Annual outlook 2024 - (Geo)politics: Power play

Our long-term investment themes (LTIT)

We see these as the key global challenges: how to sustainably utilise and conserve our global resources; how to provide for the global population, and how to develop key technologies to help us all do this.

We now have 11 long-term investment themes (LTIT) grouped into three broad areas: Resource transition, Population support and Next-phase technology.  

 

The division of the LTIT into these three areas is shown in the figure below.

There are a few changes to our existing themes for 2024. The previous Land Resources theme is split into two separate themes – Circular material use and Sustainable food system, for reasons we discuss below. We refocus the previous Millennials and GenZ theme to a more explicitly consumption-related theme – Consumption megatrends. We also add a new theme – Digitisation – to our Next-phase technology group.

Circular material use (new theme)

 

What

Sustainable use of resources is economically and environmentally essential. Circular material use (part of our previous Land resources theme) concentrates on how we can use material resources – e.g. metal ores, non-metallic minerals and plastics – in a more sustainable way, for example through recycling. This will both reduce CO2 emissions substantially and support many of the 17 United Nations Sustainable Development Goals (SDGs).

 

Why

Global primary materials use is expected to nearly double from 89 gigatons (Gt) in 2017 to 167 Gt in 2060.1 Metal ores (iron, aluminium, copper and other non-ferrous metals) account for around 10% of this but non-metallic minerals (sand, gravel, limestone) account for the greatest share of primary materials use. We need to boost secondary material use but recycling rates vary widely. For lead, recycling rates have risen to more than 50%, but steel is below 30% and secondary shares for aluminium, zinc and copper are even lower. Many non-metallic minerals are currently too cheap or too difficult to be recycled, but some can be downcycled (into lower-value products). The OECD expects the recycling sector to more than triple in size by 2060 and this is reflected in their forecasts of extraction vs. GDP growth. One important challenge is to incorporate circular materials use into high expected infrastructure growth in the emerging markets.

 

How

The shift to circular economy principles needs to be complemented by conservation of resources and regeneration of nature. Recycling and recirculation (reuse) are interlinked. Opportunities are likely to occur at all stages of the value chain, from product design (e.g. recyclability of components, reduction of overspecification), through production and consumption methods. Investment can be made in individual companies or via broad circular economy indices, or other ESG indices. Private markets may be an interesting way to approach this area.

 

Risks

Risks: Investment will be affected by the economic viability of circular approaches (dependent on primary/secondary materials prices and available technology), regulatory frameworks and changing consumer needs and preferences. Tech-based circular economy firms may offer potential high performance, but with an increased degree of risk. 

Sustainable food system (new theme)

 

What

A sustainable food system delivers food security in a way that is economically sustainable (i.e. profitable), is socially sustainable (has broad-based benefits for society) and environmentally sustainable (has a positive or neutral impact on the environment). 

 

Why

Food is one basic human necessity. But how we produce and consume it contributes greatly to climate change – it accounts for around one-third of global CO2 emissions. Expansion of agricultural production is the largest driver of biodiversity loss and deforestation worldwide, accounts for 70% of the world’s freshwater withdrawals and has many other environmental impacts.2 Hidden social, economic and environmental costs of the food system may already equate to USD12 trillion a year.3 A growing global population and climate change are likely to put the global food system under increasing strain in coming years, with implications for many people’s food security.

 

How

A range of opportunities exist at all stages of the supply chain – e.g. sustainable practices, land regeneration, rural infrastructure, water management and flood risk mitigation, carbon sequestration, innovative food production, innovating distribution systems (packaging), not forgetting the power of food retailers to influence both production and retail trends. Priorities include reshaping public support schemes to support food security (rather than overproduction), social protection systems that are equitable and many have other social objectives (e.g. reduction of sugar consumption), and making sure that individual financial models are scalable. Public sector development institutions will have a role to play here in using their capital as a catalyst in specific projects and via financial instruments (e.g. food system bonds) which can then attract private finance (so-called blended finance).

