Credit Suisse: The 4 'crossover' megatrends to watch
When it comes to the megatrends for 2022, it pays to think big, and if last year's Livewire reader survey has been anything to go by, there are plenty of big investment trends to follow.
Perhaps unsurprisingly, readers favoured decarbonisation, health and wellness, along with cloud computing and artificial intelligence/machine learning (which came in neck-and-neck), as the megatrends most likely to be added to investment portfolios.
But these are called megatrends for a reason: each category may capture many different structural shifts, while you may have had a megatrend idea that didn't make the final cut.
Given this, we've decided to delve a bit deeper into 2022's investing megatrends with help from Stephen Cabot, investment consultant and director at Credit Suisse.
The 'crossover' megatrends relevant in 2022
There is a large degree of crossover between Credit Suisse's own multi-decadal trends and those megatrends highlighted in the reader survey, but Cabot points out a few salient differences, with particular attention given to structural changes in infrastructure and demographics.
"Some of our themes are based on demographic trends that reach into 2050, such as our Silver economy or Millennials’ values Supertrends, while another, our Climate change Supertrend, focuses on CO2-reduction and net-zero targets through 2040 and beyond."
The 6 Credit Suisse Supertrends are: Technology at the Service of Humans, Silver Economy: Ageing Population, Climate Change, Millennials Values, Anxious Societies and Infrastructure: Closing the Gap.
"Of the livewire megatrends identified:
- Cloud Computing, AI and ML, Fintech and Virtual Reality would fit into our Technology at the Service of Humans Supertrend.
- Decarbonisation aligns with our Climate Change Supertrend
- Demographics aligns with the Silver Economy Supertrend
- Health and Wellness applies for both the Silver Economy."
Given the overlap, there are two standout reader survey megatrends where Cabot sees great potential.
The accelerated switch to digital tech during the pandemic is a no-brainer for Credit Suisse, where the structural growth drivers remain manifold across the themes surveyed - including cloud software and infrastructure, AI and automation, and even the Metaverse.
And while such areas may have experienced temporary '"hyper-valuation" during the last few years, Cabot expects some normalisation to follow, but wouldn't rule out "above average growth for digital services, infrastructure and products."
"During this period of normalisation, we continue to follow a stock selection strategy, which is balanced between investing in long-term growth opportunities with strong growth prospects but higher volatility, quality IT and communication sector stocks with strong existing market positions and lower volatility in core earnings businesses, and on pure “value” names with low growth but stable dividends.
"However, lower share prices for companies exposed to these growing fundamental trends should turn investors (earlier rather than later) back to growth investments, in our view."
Climate change is an important theme for many investors, and for Credit Suisse this supertrend is well-positioned in regard to climate action initiatives - such as the global warming targets set at the COP26 in November 21'.
"The recent spike in electricity prices and fossil fuels resulted in what we call greenflation, and underscored the need to accelerate the expansion of green energy and to further accelerate the transition.
"Further areas that are tackling CO2 emissions include agriculture and food, which offer long-term opportunities for a broad range of industries."
Closing the infrastructure gap
A Credit Suisse supertrend not reported in the Livewire survey is infrastructure, which for Cabot includes transport, energy and water infrastructure subthemes with a 'renewable' angle.
In many ways, COP26 acted as a reminder that building renewable energy infrastructure and smarter electricity networks remains a top priority for most jurisdictions.
"Germany’s new coalition government will be taking the lead in Europe, while a possibly scaled-down version of US President Joe Biden’s stalled Build Back Better plan would support green infrastructure investments for renewable energy, energy-efficient housing and electric vehicle (EV) infrastructure in the USA."
Transport also fits nicely into the travel sector, which was hard-hit in 2022 and is still experiencing a lagging recovery, although a further reopening of domestic and international travel looks more and more likely.
Cabot adds that rising inflation is "usually positive for the infrastructure sector because companies in the transportation and regulated utilities industries enjoy price escalators embedded in their contracts, which are either linked to the consumer price index (CPI) or a sector-specific measure of inflation."
"Earnings prospects for 2022 should therefore improve for these infrastructure businesses, as contracts are repriced at the start of the year."
Don't underestimate the silver economy
While climate change is clearly a key theme across industries, Credit Suisse's Investment Outlook for 2022 highlights the "silver economy" as the preferred supertrend, owing to its sector positioning in healthcare and financials.
"Healthcare and financials are currently two sectors that are in favour from a tactical point of view due to their defensiveness (the former), and the expectation of higher interest rates (the latter)."
In particular, Cabot pinpoints some important therapy areas such cardiovascular disease, oncology and neurology, where companies with heavy exposure in these areas will see rising demand and strong earnings growth as our society ages.
"The healthcare sector had a mixed start to the year in markets, as several segments with longer-dated assets (e.g., emerging biotechnology and medical technology dependent on a resumption of elective surgeries) came under pressure due to rate hike concerns.
"However, we believe this creates an opportunity and we have now upgraded the sector to our key overweights for 2022, given the sector’s relatively undemanding valuation, good underlying demand due to demographics, as well as continuous innovation that led to 2021 being another good year in terms of new product approvals."
As always, diversity is key
In Cabot's view, the broad diversification across various themes is the "key to navigating choppy phases".
"Given the multi-decadal nature of these trends, we typically advise clients to diversify amongst the trends evenly within their thematic allocations, rather than trying to anticipate which trend will outperform through the near term."
And while thematics are useful, it's important to keep perspective:
"Some of the investments are very pure in the expression of the theme, these tend to be smaller and mid-cap focused companies. Others can be part of larger corporates who have partial alignment with one, or indeed a number of the themes."
Investing with purpose
When Credit Suisse first launched the Supertrends in 2017, its objective was to identify multi-year societal trends that could lead to fast-growing business opportunities and enable investors to grow their capital. To access the latest Supertrends report, please visit their website.
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Meg Kerr (she/her) is a Content Editor at Livewire Markets with experience writing for financial publications, including Stocks Down Under and Fat Tail Media. She has a passion for content creation, especially in the resources and commodities space.