Adrian Lowcock, head of personal investing at Willis Owen, outlines the big themes that he thinks will play out for investors in the future.
‘We overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10 years.’
In the quote above Bill Gates has perfectly summed up 2020 from an investor’s point of view.
The disruption caused by Covid-19 has created investor panic all over the globe. Markets first plummeted in March only for some indices, in the US mainly, to rally strongly in the summer.
Longer-term the disruption caused by Covid-19 could be a driving force for change and help improve economic conditions
Behind the headline index values, the share prices of companies are very different to how they were at the start of the year.
Disruption and turmoil are clearly not good for the economy in the short term, as companies go bankrupt and people lose their jobs and income.
However, longer-term this disruption can be a driving force for change and help improve economic conditions as well as standards of living. The coronavirus crisis has meant many companies that were badly run or in declining industries have left the market.
The better-run companies are able to take market share and improve their profitability in the long run, whilst the change in consumer behaviours and people’s priorities, creates its own opportunities. From this spring five themes that could really benefit over the next 10 years.
Technology stocks have played a huge part in markets for the last 10 years, but the theme looks set to be a multi-decade one. There is no one tech stock that drives this opportunity, in reality it is several combined in themes. For example, cloud computing represents about 30% per cent of a $7trn market and such software will increasingly feature in future computer devices.
Scale is important and it is hard for companies to break into the market, with Amazon, Microsoft and Alphabet the market leaders. AI and machine learning also offer opportunities for companies and investors.
This sector is core to driving the advertising ecosystem and the social and commercial experiences we have. It is also fundamental to mega themes such as autonomous vehicles.
Funds to take advantage of this growing theme are T.Rowe Price Global Technology. Manager Alan Tu is based in San Francisco and has been able to research companies throughout their life cycle often getting to businesses long before they float.
Biotechnology and drug development
There is the potential for major breakthroughs in drug discovery as IT and data analytics improve productivity in therapy, and provide more targeted treatment
The healthcare industry, and in particular pharmaceutical giants, has struggled for the past two decades to produce new blockbuster drugs. However, the need, value and importance of having quick and successful treatments has never been clearer given the current circumstances.
There is the potential for major breakthroughs in drug discovery as IT and data analytics improve productivity in therapy, and provide more targeted treatment.
China is a growing market for drug development. It has a large amount of cancer patients, and one in two of those are in drug trials, compared to one in 20 in the US. There is a huge amount of data being collected through apps and monitoring tools. Wearable devices such as Fitbit often sync with other health apps to present your data.
Funds to take advantage of this growing theme are ASI Global Smaller Companies is overweight healthcare. Manager Harry Nimmo focuses on change and looks for companies which offer the best combination of growth, quality and trade at attractive values.
This year has seen the full gamut of issues, from wildfires to a pandemic. Above, wildfires in Southwest Reno, Nevada
Ethical and sustainable investing is likely to remain a core theme throughout the next decade. This year has seen the full gamut of issues, from wildfires to a pandemic. These crises have demonstrated how such environmental factors can impact markets, economies and people’s wealth.
In both the UK and EU governments are committed to using fiscal responses to coronavirus to invest in an environmental and green recovery. Companies had already begun to realise the importance of ESG policies to their businesses, the case for them has only strengthened this year.
Those that adopt them have more sustainable businesses which are better placed to survive any shocks. A greater focus on the long term, strong company financials and environmental impact is likely to also help shareholder returns.
Funds to take advantage of this growing theme are Royal London Sustainable Leaders managed by the experienced Mike Fox. The fund invests in companies that have a positive impact on the environment, human welfare and quality of life.
Also ASI UK Ethical Equity takes a strict ethical approach. Manager Lesley Duncan excludes companies involved in activities including animal testing, genetic engineering, alcohol, gambling, tobacco etc. The fund also looks for companies making a positive contribution such as pollution control or businesses which promote equal opportunities.
Big getting bigger
The market share of the largest companies is getting bigger
The market share of the largest companies is getting bigger. Sectors are being dominated by a few large companies in areas such as online advertising.
Whereas scale advantages were previously regional, they have gone global, against a backdrop where many of these are fixed-cost businesses. What this means is the marginal cost of established businesses getting one new customer is almost zero, but for new player it could cost billions.
The feedback loop of data also helps reinforce the business model and improve services which gives the established players a significant advantage.
Funds to take advantage of this growing theme are Fund Smith Global Equity and Lindsell Train UK Equity both invest in global leaders. They share similar investment philosophy looking to invest in companies which offer the potential for long term compound growth. The focus is on quality businesses that managers Terry Smith and Nick Train believe will be around for decades to come.
In 2008 inflation did not materialise, and of course there are no guarantees it will this time, however the situations are very different
The amount of quantitative easing pumped into the system has been colossal, far in excess of the support provided during the Global Financial Crisis. In 2008 inflation did not materialise, and of course there are no guarantees it will this time, however the situations are very different. The money transmission mechanism isn’t broken this time round so any QE has got into the markets.
In addition, unlike 2009, governments have recognised the need to invest fiscal stimulus to generate economic activity and growth. This should help drive job creation and then inflation.
Funds to take advantage of this growing theme are M&G Global Macro Bond managed by Jim Leviss is a go anywhere fund. Leviss is able to combine his outlook on the global economy and market and combine that with bond selection.
Because this bond can go anywhere he should be able to position it for inflation at the appropriate time. Threadneedle UK Equity Income, the manager Richard Colwell has proven to be a safe pair of hands and his focus is on companies with strong cashflow and he will invest in both growth and recovery stocks.