumers didn't know they needed but immediately wanted. Jobs once likened his approach to that of ice hockey player Wayne Gretzky, who said he skated to where the puck was going to be, not where it had been.Investors can emulate Jobs by looking beyond the daily market noise to think about themes and mega-trends that are shaping tomorrow's world. The difficulty is in identifying themes with ready-made investment opportunities.Professional thematic investors use themes as filters to select companies with a promising outlook before doing further analysis to find the best-value investments. Money has singled out a handful of the mega-trends identified.NEW TECHNOLOGYThe invention of the automobile spawned thousands of car makers, but only a handful survived to become global players. This is a lesson investors had to learn anew during the dotcom boom and bust, when investors rushed to buy internet start-up companies only to lose their money.Just as some of the biggest winners of the car revolution were second-tier companies that used new technology as leverage, such as construction companies that built new highways, the biggest winner from the internet revolution to date is Apple.While Apple is no longer a bargain investment, an investment strategist at Zurich, Patrick Noble, likes companies such as Google and Amazon that will be winners as the internet transforms business structures.He also likes second-tier companies such as Visa that will be beneficiaries of internet-enabled payment systems.Noble is also looking for companies that can cash in on the shift from capital-intensive to information- or knowledge-based industries. He cites London-based Pearson, which has used its print-media strength as a springboard into education, and in the science area US giant Monsanto, which has moved from a dependence on agricultural products to seed technology.An investment specialist at Deutsche Asset Management, Bill Barbour, also looks for companies that thrive on the talent and intellect of their workforce, such as the US computer technology corporation, Oracle.LIVING LONGERBy 2050, almost a quarter of Australia's population will be aged over 65, compared with 14 per cent now, a trend that is playing out across the developed world. This has profound implications not just for policymakers but for investors, as older people spend more on health and aged-care services.A portfolio manager at SG Hiscock, Rob Tucker, says greater demand for aged-care services is already putting pressure on fragile government budgets. He says governments will increasingly look to the private sector to fill the gap."The ageing-population theme will be with us for a long time. The older people get, the more they spend on healthcare, hospitals and pharmaceuticals. For certain sectors such as healthcare, this will create organic growth," Tucker says.The chief investment officer of Australian Ethical, David Macri, says there is no pure investment exposure in the aged-care sector. So he takes a step back and targets property developers active in the sector, such as Lend Lease and Stockland.The healthcare sector is easier to access. In the year to June 2012, healthcare, pharmaceuticals and biotechnology were among the few positive sectors of the local market. Tucker's preferred exposure to the sector is currently Ramsay Health Care.Macri says the growing disease burden and the cost to governments is a theme with strong investment characteristics. Cochlear and CSL are already global success stories, but Macri says small biotech stocks offer the potential to revolutionise medical treatment on a global scale.Australian Ethical recently bought shares in three biotechs with promising new drugs and technology - Avita Medical, Alchemia and Neuren Pharmaceuticals. The sector offers opportunities for patient investors with a high-risk tolerance.Barbour identifies a variation on this theme, which he calls personalised medicine. He says the unravelling of the genome has raised expectations of significant breakthroughs in cures for cancer and other diseases. At the same time, the cost of DNA sequencing per person is falling dramatically."We expect medicine to move from a 'diagnose-and-treat' model to 'analyse-and-predict'," he says. "We think this could be bigger than the internet over the next decade."Drawing an analogy with the 19th-century gold rush, in which people who sold picks and shovels to the miners often made more money, he prefers investments in companies that make and sell machines that aid diagnosis.Barbour says large pharmaceutical companies are already taking over companies that sell diagnostic equipment, pathology labs and breast-screening companies.LIVING IT UPMuch has already been written about the growing appetite for consumer goods and services among the newly emerging middle class in China, India and elsewhere. And Australian exporters are already benefiting.In just one example, Tucker says Asian wine consumption is growing at a compound annual rate of 17 per cent a year. This is why one of his favourite stocks is currently Treasury Wine Estates, the owner of the Penfolds wine brand."I think we're seeing the investment cycle in Asia slow down but the consumption cycle has a long way to go," Tucker says.But incomes are not only growing among the newly affluent middle classes. Barbour digs deeper to what he calls the "bottom billion" in developing nations. Last year, 2 billion people moved from annual incomes of $US1000-$US3500 ($960-$3300) a year to incomes of $US4000-$US10,000 a year.Large food conglomerates