We cherish rational and independent analysis.

Mega-trends Push Forward Unabated

To say that 2020 was rich with excitement and surprise is a bit of an understatement; it will go down in history as one of those years that felt like a decades-worth of action - socially, economically, and financially. And yet, there were a few developments of consequence that slipped under the radar as the more spectacular and noisy events of the year, like COVID, the US presidential election, and Brexit took up all the bandwidth. I’d like to share three trends – mostly with illustrations – that I consider long-term “mega-trends” that did not start with the pandemic but were accelerated by it.

Over the past decade, a number of mega-trends have gained momentum, changing the fabric of our lives and our societies in far-reaching ways. While much of the spotlight in 2020 was focused on the media’s favored spectacles, three mega-trends have moved ahead unabated and have even picked up steam during, and due to, the pandemic:

  1. Digitalization and technological innovation

  2. The rise of the East

  3. Big government, bigger debts

I consider these three mega-trends to be amongst the biggest and, for us investors, the most noteworthy driving forces to consider as we bravely venture forward into this young decade.

The acceleration of digitalization and technological innovation

We have all experienced first-hand how our use of new remote communications and co-working tools picked up during the lockdown periods. From Zoom to Teams and Slack, we all learned to more effectively and efficiently employ these new technologies. However, these tools are only one of the many areas in which the fourth industrial revolution continues to advance at an ever-increasing pace.

We also learned how much power social media platforms have in influencing public opinion, sensationalizing developments, and feeding our worst instincts with a focus on binary arguments and click-bait driven news. While man has never had more sources of information and the means to express their opinions, the current media model tends to focus on the sensational over the newsworthy. It acts as a divisive force that stirs and spreads controversy, rather than the fountain of basic common understanding of important developments. Mental bandwidth overload from an increasingly noisy and partisan ‘public square’ leads many away from independent thought and common sense, as they either retreat into self-censorship or jump into the melee of digital conflict, abandoning all appreciation for the basic values most people share and focusing only on what divides us. This is not a recipe for a constructive dialogue on the many challenges we face, and for some, it has become a lucrative business model. We need to do better.

However, technological progress has also underpinned the evolution of our economies and societies for centuries and most of the innovation unfolding before us is amazing and could have a very positive impact. Away from all the ‘noise’, real leaps are underway. According to research by Quant IP, the following achievements quietly unfolded while the world was focused on the ‘click-bait’-driven doom and gloom of 2020:

“Elon Musk's space company Space X has made a total of 26 operational rocket launches in 2020, and the rocket has landed 23 times. Already 900 small satellites of the program Starlink are in orbit, which will offer fast internet for the most remote areas of the world. A machine learning algorithm predicted the folding of proteins with a hit rate of 90 percent. This is likely to greatly accelerate the development of drugs for many diseases, including cancer. US company QuantumScape has released test data on its solid battery, which could be a breakthrough for battery-powered cars. In 3 years, an incombustible battery is to go into mass production, which can be charged in 15 minutes to 80 percent, allows about 50 percent more range and still has 80 percent capacity after 800 charging cycles.”

These examples stand testimony to the rapid advances of technology, and the fast arrival of a very different world than the one we have been used to.

Some of all this is exciting. Some of it is daunting. Whichever way you look at it, however, rapid and deep technological change is here…and here to stay. As we shift from the old economy to a new economic model, value has moved from the tangible to the intangible, or a combination thereof. The ascent of tech firms since the 1990s has brought about a massive change in the asset mix of publicly traded companies, with the share of intangibles currently at unprecedented levels. The following infographic charts the growth of intangible assets in the S&P 500 over time, providing a glimpse at how prevalent technology has become in our lives. Moreover, as shown then in the second infographic, a handful of tech companies make up the vast majority of the value of the Nasdaq index.

The Soaring Value of Intangible Assets in the S&P 500

Source: Visual Capitalist

While technological innovation has always proven to be the driver of paradigm change and often a productive and positive challenge to the status quo, the ‘winners’ of the last decade have been tech businesses built upon the powerful foundation of the internet and the network effect. The network effect tends to lead to near monopolies in each sector, as the early mover that manages to scale can establish a level of control at a rapid pace unseen before in history. This has brought great consumer experiences and productivity to business, but it has also created a handful of very powerful entities with little oversight and with control over the ‘oil’ of the digital economy – all our data. The illustrations that follow highlights these trends.

The Nasdaq’s value is dominated by a handful of tech companies (in US dollars)

Source: The BBC

In recent years, much has been said about China and the need for the US and the West to decouple from it. However, a look behind the headlines over the last 2-3 decades clearly shows that China and Asia have long been working to establish independence from Western finance and technology, and to harness global trade as a means of bettering the lives for their people and growing their economies and position in the world. I did a 100-page plus report on these dynamics with some of my distinguished research partners a few years back, which I am happy to share with people seeking a deeper dive.

Here, we will just briefly look at some of the key findings via a few illustrations. The first illustration that follows clearly shows the shifting power of global manufacturing and the transportation infrastructure.

The shifting power of global manufacturing seen via the World's top shipping hubs over the last 15 years.

Source: Visual Capitalist

Here is a look at the changing dynamics over the long arch of history in market capitalizations of the continents. While it is not a perfect lens, it is instructive on the direction of financial power.

Market Capitalization Share by Continent