The Big Five Investment Themes

Mega investment trends and the forces of change in the next decade.

Successful investing requires anticipating change and its implications. But the longer the investment time horizon, the harder it becomes to visualize an asset's likely ultimate performance. In this piece, we examine the main drivers of long-term change and present what we regard as the five key longer-term investment themes. These themes highlight some of the likely beneficiaries of these secular changes. They also point to other potential investments for which these same forces can be headwinds that undermine their returns and even drive them to extinction. Understanding these differences, we believe, is critical to long-term investment success in a rapidly changing world.

The Rebalancing of Growth and the Main Drivers of Long-Term Change

We appear to be at the beginning of a long-term growth phase for the U.S. economy driven in large part by the rebalancing of global growth from the developed to the developing world. Not surprisingly, this broad-based shift is complex and often confusing. Demographic changes, the movement of capital around the world, and the related political pressures are all creating imbalances: a public sector in recession while the private sector is driving the recovery; the healing U.S. consumer; the aging of Japan; still-high, if falling, unemployment in the U.S.; the U.S. deficit and the long-term entitlements issue; the breakdown and rebuild of the housing market; Europe's struggling financial system and austerity programs; China's transformation from an investment and export-based economy to a domestically led economy; and the depletion of natural resources shifting to the buildup of natural resources and the prospect of energy independence in the U.S.

These imbalances are all part of the changing nature of global growth, and they inevitably create some interim havoc with equity markets, interest rates, currencies and economies. But these same imbalances also create areas of growth and investment opportunity. While imbalances have grown in the public sector, the private-sector growth mix has also changed, and therefore traditional models, theories, and outcomes from prior cycles do not necessarily apply as much as the general consensus believes.

With so much of the world in flux, with so many powerful and overlapping trends, where and how do we find appropriate investments? As investors, how can we best participate in these powerful changes? Rather than adopting a more traditional and narrow focus on sectors, industries and individual companies, we focus first on the long-term growth drivers, the macro forces at play across industries and geographies that are going to take us into the next secular growth cycle. To that end, we have identified five long-term investment themes: the accelerating change in technology and economic innovation; the rise of the emerging market middle-class consumer; the energy and natural resource revolution; the great global income convergence and demographic transformation; and the evolution of global real estate.

OUR INVESTMENT THEMES

The Accelerating Change in Technology and Economic Innovation

While all five macro themes will impact and influence each other, technological change is arguably the most powerful and pervasive. After accelerating relatively slowly over the past few centuries, the pace of technological change has been increasing rapidly in recent decades, to the extent that it will soon strain human capacity to think even a decade ahead. The implication is a much faster-changing, harder-to-comprehend future. This means a much murkier outlook over investment horizons and a much faster pace of creative destruction that can quickly turn a high-flying equity market winner into an obsolete investment dog. In other words, while rapid technological change is likely to be a positive force for global growth, it will also create turbulence — both positive and negative — for investors. We see technological change having a significant impact on a wide range of areas in the global economy in the coming years. With a primary focus on manufacturing, we look at some of the major emerging themes in technology and innovation.

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