Big trends, megatrends, secular trends - call them what you like, but understanding them is essential if you want to generate outsize returns. If you can identify the industries that will benefit from big, long-term trends in business and the economy, you’ll be a lot closer to picking the best companies to invest in. These will be the companies that are able to compound their earnings at above-average rates for 10 to 20 years.
In this series of articles, we are going to explore some of the emerging and established trends that investors should know about.
| Topic | |
| Part 1 | Healthcare Technology |
| Part 2 | Demographic and Geopolitical Trends |
| Part 3 | Energy and Climate Change |
| Part 4 | Artificial Intelligence, Data and Cloud Infrastructure |
| Part 5 | Cybersecurity - How Your Data Is Protected |
| Part 6 | Automation - Doing More, With Less |
| Part 7 | Tech Innovations In Advertising, Education and Agriculture |
| Part 8 | 3D Printing |
| Part 9 | The Internet of Things |
| Part 10 | Gaming, Augmented Reality and Virtual Reality |
| Part 11 | Nanotechnology |
| More coming soon! |
Secular vs Cyclical Trends
Cyclical trends typically last from one to five years and are closely tied to the business cycle and interest rates. Secular trends can last for multiple decades and are caused by bigger forces. Usually they are caused by new technologies or structural imbalances related to demographics, the environment, or prior policy decisions. Policy makers have some control over cyclical trends, but very little control over secular trends. In other words, once they start they tend to continue until they have run their course.
These are just a few of the secular trends that have played out over the last few decades:
Economic and demographic:
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From the early 1980s until 2021 productivity gains from technology and globalization led to falling inflation, which led to structurally low interest rates - even before quantitative easing came along.
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Quantitative easing created a new ‘free money’ environment, which forced investors to invest in stocks if they wanted to generate any kind of return.
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Urbanization caused cities to grow while small towns got smaller.
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Economic development in China and Southeast Asia created a new middle class with discretionary income.
Technology and finance:
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Computers become cheaper and more powerful, allowing the software and internet industry to flourish.
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Broadband internet became widespread in most countries.
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Mobile phones and then smartphones became ubiquitous.
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Social media, streaming video, and digital advertising upended the media industry.
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Cloud computing enabled software companies to pivot to a subscription model with recurring revenue.
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The emergence of online trading and ETFs began the process of democratizing finance and disrupted the mutual fund industry.
These trends caused major changes to the global economy and the investment landscape. Many of these trends have been closely connected and reinforced one another. Each new phase in one trend enables a new phase in other trends.
The trend in smartphone sales (below) paved the way for new industries but was only possible because of several other trends.
Worldwide Smartphone Sales 2007 to 2021 - Image Credit: Statista
From an investors point of view, secular trends are interesting for a few reasons:
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They last a lot longer than cyclical trends, giving companies time to establish themselves and then compound earnings for years.
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Companies need capital to grow, which creates the opportunity for investors.
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R&D investment and competition leads to lower prices for consumers, which increases the addressable market size. As we mentioned last week t he first mobile phone was priced at $3,995 while a new phone in India is selling for $12.
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Companies that participate in major trends are often perfectly positioned to pivot into new markets or sell new goods and services to their existing market. Nvidia , Alphabet and Apple spring to mind.
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Secular trends tie together nicely with narrative investing. You can build a narrative around a company and the industry it operates in and then continually update that narrative. You can identify the catalysts you want to see before you’ll invest, or add to your position, or remain invested.
The Next Big Trends
Looking forward, we’ll split the big trends into the following categories:
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Life Sciences
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Medical Devices
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Telehealth
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Software
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Aging populations
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Growing Middle class
- Infrastructure Investment
- To be covered:
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Urbanization and de-urbanization
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Remote work and the gig economy
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Part 3: Energy and Climate Change
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Electrification and EVs
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Renewable energy generation
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Battery storage
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- To be covered:
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Natural gas
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Nuclear energy
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Technology
- To be covered:
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IoT
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Other: EdTech, Metaverse
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Money and Finance
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Fintech
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Digital money
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Crypto
Geopolitics and the Economy
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International Relations and Deglobalization
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Security: Technology and IP, food, resources, data
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Infrastructure investment
Other
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Commodities
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Space
Convergence
There’s a lot of overlap between these trends and themes. The convergence of these themes is likely to increase, with all roads seemingly leading to artificial intelligence. But it’s not just AI that overlaps repeatedly: data, security, semiconductors, and energy all seem to intersect with multiple trends.
Convergence is important because it means a company that establishes itself in one industry, can suddenly find itself in a position to use its expertise in a different market. Nvidia started out developing GPUs for the gaming industry and ended up being the key supplier to at least five other industries.
Happening or hype?
Some trends are really underway, others are emerging experiments, and others are more hype than anything else. Electric vehicles and renewable energy are now well-established trends. Most of the cryptocurrency landscape and the metaverse are more experimental or in some cases all hype.
Rising stock prices and media noise isn’t a good indication of a real trend. To work out how real a trend is, look at how it's changing an industry and how incumbents are reacting.
Investing very early in an emerging trend means more potential upside and more risk, so it makes sense to size your positions accordingly. Just remember that diversification across lots of small positions within one trend won’t help you if the whole trend turns out to be a dud.
New secular trends often start with one or two bubbles. Looking at how insiders and venture capital investors behave after a bubble bursts.
Above all else, learn as much about a new industry, technology or emerging theme as you can from various points of view. Consider it from the point of view of customers, incumbents, insiders, early investors, and competitors. Try to identify the catalysts that will prove the trend has real momentum.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
Simply Wall St analyst Richard Bowman and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
Richard Bowman
Richard is an analyst, writer and investor based in Cape Town, South Africa. He has written for several online investment publications and continues to do so. Richard is fascinated by economics, financial markets and behavioral finance. He is also passionate about tools and content that make investing accessible to everyone.