Risks

Despite attempt to change it, the food system and investments in it are likely to remain vulnerable to climate change and both international and domestic economic and political factors. Tariffs/subsidies and other international trade restrictions are examples of how these factors affect food supply. 

Energy transition 

 

What

The energy transition will involve a shift to renewable sources to reduce dependence on fossil fuels; decentralisation of energy systems (including new distribution systems) and improved technological and operational efficiency (e.g. through better energy storage solutions).

 

Why

Energy accounts for 73% of human-induced greenhouse gas emissions, meaning that the energy transition is central to global efforts to combat climate change. The transition will offer substantial investment opportunities across a wide range of rapidly developing sectors, such as renewable energy, energy storage and energy efficiency. Government policy is increasingly supportive: the U.S. solar industry, for example, is forecast to nearly triple in size (installed capacity) over of the next five years, thanks to the long-term policy certainty provided by the 2022 Inflation Reduction Act (IRA).

 

How

Consider investing in companies engaged in the production of renewable energy, such as solar and wind power, although oil and gas companies with credible transition targets and strategies will also play a meaningful role in the energy transition. Also look at companies developing innovative energy storage technologies, which are crucial for enhancing grid stability, and firms that provide solutions to improve energy efficiency across industries and buildings (which may account for more than 40% of the expected reduction in energy-related greenhouse gas emissions). 

 

Risks

Shifting political landscapes and evolving regulations will impact the energy transition: consider both trade and manufacturing dependencies (e.g. U.S./ China) and concentration of some natural resources in a few countries. Rapid change also brings technological and operational risks, for example setbacks in new technologies, unforeseen technical issues, or delays in scaling up innovations. Fluctuations in energy prices, inflation, or interest rates could influence the pace of the energy transition and affect the profitability of related investments. Changing costs of capital could, for example, potentially change the competitive dynamics between renewables and fossil-fuel-based energy. 

Blue Economy

 

What

A Sustainable Blue Economy provides social and economic benefits for current and future generations; restores, protects and maintains diverse, productive and resilient ecosystems; and will be based around clean technologies, renewable energy and circular material flows. Recent UN agreement on the High Seas Treaty, a legal framework that creates protected maritime areas and sets 2030 targets to maintain the health and biodiversity of the oceans, help accelerate interest in the area. 

 

Why

Sustainable practices in the Blue Economy contribute to the long-term viability of marine resources and are important for individual economies and societies. The Ocean and coastal ecosystems are vital to the livelihoods of billions of people. Sustainability is likely to be linked to future corporate health: seafood companies that do not act in a sustainable way, for example, face declining fish stocks, revenues and profits. 

 

How

Potential investment areas include renewable marine energy (e.g. offshore wind farms; wave and tidal energy), sustainable fisheries and aquaculture and maritime transport solutions (e.g. reducing emissions). There is already a diverse range of investors and approaches. For example, venture capital firms and other early-stage investors are especially active in circular economy solutions; in the fixed-income space, blue bonds are funding sustainable ocean economy projects (note blue carbon and marine biodiversity-related credits); countries are using their natural assets to refinance themselves at better conditions with Debt for Nature Swaps. 

 

Risks

Shifting regulations and policies can impact implementation and profitability of investments. Geopolitical tensions can result in delayed implementation of international agreements. Natural disasters, climate change effects, or unexpected environmental shifts can affect the stability of fisheries, aquaculture, and other related sectors. Over-exploitation of marine resources can lead to ecological imbalances, declining biodiversity, and impact the viability of investment. Companies in nascent blue economy sectors are potentially highly leveraged and sensitive to interest rate changes. 

Infrastructure

 

What

This can include economic, social, environmental and digital infrastructure. Examples are energy infrastructure (production, transmission, distribution, or storage), communication infrastructure (e.g. telecommunications, satellite technology) and public utilities focused on core service provision (e.g. water sanitation) or providing or maintaining transport facilities (e.g. roads, bridges, airports, and ports).

