7 trends these fundies believe will shape the next decade
While the battle against COVID-19 isn’t yet won, the emergence of vaccines has provided a faint light of hope at the end of the tunnel. And with the world’s biggest vaccination campaign in history underway, 2021 will be the year of transition into a world that's forever changed.
Barring any unexpected catastrophes or vaccine-resistant variants, investors and advisers have an opportunity to catch their collective breaths and take a moment to reconsider or reset portfolios against the big pandemic-driven shifts which are set to dominate markets over coming years.
From the changing geopolitical landscape to rising bond yields and the online punting boom, Australia's best and brightest share their views on the trends set to shape the next decade on Livewire's Top-Rated Funds Series.
Click on the player or read an edited transcript below
James Marlay: If we were to put our longer-term thinking caps on, is there a particular trend or a thematic that you think will be really important for investors to get right over the longer term?
Theme #1 - Expect a focus on valuations (especially in tech)
Kate Howitt, Fidelity
I think one of the things we've been discovering over the last couple of years is how profoundly different some software company business models can be and these winner-take-all markets, where they have very low asset intensity, very low cost bases, high margins, and an ability to grow their revenues at this extraordinary rate and create new markets where there were none before. These are really kind of strange beasts from an economic point of view.
Now, the market has priced these very fulsomely. So, I think over the next couple of years, there's going to be this real tension between these companies which might continue to capture the lion's share of the profits available out there. But then how much of that is already reflected in pricing?
Because if you go back to 1999, even if then you'd been an amazing stock picker, and you'd figured out that Microsoft, Amazon, Google, that those ones are going to be the winner and Pets.com were going to blow up, you still had to wait 16 years to get back to the previous peaks. So, you can have an amazing company that's a long-term winner, that still can have some very big gyrations in the valuation the market will put on it.
Theme #2 - Climate change will emerge in importance
Andrew Parsons, Resolution Capital
Climate change is a critical issue. I think if we could try and perhaps refocus it away from the term climate change to health, I think that's a better way of looking at it. And so, if we can come to grips with those consequences, that to me will lead to much better outcomes all around.
Theme #3 - Interest rates and bond yields are set to rise
Paul Skamvougeras, Perpetual
Bond yields have actually been falling, for the last 40 years. We've reached a point probably where they can't go much lower. So over the next decade, we're thinking about where could interest rates get to? Especially when you have monetary policymakers and fiscal policymakers, especially in the US and Australia, very much intent on creating inflation. And that's what we're seeing. Monetary policy cannot do much more from here. But now the governments are taking over and they're really, really spending.
So, the stimulus that was injected into the global economy to offset COVID was 15% of global GDP. That's $20 trillion across the globe that's been pumped into the system. So, there's very much an intention. You can see from what the Treasurer says that they want to create inflation, in particular, wage inflation. Now all policymakers will say, "Well we like a little bit of inflation." Everyone likes a little bit of inflation. The question is, will it be a little bit of inflation or will it be something that gets out of control? We don't know that. But I think getting that question or thinking about that over the next decade is quite important.
Catherine Allfrey, WaveStone Capital
The rising bond yield is going to have an impact as we move back to normalcy. There has to be an impact on multiples, and what happens to multiples. The question is can earnings growth make up for that contraction in multiple? We're already starting to see it in the market because we've got this positive earnings revision coming through.
Plus the multiples are contracting as those earnings are rising. So I do think it's really, back to that inflation argument, rising interest rates, and that is going to be one area that you have to really grapple with over the next 10 years.
Theme #4 - Online gaming and betting will boom
Ben Griffiths, Eley Griffiths
The most exciting thematic that is beginning to play out, and has a long way to go, is the rise and rise and rise of iGaming, and eGaming, and E-Sports. We're talking about online betting and gaming. And we're talking about, in the case of the United States, where essentially betting and gambling was essentially prohibited outside the government tote. It was prohibited for a hundred years. So you had the passing of legislation there, which is state by state, and it's going to open up waging and gaming across the United States.
We've already got a substantial market in global video gaming as well. The global video gaming, we're talking about Nintendo games and Activision Blizzard and Take-Two and those sorts of businesses, that market's already worth something like $31 billion. It looks to me very much like iGaming and E-Sports, that market will dwarf that in size.
I think the estimates in the US of iGaming did have the total revenue available to companies that are something like $25-$30 billion. It looks like that pool of potential gambleable dollars if that's the word, or puntable dollars, is probably closer to $40 billion. So, there's an enormous opportunity that goes with the rise and rise of online commerce.
Theme #5 - Cash is not King
Adam Bowe, PIMCO
From my perspective risk-free real returns are dead. Gone are the days when people could sit and risk-free, or close to risk-free assets like cash and term deposits, and generate some sort of real return, so a return on top of whatever the inflation rate is. At the moment that's deeply negative. Even when central banks, I think, go through the next cycle of lifting interest rates, it'll get back to somewhere around zero.
So if you're an investor sitting there and you require a real return, a real income stream, you have to start to think to yourself, what risks am I happy to assume? Because if you sit in riskless term deposits and cash, then the chances are - the probability is that over time - your capital after inflation is going to go backwards. So you have to ask yourself about that and it's going to be a different answer to it for each individual investor.
Do you take some term or maturity risk? Are you happy with credit risk? Are you happy to put more equity risk into your portfolio? So I think the answer is different for everyone, but if you're not asking that question, and it depends on the initial conditions of your portfolio, then I think you're taking a real risk looking forward from here.
Theme #6 - Invest in long-term, sustainable businesses
Sam Ruiz, T. Rowe Price
Investors need to recalibrate their expectations. So we are at a point now where, from the bottom, markets are up 70-80%. There are not many places you would have put your money that would have lost your money over the past 12 months because everything almost went up unanimously, in synchronisation.
So I think to get it right, and this really aligns to how we think about investing, is you want to think about which businesses will truly succeed over the next two to three years. One test that's very simple which we like to use is asking: "If the market's closed today and you couldn't trade anything for the next three, five, seven years, what would you want to own now that would be worth the most on the other side of that?"
Theme #7 - Geopolitical shifts and inequality will shape policy
Simon Doyle, Schroders
One of the things which I think is now starting to become important is this broader idea of rebalancing. We're seeing it in terms of geopolitics; US, China, and how and where that plays out. We're moving into a world of de-globalisation which could be problematic for inflation and a kind of a realignment of the geopolitical power alignment.
I think the inequality story is playing out as well. And that's, I think, likely to flow through into policy settings and so on in terms of taxation and so forth. So I think there's this very positive short-term story, but I think there's a number of fairly powerful, longer-term structural thematics that I think will have a big impact over the next decade.
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