such as Unilever have been quick to respond and are focusing on developing nations, with the sale of large volumes of cheap products. At the country level, Barbour says there are opportunities in companies that are cashing in on these emerging consumers, from Nigerian banks to a Brazilian budget airline.LOAVES AND FISHESThe first thing people do when they have money is spend more on food. But the combination of population growth, rising incomes and shortages of arable land and clean water puts pressure on the world's ability to feed itself.There are 7 billion people on the planet, with a projected 9 billion by 2050. According to Oxfam, 900 million people go hungry and 2 billion are malnourished. As Marie Antoinette found, a hungry mob is an angry mob.Following recent natural disasters such as weak monsoonal rains in Asia and severe drought in the US and Russia, prices of corn and wheat have risen by nearly 50 per cent since June. This has prompted Oxfam and the United Nations to warn of a second global food crisis in five years.Food-price spikes have a devastating effect on developing countries that rely on food imports. The previous global shortage in 2008 is credited for playing a role in the Arab uprising and social unrest in parts of Europe."The demand for food is not linear but will be almost exponential over the next decade," Barbour says. He says companies that feed the world are still cheap relative to the rest of the market after being hammered by the belief that slower world growth would reduce demand. "We're not speculating in commodities but investing in companies trying to solve the problem," he says.Even farmers facing drought will spend on seed and fertilisers from global giants such as Monsanto, Mosaic and PotashCorp.DWINDLING RESOURCESThe growing awareness that natural resources such as oil, land, water and forests are in limited supply has led to a focus on sustainability and alternative sources of energy.One trend that has investors excited is the potential for shale-gas projects in the US to help reduce dependence on foreign oil. The US has the largest shale-gas reserves behind China, according to the US Energy Information Administration.Noble says the US can produce shale gas for $3 a British thermal unit, while other producers sell gas relative to the price of oil at $12-$15 a British thermal unit. As a result, many large US chemical companies are switching from oil-based to natural-gas-based chemicals and investing heavily in plant upgrades and new facilities in North America."We are investing in chemical companies like DuPont and Dow Chemical that are energy-intensive but building plants in the US to bring the supply chain back home," Noble says.Closer to home, there is continuing growth in demand for Australian liquefied natural gas (LNG) from Asia.This is used predominantly for the production of electricity and has a key role to play in global attempts to diversify away from coal.By 2020, Australia will account for 35 per cent of total LNG supply into the Asian market. Tucker says companies such as Monadelphous that service LNG projects with engineers and contractors are well placed, as is Oil Search, which will have the first regional project to generate cash.Macri says reducing demand for non-sustainable energy sources is the more interesting side of the supply-demand equation, citing areas such as energy efficiency, recycling and energy storage.THE UNTOUCHABLESAn awareness of long-term themes can also be used to filter out potential losers. Just as the car replaced the horse, smartphones and tablets are revolutionising everything from the way we shop and bank to how we consume news. Companies that fail to adapt could, like the horse, be put out to pasture.Noble stays away from developed-world financial stocks, especially European and US banks, which face "interesting" challenges.Banks are under regulatory pressure after the failings that produced the global financial crisis, the more recent Libor scandal, and the looming judgment day when artificially low bond rates return to normal and bank borrowing costs increase.Smart energy and other world-changing themesAustralian investors interested in tapping into global themes might need to supplement Australian shares with an international share fund. Only two diversified global thematic managed funds are sold locally, the DWS Global Equity Thematic and Zurich/Lazard Global Thematic Share funds.Australian Ethical's International Equities Trust is based on a single theme of global smart energy and is subject to the fund manager's ethical investment screens.An Australian fund with a thematic bent is SG Hiscock's SGH20 Fund.The DWS fund identifies 13 themes that change over time, with about 10 stocks in each and up to 30 per cent of stocks in emerging markets. The Zurich fund invests in 80 to 120 companies across eight to 12 themes."There's lots of noise [on global markets] at the moment, so to beat the [MSCI World Index], we don't trade on policy such as quantitative easing or the next possible announcement out of Greece but look at the long term," Zurich's Patrick Noble says.Both funds look for companies that offer asymmetry, which Noble describes as "heads I win and the downside is I don't lose".Barbour says asymmetric negotiators such as resource companies with ownership of scarce assets have the ability to conduct one-sided negotiations. "Companies like BHP Billiton and Rio Tinto are likely to be there for the long-term and profit from it," he says.
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