Our Current Investment Themes and Megatrends

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Megatrends. Which sectors are poised to outperform in the next decade?
 

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An executive with long blonde hair and green eyes, Anastasia Amoroso, speaks to us remotely.
 

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Anastasia Amoroso, Head of Cross Asset Thematic Strategy, J.P. Morgan Private Bank.
 

Ms. Amoroso:

My name is Anastasia Amoroso, Head of Cross Asset Thematic Strategy at J.P. Morgan Private Bank. The world as we know it has been upended by the recent COVID pandemic and left many of us wondering, what does the new normal look like? What is this world post-COVID going to be? The biggest takeaway is that COVID has significantly strengthened and accelerated many of the durable trends that were in place even before that. We like to call them megatrends.

So what is a megatrend? It is a trend that is going to change and shape, and disrupt our lives not only in the next couple of quarters, but over the next three to five years. So we are focused on three such megatrends in particular: digital transformation, healthcare innovation and sustainability. Now these are not new trends per se, and the sectors that are benefiting from them, tech and healthcare, have done quite well. So why do we think these sectors and stocks are going to continue to deliver outperformance?

These megatrends are helping fuel double-digit earnings growth for parts of tech, biotech and clean energy sectors. And what we found is that, all else equal, these well-above benchmark growth rates is what tended to drive long-term outperformance.
 

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A bar chart appears, labeled "Tech and Biotech have cumulatively (though not always consistently) outperformed over the past two decades."  The chart shows:

SPX at about 0.5% between 2001 and 2005;

SPX at about 3% between 2006 and 2010;

SPX at about 2% between 2001 and 2010;

SPX at about 12% between 2011 and 2015;

SPX at about 13% between 2016 and 2019;

SPX at about 6%, overall, between 2001 and 2019.

Tech at about negative 3% between 2001 and 2005;

Tech at about 10% between 2006 and 2010;

Tech at about 3% between 2001 and 2010;

Tech at about 13% between 2011 and 2015;

Tech at about 24% between 2016 and 2019;

Tech at about 10%, overall, between 2001 and 2019.

Biotech at about 7% between 2001 and 2005;

Biotech at about 0% between 2006 and 2010;

Biotech at about 2.5% between 2001 and 2010;

Biotech at about 35% between 2011 and 2015;

Biotech at about 2% between 2016 and 2019;

Biotech at about 11%, overall, between 2001 and 2019.
 

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Source: Bloomberg Finance L.P., FactSet.  As of May 1st. 2020.
 

Ms. Amoroso:

And we take it a step further. It may be that, very near term, a lot of optimism has been priced in, but the longer term, we think not enough optimism has been priced in. This is because while industry forecasts are ambitious, company and analyst estimates tend to be quite conservative. Let me give you a few examples of what we think is yet to be priced in but could lead to lasting outperformance of tech, biotech and clean energy.
 

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Digital Transformation.
 

Ms. Amoroso:

We know that in technology, growth and data is the most prominent trend in technologies. Like cloud computing, ultra-fast 5G and artificial intelligence are helping us capture this trend. But we’re still so early in the very early stages of these technologies. For example, 5G smartphone adoption may reach only 15% by the end of 2020. The enterprise adoption of the cloud is running at only 20%, although this is being significantly and rapidly accelerated due to COVID. And for artificial intelligence, only 20% of enterprises have adopted AI at scale.
 

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A bar graph labeled "We are still in early stages of adoption of new technologies" shows the adoption rates for 5G, cloud, and AI.
 

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Small print text: Source: "Global Handset Model," J.P. Morgan North America Research. March 2020. "Cloud Adoption to accelerate IT modernization." McKinsey 2018. "Talent and workforce effects in the age of AI." Deloitte. March 2020.
 

Ms. Amoroso:

So the opportunity to scale up these technologies is immense. And by the way, not to mention new technologies like augmented reality, remote surgery or autonomous driving that the former technologies will help enable. In fact, enterprise adoption of 5G is a potential $700 billion opportunity for service providers, yet to be captured. And artificial intelligence is a $60 trillion opportunity to add economic value by 2030, also yet to be captured.

