Rising sustainability awareness
A generation ago, the phrase ‘carbon footprint’ would have meant little to most of us. But today our lifestyle, consumption choices, and increasing awareness of sustainability – from what and how we eat to the modes of transport we use – are increasingly shaped by ecological considerations. Think about plant-based diets, electric or autonomous vehicles, and the energy transition to renewables. Protecting the environment is now a priority for consumers, companies, and governments as extreme temperatures are becoming part of our day-to-day lives.
This example illustrates trends that are reshaping our world over a long-time horizon – what we call ’megatrends’.
Reshaping the future
Megatrends are the disruptive socioeconomic, environmental and technological forces that shape our world and the future. The virtualisation of the economy, the rapid expansion of cities and the depletion of the Earth’s natural resources are just some of the structural trends transforming the way countries are governed, companies are run, and people live their lives.
Source: Pictet Asset Management, September 2023
The DNA of our thematic investing franchise
Because megatrends are so disruptive, they can be a crucial source of a company’s long-run revenue and earnings growth. That is why Pictet Asset Management has used megatrends as the basis for each of its thematic equity portfolios for over two decades. For a trend to qualify as an investible megatrend, it must possess the potential to exert a lasting impact on large parts of the global economy over a time horizon of at least a decade. It must also demonstrate that it can act as a catalyst for long-term growth and give rise to new business opportunities.
Pictet Asset Management has tackled this by constructing a megatrends framework in collaboration with experts at the Copenhagen Institute for Futures Studies (CIFS), a global research and advisory firm known for its expertise in the megatrends field. We also draw on the insights provided by its 13 Thematic Advisory Boards. These groups of distinguished industry practitioners, scientists and academics help us monitor megatrends and ensure the continued relevance of its investment themes and their investment opportunity sets.
Pictet Megatrend Framework: where themes converge
Building on a more than decade-long collaboration with the CIFS, Pictet Asset Management has developed an investible megatrends framework specifically designed to be applicable to thematic equity portfolios. It consists of 21 megatrends organised in six clusters.
Source: Pictet Asset Management, September 2023
The megatrend framework helps to define and monitor the themes that form part of its investment universe. Part of that process involves gauging the extent to which a particular megatrend is a long-term source of growth for each of its thematic equity strategies.
Themes underpinned by multiple megatrends tend to exhibit strong secular growth.
This analysis is conducted within our investment teams with, at times, the involvement of the CIFS and Pictet Asset Management’s Thematic Advisory Boards. Aggregated at the portfolio level, the assessments aim to identify the five to eight most important megatrends for each thematic investment strategy.
Viewed through this prism, for example, our global environmental theme, which invests in companies in clean energy and water, agriculture, forestry and other areas of the environmental value chain, is powered by eight of the megatrends within its framework: virtualisation & dematerialisation, environmental quality, climate change, resource scarcity, biodiversity & ecosystem services, urbanisation, economic growth and focus on health.
Another example is the robotics theme, which aims to capture opportunities in three main areas: industrial automation, robotic solutions and enabling technologies.
We can also identify themes which have a social tilt. The premium brands theme is one of the examples. It covers the companies that marry excellent premium quality goods and services with consumer aspirations, aiming to capitalise on the new ‘experiential luxury’ phenomenon.
Source: Pictet Asset Management, September 2023
After mapping the megatrends according to different themes, Pictet Asset Management's investment managers then track the evolution of each of the megatrends by monitoring selected data points and indicators. While this is not a high-frequency process—the relevant megatrend-related data is usually annual at best—it can serve as a basis for validating the long-term investment thesis for segments of the thematic portfolio, and over time, for making adjustments to the thematic universes.
By analysing and harnessing megatrends in this way, we believe we can better identify companies with the most promising long-term investment potential.
Achieving sustainability through thematic investing
As active managers, we believe we have a responsibility not only to our investors, but to society as a whole. Our intention is to contribute to positive societal and environmental outcomes.
We intend to minimise harm from all of our thematic strategies. As a result, we integrate environmental, social and governance (ESG) factors, and sustainability risks are taken into consideration when evaluating investment risks and opportunities. All our strategies exclude companies with significant exposure to controversial activities such as weapons, gambling and thermal coal extraction. We conduct engagement and exercise voting rights systematically as part of our active ownership responsibilities. Finally, as we believe transparency is key, we publish extensive sustainability and impact reports for every one of our thematic strategies on a yearly basis.
In addition, we aim to achieve a dual objective, with both a positive environmental and/or social impact alongside an attractive risk/return.
Appendix: deeper dive into individual megatrends
Megatrend cluster: Technology and science
- Virtualisation & dematerialisation
The trend towards replacing physical objects and analogue processes with digital equivalents has accelerated in recent years and will continue to affect a wide array of services. - AI & computing power
Harnessing the power of robotisation and automation with artificial intelligence will see economies benefit from enhanced performance but also face challenges in adapting the current workforce. - Greater interconnectedness
Increasing connectivity between people or objects means collapsing geographies and demand for greater reliability, speed and bandwidth. - Life sciences
Advancements in research and development surrounding living organisms will continue in various fields of biology including biotechnology, genomics and neuroscience. - New materials
The demand for high-quality and high-performance materials with affordable and environmentally friendly attributes is leading to major innovation.
Megatrend cluster: Environment
- Environmental quality
Increasing levels of pollution mean adverse impacts on health and wellbeing that come at an economic cost. Environmental improvement and protection are growing priorities. - Climate change
The impact of rising temperatures and sea levels puts pressure on policymakers, individuals and businesses to limit greenhouse gas emissions and become resilient. - Resource scarcity
Demand for energy, water and raw materials is placing stress on resources and changing consumer behaviour, business decisions and policy choices. - Biodiversity & ecosystem services
The fast pace of biodiversity loss has been called the “sixth mass extinction”. The costs and opportunities related to ecosystem services and natural capital are becoming better understood.
Megatrend cluster: Global governance
- Geopolitical tensions
Major geopolitical rivalries are expected to increase as China ascends to superpower status while the US cedes some influence. - (De)globalisation
Globalisation is no longer uniform. It continues in culture and information but remains unclear in investment and travel. However, social and economic interdependence still grows.
Megatrend cluster: Demography
- Urbanisation
Employment opportunities, social benefits and services lead to productivity differentials between rural and urban areas, especially in the developing world.
- Generational shift
Societal shifts are influenced by factors including cohort size, technological changes and times of war. They also affect how different age groups interact with the global economy.
- Population growth & migration
Global population has quadrupled in 100 years; Europe and parts of Asia declined as the bulk of the growth came in Africa. We believe that this will continue to influence future migration.
Megatrend cluster: Economy
- Specialisation & complexity
Economies are becoming more complex, driven by a diversifying of activities and specialisation, often accompanied by a need for new services. - Commercialisation
Value is increasingly attached to parts of society that were deemed implicit or hidden. This is a process explained by commercialisation. - Service economy
A number of countries have shifted away from agriculture and manufacturing towards the service industry, significantly altering the global economy. - Economic growth
Driven by increasing productivity, this trend is characterised by a tendency towards a growing income per capita. It is often joined by subtrends, such as the convergence of emerging markets and faster income growth for women.
Megatrend cluster: Society
- Individualisation & empowerment
Societies are focusing more on the individual and their desires and less on the collective. Subtrends within this include a fading trust in institutions and a tendency towards customisation. - Growing disparities
Increases in economic and social inequality will likely drive consumer and political behaviour, which could contribute to growth differentials between various market segments. - Focus on health
Interest in healthy lifestyles, preventive health, mental health and the primacy of public health is growing in most facets of society.
