The secular, durable trends that will change, shape, disrupt, and drive portfolio returns in the future.
While markets may be quick to rise or fall in the short term, part of our approach to investing is to look at secular, durable trends that will change, shape and disrupt the world as we know it. We call them megatrends. At the core of these megatrends are innovative technologies that can disrupt the status quo of large addressable markets, and thus present outsized growth opportunities. In this week’s Top Market Takeaways, we focus on the megatrends that we believe will drive portfolio returns in the years to come.
Digital transformation: factory of the future
Digital transformation was the defining market trend of 2020. Businesses, consumers and families learned how to more comprehensively live in an online world. However, this is just the beginning in the digital transformation lifecycle, and we believe the future adoption of key technologies are not yet fully priced in.
Imagine a 5G-enabled factory of the (not-so-distant) future. Products could be designed virtually and assembled by 5G-connected collaborative robots (“cobots”). Employees could use 5G-enabled augmented reality (AR) capabilities to quickly learn and execute assembly tasks. Production processes could be digitally supervised. Artificial intelligence might predict when a product needs maintenance. The factory's output might be customized. Real-time customer order data could inform the manufacturing process. A consumer may be able to order the right color or perfect size, and the producer might not have to charge a fee. The factory of the future could also be local. Technology could reduce the barriers imposed by labor force skill mismatches or costs. These “smart factories” are expected to add over $2 trillion in economic value by the year 2023, and we think that estimate could even be conservative.
This represents just one of many examples emerging in the digital sphere. It is only just the beginning and technology will continue to transform production and consumption for years to come. We think investors should embrace this opportunity, as these trends stand to generate superior earnings growth, irrespective of the ebbs and flows of the business cycle.
Sustainability: breakthrough technologies that mitigate waste and pollution
Backed by strong government incentives, favorable economics of wind and solar, and increased corporate focus on sustainability, in 2021 renewable power is forecast to become the largest area of spending in the energy industry for the first time in history. And this is just a start. In our view, a limited supply of investment opportunities and a rising investor demand should continue to support clean energy valuations in public and private markets.
So, where exactly to invest in renewables? We see an opportunity in distributed solar technologies and energy storage. Residential installations of solar should remain the highest growth segment, with a forecasted CAGR through 2025 of 12% compared to 6% for commercial and a 4% decline for utility-scale.
Money is flowing into ESG, and institutional capital is driving it. Certain states in the U.S. require state pension funds to include sustainable investing, and many others are choosing it. Even sovereign wealth funds, like Norway’s, are divesting away from ESG negative stocks and adding to ESG positive stocks. Insurance companies, too, are holders of ESG assets. This $27 trillion institutional market is making a commitment to Sustainable Investing, and the potential for trillions of dollars of institutional capital flowing into ESG funds in the coming years is a significant technical factor that creates upside return potential in ESG. Investors could benefit by investing alongside the world’s biggest institutions and getting in early.
Healthcare innovation: precision medicine
2021 is set to be a pioneering year in healthcare innovation. For most of 2020, the world anxiously waited for a vaccine for COVID-19—a one-size-fits-all solution to stop the global pandemic. But also on the horizon is a supremely customized approach to healthcare that promises to transform how we diagnose and treat disease: precision medicine.
We see precision medicine as potentially the next big opportunity in healthcare. Precision medicine aims to deliver the most effective treatment tailored to a specific patient at the most opportune time to achieve the best possible result. Consider one early example from 2018—a treatment called “milasen,” named for the eight-year-old who received this custom treatment for Batten’s disease. Milasen is believed to be the first drug developed for a unique, individual patient. Milasen is essentially a custom piece of RNA designed by doctors to block certain negative effects of a mutated gene within the patient’s DNA. The treatment worked, and the positive impact was visible in the patient within months.
Imagine the impact if a similar custom method could be used to create precision medicines that could treat 18.1 million new cancer cases and potentially prevent 9.6 million deaths worldwide, as seen in 2018. For example, Moderna is partnering with Merck to develop and test a personalized mRNA therapeutic vaccine to treat cancer. Moderna’s approach aims to use the human body’s immune system to target and kill cancer cells in the same manner that the immune system can already target other pathogens. If successful, Moderna would be creating a personalized cancer vaccine based on mutated antigens that are unique to an individual’s tumor.
All in all, we are convinced that these trends are going to change, shape and disrupt the world in the years to come, and present opportunities for outsized positive returns. However, as important as it is to understand general societal and economic trends, the real challenge lies in identifying concrete investments. Your J.P. Morgan team is able to help you make sure that any opportunity you choose supports your unique wealth plans and goals.
All market and economic data as of December 21, 2020 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
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