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Written by: Adrian Lowcock
05/11/2020
2020 can be summed up in a lot of ways but from an investor perspective, this quote from Bill Gates fits quite nicely: “We overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10 years.”

The disruption caused by Covid has set markets all over the place, plummeting in March only for some markets, such as the US, to rally strongly in the summer. Behind the headline index values, the share prices of companies are very different to how they were at the start of the year.

Disruption and turmoil are clearly not good for the economy in the short-term as companies go bankrupt and people lose their jobs and incomes. However, longer term this disruption can be a driving force for change and help to improve economic conditions as well as standards of living.

The Covid crisis has meant many companies that were badly run, no longer economically viable or are in declining industries have left the market. The better run companies are able to take market share and improve their profitability longer term, while the change in consumer behaviours and people’s priorities creates its own opportunities. Here are five themes that could stand to benefit over the next decade.

Technology

Technology stocks have driven the markets for the last 10 years, but the theme looks set to be a multi-decade one.

Cloud computing represents about 30% of a $7trn market and software will increasingly feature in devices. Scale is important and it is hard for companies to break into the market, with Amazon, Microsoft and Alphabet the leaders.

Streaming platforms are expected to continue to grow but some areas are very competitive. AI and Machine Learning all offer opportunities for companies and investors. This is core to driving the advertising ecosystem and drives social and commercial experiences we have.

It is also fundamental to mega themes such as autonomous vehicles. Cyber security is already essential for so many businesses, but is growing quickly as poor security can damage business reputation and result in huge fines.

Biotechnology & drug development

The healthcare industry, and in particular, the pharmaceutical giants have struggled for the past two decades to produce new blockbuster drugs. But the need, value and importance to have quick and successful treatments have never been clearer.

There is the potential for major breakthroughs in drug discovery as IT and data analytics improve productivity in therapy, and provide more targeted treatment.

China is a growing market for drug development. It has a large cancer patient issue and one in two are in drug trials compared to one in 20 in the US. This also highlights that a lot of data is being collected through apps and monitoring tools.

ESG

Ethics is likely to remain a core theme. Wildfires and pandemics in 2020 have demonstrated how such factors can impact markets, economies and peoples wealth.  In the UK and EU the governments have committed to using their fiscal responses to invest in an environmental and green recovery. Companies had already begun to realize the importance of ESG policies to their businesses. Those that adopt them have more sustainable businesses which are better placed to survive any shocks. A greater focus on the long term, strong company financials and environmental impact is likely to also help shareholder returns in the long run.

Big are getting bigger

Market share of the largest companies is growing such as with online advertising. Scale advantages are now global whereas they were previously regional and many of these are fixed cost businesses. The marginal cost of established businesses getting one new customer is almost zero but for new players it could cost billions. The feedback loop of data also helps reinforce the business model and improve services which gives the established players a significant advantage.

Inflation

The amount of Quantitative Easing being pumped into the system has been colossus, far in excess of the support provided during the global financial crisis. Then inflation didn’t materialise and of course, there are no guarantees it will this time.

However the situations are very different. The money transmission mechanism isn’t broken this time round so any QE has gone into the markets. In addition unlike 2009, governments have recognised the need to invest, for fiscal stimulus, to generate economic activity and growth. This should help drive job creation and then inflation.

Adrian Lowcock is head of personal investing at Willis Owen

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