Investment Solutions identifies five key megatrends that will define our future

Investment Solutions has released research covering what it considers to be the five key megatrends that will have the most significant impact on economies and markets, both directly and indirectly.

Glenn Silverman, chief investment officer at Investment Solutions, states that forecasting the future is a dangerous thing to do. As Niels Bohr so profoundly and humorously stated “Prediction is very difficult, especially if it’s about the future”. “It’s hard enough to identify the correct key Megatrends, it’s even harder to predict the market impact and timing correctly, so determining the future is like looking into a murky crystal ball, with all the attendant caveats” says Silverman.

Nevertheless, he continues, “Identifying future trends and considering the possible impact of that on investors, markets and our portfolios, is an important element of what we do at Investment Solutions.”

In compiling the Investment Solutions “big five”, as he calls them, Silverman considered a number of sources including former chairman and CEO of Anglo American, Clem Sunter and scenario strategist, Chantell Ilbury’s “Mind of a fox”, as well as local futurist, Daniel Silke’s “Tracking the Future.” To ensure adequate focus was given to the risk side of the equation, Silverman also incorporated themes from the World Economic Forum’s Global Risks 2013 report.

As against trying to call the short term picture that so many commentators seem fixated on, Silverman outlines and discusses the following five key themes that he believes are most likely to play out over a five, ten and twenty year time-frame:

1. Finite earth - Earth is a finite planet and hence we need to work within the constraints of the environment. Silverman identifies fossil fuels as a particular problem as the cost of extraction has risen and is likely to continue rising, quite dramatically. Brad - can we put a figure/statistic here to support this statement?

2. Demographics - The implications of a large and growing global population, along with a rapidly aging populations, combined with declining fertility rates in many parts of the world, creates an interesting cocktail of possible outcomes and implications. In many parts of the world, rapidly aging populations, combined with high youth unemployment rates, means that the ‘tax pyramid’ is inverted ie. a smaller and smaller tax base, needing to cover a large and growing set of welfare promises. “This spells trouble,” says Silverman, “slower growth, increased social tension, delayed retirements, welfare promises that governments cannot meet, and more.”

3. Technology - Silverman says some argue that increasing human intelligence is the key underlying driver of long term growth. With technology and innovation continuing to explode apace, and Moore’s Law still intact, this would be the most bullish of the Megatrends. He does caution, however, that technology is a “double-edged” sword, which has some negative implications.

4. Shifts of power – There is a clear shift of power from West to the East. The likes of India and China are returning to their more dominant positions that they held some 2,000 years ago. The Emerging markets, including Africa, are on the rise, and set to continue.

5. Financial repression – Silverman covers this theme in detail, with many areas of risk and concern identified. As such, a focus on “return OF your capital, will remain as, or more, important than the return ON your capital”.

Discussing Financial Repression, Silverman highlights some of the possible implications, which include increasing volatility (‘boom & busts’), distorted capital markets, a low return environment and the lack of “safe havens”.

“Debt, in most parts of the West, but even the likes of Japan & China, remains an overarching concern that continues to challenge the likely long-term sustainability of the current markets,” cautions Silverman, who recommends that investors continue to focus on the three themes of growth, yield and quality. Citing research from Bank of America Merrill Lynch, Silverman says global GDP has risen by $1 trillion since the end of the Global Financial Crisis; yet global equity market caps have risen by $12 trillion over the same period. “Whilst this can still go further, this increased gearing of the financial economy to the real economy, remains a key concern,” says Silverman. “With the likes of Quantitative Easing ‘alive and well’ and central bankers committed to providing forward guidance, one is reminded of a quote by Charles Prince III (former Citigroup chief executive) who in July 2007 infamously said, "as long as the music is playing, you’ve got to get up and dance..."

The ability to stand strong and take a long term view is increasingly difficult, but likely to richly reward those who can. Silverman hopes that by identifying and communicating his five Megatrends, and considering the implications of such, investors will be enabled and assisted to do just that!