 

Why

Infrastructure investment can stimulate growth, both directly and through long-term enhancement of a nation‘s productivity and competitiveness on a global scale. The United Nations estimates that 75% of the infrastructure needed in 2050 has yet to be built, the majority of which is in the emerging markets. Traditionally, infrastructure investments have offered the potential for stable, long-term returns, often supported by revenue streams from tolls, fees, or public funding, making them attractive to investors seeking reliable and resilient assets in their portfolios. But with infrastructure in newer technologies (e.g. around the green transition), the investor focus may be on capital appreciation. 

 

How

The energy transition will require a rethink of the accompanying infrastructure, as localised hydrocarbons distribution is replaced by upgraded long-distance electrification transmission systems. Transportation infrastructure will also continue to evolve, for example via an expanded zero emission vehicle infrastructure (i.e. charging stations). Communication infrastructure must reliably handle increasing data volumes. Much infrastructure investment has been via private markets, but with some important exceptions (e.g. telecoms providers, where large publicly-listed firms dominate). Investors may need to take a more differentiated approach, both in terms of methods and expected returns.

 

Risks

As always, regulatory or policy changes, or political instability can impact infrastructure projects, leading to uncertainties around project timelines, funding, and overall profitability. Financing and funding challenges can be amplified by capital availability, interest rate fluctuations, or changes in credit conditions. Infrastructure investments are susceptible to broader economic downturns and market fluctuations, affecting demand for services, project financing, and the overall financial performance of infrastructure assets. Operational and construction risks are also important.

Healthcare and MedTech

 

What

Healthcare provides medical care to an individual or community; MedTech provides the equipment and tools that make this possible. Effective future provision of healthcare will involve resolving issues including technology (e.g. digitisation, remote delivery), social fairness (in terms of access and costs as well as outcomes) and also workforce skills and retention – around 65 million people are estimated to work in healthcare worldwide. Developments in many areas – e.g. vaccination – are rapid and disruptive. 

 

Why

The world’s population is growing and also getting older, with older people usually spending more on medical services. Economic growth, through raising incomes, is also making more medical services available to growing numbers of people, particularly in the emerging markets. Technology continues to improve and open up new ways to deliver care, for example via artificial intelligence (AI) and its uses in telemedicine and remote monitoring as well as back-office functions (e.g. billing). AI is also already rapidly speeding up development of new chemical compounds and drugs.

 

How

Multiple investment opportunities exist across the industry, across the full spectrum from large and established companies (e.g. in pharmaceuticals) to much smaller companies. Investments can be done through individual securities, or through a wide range of existing thematic ETFs covering different aspects of the Healthcare and MedTech sectors. Private market opportunities exist in both established and emerging sub-sectors.

 

Risks

Costs will remain an issue, particularly for governments still burdened with higher levels of debt after the coronavirus pandemic. Government efforts to manage costs (both in public and private healthcare systems) are just one component of a very complex regulatory environment. Much of the sector is dependent on technological change which may be unpredictable. Drug development and repurposing are also inherently unpredictable. Labour shortages could hinder care provision.

Consumption megatrends (new theme)

 

What

This opens up our previous Millennials and Gen Z theme for a broader looker at consumption patterns globally – driven not just by generational shifts but also by other demographic factors, regional and national growth patterns and other drivers of consumer behaviour

 

Why

The purchasing habits of individual generational or income groups will have an impact not only on sectors and firms, but also on economic policy more broadly. Consumption trends do not just involve changed prioritisation of individual sectors (e.g. luxury goods as incomes rise) but also shifts in ownership patterns and methods of access to goods and services (e.g. rental vs. ownership). The rise of new consumer groups may also put new demands on how companies behave – and not just in ways related to sustainability and social purpose. 

 

How

Rising incomes have already had an obvious impact on the global personal luxury goods market with growth here largely driven by Asia and the U.S. Further future increases in the number of people with middle and high incomes are expected around the world. An ageing population may also boost some areas of luxury consumption. But we should also pay attention to changing demand and preferences in other income and age groups around areas such as social media and entertainment, health and fitness, clothing and clothing accessories, food and drink, travel and leisure, housing and household goods, and financial services.

 

Risks

Rising incomes depend on continued economic growth and this will not be linear. Short term policy-induced hits to consumption are possible, with intergenerational or other wealth inequalities among potential long-term political stresses.

