Megatrends: Thinking long-term in the downturn

Key takeaways

• The world will be different following COVID-19, which brings megatrends into focus as they offer access to long-term, structural forces vs. traditional (and cyclical) broad market or sector indexes
• Market dislocations present compelling entry points into megatrends that can result in outperformance as we saw with past megatrends such as e-commerce following the global financial crisis
• The megatrends we see most impacted by the COVID-19 pandemic include exponential technology, robotics, AI, cybersecurity, genomics and immunology
• Investors can access long-term themes, that may be propelled forward by coronavirus, using megatrend ETFs that are designed to capture these structural trends

Introduction

Worries about an economic downturn in the first quarter of 2020 triggered equity declines but presented opportunities to invest in megatrends: powerful, long-term economic and societal changes — especially where megatrends play a prominent role in crisis response as with exponential technologies, robotics, AI, cybersecurity, genomics and immunology.

Megatrends offer investors tangible ways to own themes that are transforming the world. On a historical basis, past megatrends, such as e-commerce, have therefore outperformed coming out of economic slowdowns.

Dislocations create investment opportunities

The five megatrends and related themes are:

1. Tech breakthrough: exponential technologies, robotics, AI, cybersecurity
2. Demographics & social change: genomics, immunology
3. Rapid urbanization: infrastructure
4. Climate change: clean energy, self-driving and electric vehicles
5. Emerging global wealth: rising EM middle class (e.g., China, India)

Each theme is transforming society and global economies over the long term. They are not fads; they are not cyclical or timing-focused, as traditional stock sectors can be. Megatrends are structural, meaning that they play out over decades and through market cycles.

Take genomics and immunology. By 2035, more people in the U.S. will be over 65 than under 18 for the first time, a trend driving massive R&D for medical breakthroughs¹. For example, the cost of mapping a human genome has dropped from billions of dollars to less than $1,000 in a short period of time²; and the U.S. Food and Drug Administration recently approved 32 immunotherapy treatments for renal, brain and skin cancers³.

And it should be no surprise that genomics and immunology were at the forefront of coronavirus response. The former helped researchers understand the disease’s RNA, while the latter field helped to incubate treatments that work directly with our immune systems. Companies in both areas have worked to produce vaccines, treatments and the data that enable them. Broad healthcare sector funds may have some exposure to genomics and immunology, but a megatrend benchmark like the NYSE FactSet Genomics and Immunology Index provides precise, targeted exposure specifically to this theme.

Exponential technologies such as digital interconnectivity are increasingly integral to daily life, and the number of internet-connected devices is expected to rise from roughly 30 billion today to 75 billion by 2025⁴. Society stayed connected through the pandemic because of big data and networking technologies. The race is on to move faster, with 5G. At the same time, AI helped map the outbreak while 3D printers fabricated critical supplies.

People need to feel safe in an increasingly digital world, which is a reason the NYSE FactSet Global Cybersecurity Index has outperformed the MSCI ACWI Index by over 11 percentage points in the first quarter of 2020⁵. Megatrend ETFs offer direct access to these themes by investing in companies thematically across sectors, compared with the traditional approach of investing in one sector, such as technology or industrials.

Think about structural growth vs. cyclical timing

Depressed valuations for megatrend indexes in the first quarter of 2020 offered a compelling entry point. On a price-to-earnings basis (P/E ratios), valuations declined as much as 30% between Feb. 19 and March 26, 2020.

P/E ratios were down as much as 30% vs. February 19, 2020 levels

Source: Bloomberg as of March 26, 2020 (indexes used: NYSE FactSet US Tech Breakthrough Index, NYSE FactSet Global Robotics and AI Index, NYSE FactSet Global Cybersecurity Index, S&P Global Infrastructure Index, NYSE FactSet US Infrastructure Index, S&P EM Infrastructure Index, NYSE FactSet Global Autonomous Driving and Electric Vehicles Index, MSCI China A Inclusion Index, S&P 500 Index). P/E ratio or price-to-earnings ratio is a comparison of a company’s share price to the company’s earnings per share. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Taking a page from the past

While there’s always market uncertainty, investors have been rewarded in the past by investing in long-term themes during selloffs.

Take the financial crisis of 2008-2009. While consumer spending faced a near-term squeeze, e-commerce was a megatrend that stayed intact. For example, MSCI’s e-commerce benchmark (MSCI ACWI Internet and Catalog Retail Index) declined 68% from peak on Oct. 23 to its trough on Nov. 20, 2008 (vs. the S&P 500 returning -50% over the same period)⁵. However, the index recovered faster than the broad market and outperformed the S&P 500 by nearly 30x through March 30, 2020.

MSCI’s E-Commerce Benchmark Cumulative Returns (MSCI ACWI Internet & Catalog Retail Index vs. S&P 500 Index)

Source: Bloomberg, indices used: MSCI ACWI Internet and Catalog Retail Index and S&P 500 as of March 30, 2020. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Conclusion: megatrends have staying power

We believe megatrends are here to stay and that the COVID-19 related market turmoil offered a long-term opportunity. They offer investors an intuitive way to gain exposure to “what’s next” by cutting across sectors to access the value chains of evolving trends that are not easily captured with individual stocks or conventional sectors.

The global pandemic is underscored exponential technologies such as cloud, data and networks that enable mobile work, AI and cybersecurity. At the same time, the most exciting areas in medicine—genomics and immunology—are positioned to deliver a healthier tomorrow. Investors can capture their potential with iShares megatrend ETFs.