In healthcare, innovation is certainly not new. But the speed of it is. In 2003, it took 13 years to complete the first reference sequence of the full human genome. Today, we can sequence a genome in less than 24 hours. The other thing that’s really interesting in healthcare is that there’s this confluence of breakthroughs in genetics and artificial intelligence that is incredibly powerful, and it is further accelerating basic innovation.

So is all of that captured evaluations? We don’t think so. Given the current level of R&D, we can see $255 billion in additional industry revenues by 2024. If that pans out and half of that accrues to biotech, the revenues of the NASDAQ Biotech Index will almost double from today’s levels.
 

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A bar chart appears, labeled "Sales should rebound, orphan drug market to almost double." It shows values, in 2018, with Prescription, excluding generics and orphan, at about 600 billion US Dollars; Orphan, at about 700 billion US Dollars; and Generics, at about 800 billion US Dollars. (The chart shows that this represents a slight increase in a steady market, since 2010.)

The chart also forecasts sharp growth. It projects, by 2024: Prescription, excluding generics and orphan, to be nearly 800 billion US Dollars; Orphan, to be about 1000 billion US Dollars; and Generics, to be about 1100 billion US Dollars.
 

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Compound Annual Growth Rate, 2019 to 2024: 6.9%.

Source: "World preview 2019, Outlook to 2024," EvaluatePharma Vision. May 2019.
 

Ms. Amoroso:

This is not yet enterprised today, but will be in the future as drug approvals go from concepts and probabilities to certainties and realities. This robust pipeline of new molecules is fueling 27% average growth rate through 2022, and this is why we think biotech has a chance to break out of this five-year trading range and break out to the outside.

Sustainability will be one of the defining movements of this decade. How can we make the most efficient use of our natural resources while minimizing the damage to the environment and ensuring everybody has access to basics, like food, water, and clean air? That’s what sustainability is about, and more. We’ll consider that only 26% of our global energy mix today is from renewables. Only 9% of our companies and governments are designed for a circular economy.

The opportunity to increase this percentage is immense. Now this has been well telegraphed, but looking back at prior forecasts, we find that time and time again, the actual adoption, the actual increase in renewables generation outpaced those forecasts. And that was when the cost of wind and solar was higher than it is today. We’ve seen that fall significantly. And now it is becoming not only a responsible decision for companies to adopt to move to circular concepts and clean energy concepts, but it is also increasingly becoming an economic decision.
 

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A line chart appears, labeled "Cost of wind, solar, natural gas, and coal." It shows:

 Wind's levelized cost of energy at 135 in 2009 and at  about 42 in 2018;

Wind's dollar per megawatt hour at about 375 in 2009 and at about 5 in 2018;

Solar's levelized cost of energy at 130 in 2009 and at  about 42 in 2018;

Solar's dollar per megawatt hour at about 375 in 2009 and at about 40 in 2018;

Natural gas's levelized cost of energy at about 84 in 2009 and at  about 60 in 2018;

Natural gas's dollar per megawatt hour at about 150 in 2009 and at about 75 in 2018;

Coal's levelized cost of energy at 110 in 2009 and at  about 105 in 2018;

Coal's dollar per megawatt hour at about 260 in 2009 and at about 250 in 2018.
 

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Source: Lazard, Bloomberg, J.P. Morgan Asset Management. LCOE is "levelized" cost of energy, the net present value of the unit cost of electricity over the lifetime of a generating asset.

It is often taken as a proxy for the average price that the generating asset must receive in a market to break even over its lifetime. Data is based on availability as of November 30th, 2019.
 

Ms. Amoroso:

So we think it is likely that the speed of adoption of sustainability practices like clean energy will surprise to the outside, ultimately helping drive those stocks’ outperformance. Thank you so much for your interest in this topic. This is just a start. We will continue to update on upcoming developments and new technologies like augmented reality, remote surgery, precision health, circular economy, food tech, and much, much more. So we look forward to working with you in finding investment opportunities within each one of these megatrends.
 

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