Artificial Intelligence

 

What

Artificial Intelligence (AI) involves the transformation of raw data into a format suitable for further analysis (data processing), the extraction of insights via advanced algorithms and machine learning techniques (data analysis) and then application of these insights to practical solutions (data utilization). These include using AI for decision-making, automating tasks, improving user experiences, through intelligent systems that adapt and learn from new data.

 

Why

The accelerating digitisation of many industries needs AI to manage and utilise massive data sets. Significant advances in computing power and algorithm development are underpinning growth here. AI is also encouraging a growing demand from consumers and businesses for personalised experiences and automated solutions, with AI integrated into a growing range of products and services.

 

How

Investment can be done in industries driving AI innovation (e.g. in software, semiconductors, technology hardware, storage & peripherals, communications services, interactive media & IT services) or companies specialising in advanced AI applications (e.g. around deep learning, natural language processing (NLP), image recognition, speech recognition and chatbots, cloud computing, and big data analytics). Megacap stocks with significant access to large data sets and advanced data analytics capabilities may be attractive. 

 

Risks

Significant ethical and privacy issues arise from AI‘s ability to process and analyse data. This may be personal and sensitive and its correct interpretation is essential. Regulatory frameworks are struggling to address these and other issues, meaning that companies developing or using AI must comply with a changing and unpredictable regulatory landscape, particularly in areas such as data protection, transparency of algorithms and accountability. Over-dependence on AI for various tasks and decision-making processes could lead to vulnerabilities in critical systems if it malfunctions. AI use also poses the risk of significant job displacement in many industries, adding to associated social and economic challenges.

Digitisation (new theme)

 

What

The three layers of the digitisation universe are data generation, data storage and data processing. Data generation can happen through various digital interactions, sensors and online activities. Data storage needs to be robust and scalable for the accumulation of this generated data – e.g. through the development and expansion of data centres, cloud storage solutions and other forms of digital repositories. Data processing of this data then extracts meaningful insights, drive decision-making and enable advanced technologies such as artificial intelligence (see our separate theme). 

 

Why

A key driver of digitisation is the increase in the generation of digital data by individuals and businesses (and devices themselves). Digitisation needs to move up to a new level to effectively manage, store and process this data. Rapid advances in technology – hardware, software and networking – also require robust digital infrastructures. The shift towards data-driven decision-making in many sectors is also driving a need to rapid and reliable analysis of large volumes of data as businesses make informed decisions, innovate and remain competitive in a data-centric world.

How

Invest in pioneering companies and industries across multiple sectors which provide the platforms and tools that are essential to the advancement of technologies such as internet of things (IoT), social media, digital payments, e-commerce, cloud computing and blockchain/P2P systems. Megacap stocks (i.e. those of the very largest IT firms) may also appeal, given that they often have the scale, resources and data to innovate and potentially maintain competitive advantage in a rapidly evolving digital landscape.

 

Risks

Digitisation’s reliance on advanced technological infrastructure can also be a vulnerability, not just in the short term (e.g. server downtime or network failures) but also through technological obsolescence, requiring continuous significant investment. The rapid pace of digital transformation also often outpaces regulatory framework, meaning an uncertain and evolving regulatory landscape (e.g. on data privacy, cross-border data transfers, and intellectual property rights). The consequences of non-compliance can be significant. The risk of cyber-attacks and data breaches increases as digitisation increases – we deal with this in a separate cybersecurity theme.

How

Invest in pioneering companies and industries across multiple sectors which provide the platforms and tools that are essential to the advancement of technologies such as internet of things (IoT), social media, digital payments, e-commerce, cloud computing and blockchain/P2P systems. Megacap stocks (i.e. those of the very largest IT firms) may also appeal, given that they often have the scale, resources and data to innovate and potentially maintain competitive advantage in a rapidly evolving digital landscape.

 

Risks

Digitisation’s reliance on advanced technological infrastructure can also be a vulnerability, not just in the short term (e.g. server downtime or network failures) but also through technological obsolescence, requiring continuous significant investment. The rapid pace of digital transformation also often outpaces regulatory framework, meaning an uncertain and evolving regulatory landscape (e.g. on data privacy, cross-border data transfers, and intellectual property rights). The consequences of non-compliance can be significant. The risk of cyber-attacks and data breaches increases as digitisation increases – we deal with this in a separate cybersecurity theme.

Cyber Security

 

What

Cybersecurity involves identifying digital assets, potential threats and vulnerabilities; implementing safeguards to prevent unauthorised access and cyber-attacks, such as security protocols, firewalls and antivirus software; detecting and responding quickly to cybersecurity incidents and, finally, recovering from them – through restoring data, repairing systems and implementing measures to prevent future incidents. Cyber security market revenue is estimated at USD166bn in 2023.5

 

Why

The need for cybersecurity is increasing as business operations become increasingly digital and systems become more connected globally. The number and sophistication of cyber threats, including malware, ransomware and phishing attacks, also continues to grow with organizations facing a constantly evolving range of threats to sensitive data and critical infrastructure. The importance of cybersecurity is underscored by the increasing focus on data privacy and the implementation of increased regulatory standards around this. 

 

How

Investments can be made in companies across a range of industries (e.g. software, professional services and communications equipment) that are key to the development of comprehensive cybersecurity solutions. Investment can also be made in companies that provide specialised cybersecurity services and products (e.g. hardware, software, network security management services, data integrity assurance, rapid response and remediation). Small and mediumsized enterprises can often drive innovation via specialized protection

 

Risks

Rapid evolution of security threats makes it difficult for organisations and cyber security providers to keep their security measures up to date and effective, creating potential vulnerabilities in systems and data. Many organisations, especially smaller ones, may also face resource and skill constraints in cybersecurity implementation in terms of recruiting skilled cyber security professionals and allocating sufficient budget for advanced security technologies. Organizations and cyber security providers must also navigate a complex and changing regulatory environment, with noncompliance having significant legal and financial consequences. 

Smart Mobility

 

What

One smart mobility component is the transition to vehicle electrification to reduce carbon emissions and dependence on fossil fuels. This will also involve advancing battery technology and investing in electric vehicle (EV) charging infrastructure. Another issue is vehicle automation and autonomous driving technologies – upgrading navigation, safety and vehicle management technologies, to change the way vehicles interact with each other and the environment. Smart mobility will also involve modal shifts in transport, both in terms of ownership (vs. shared systems) and “mobility as service” platforms, in addition to better provision of public transport.

 

Why

Transport needs to be aligned with environmental sustainability goals, and not just as regards emission reduction targets. Technological advances are also supporting consumer expectations of more efficient, safer and personalised transport experiences. The global population is increasingly urbanised, focusing attention on more efficient, space-saving and accessible transport systems. 

 

How

Investment is possible in a broad range of relevant industries, such as automobiles, semiconductors, electronic equipment, instruments and components, and machinery. But look out also for opportunities in linked areas (e.g. energy storage technologies, battery metals producers, and companies offering innovative transportation methods). Some companies may offer a broad exposure to the changing mobility value chain, from physical components to services related to new mobility solutions such as car sharing and ride-hailing platforms.

 

Risks

Many technology and infrastructure challenges need to be overcome (e.g. around battery charging and vehicle automation communications). Smart mobility operates in a dynamic and multi-dimensional regulatory environment (e.g. on vehicle emissions, the use of autonomous vehicles and shared mobility services). Uncertainty or policy reversals could affect investment decisions and market growth. Consumer acceptance and behavioural change are also critical, with the growth and profitability of companies in the sector affected by slow adoption rates or resistance to new mobility solutions.

References

  1. Global Material Resources Outlook to 2060: Economic Drivers and Environmental Consequences | en | OECD
  2. UN FAO I Sustainable Food systems - Concept and Framework
  3. Announcement on the Initiative on the True Value of Food - SC FSS2021 (sc-fss2021.org)
  4. Global greenhouse gas emissions from animal-based foods are twice those of plant-based foods | Nature Food
  5. Cybersecurity - Worldwide | Statista Market Forecast 

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