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The BID

5 megatrends shaping our future

Esta semana presentamos a Evy Hambro, director global de Inversiones Temáticas y por Sectores
de BlackRock

Lo que vemos en las películas puede decirnos muchas cosas sobre la manera en que nuestra sociedad está cambiando y progresando. Desde el estreno de Jurassic Park, el costo de crear el mapa del genoma humano cayó un 99,9% y pasó de costar USD 14 millones a costar USD 1000. Después de Terminator, los robots se han convertido en un mercado mundial de USD 15 000 billones.

Los temas de ciencia ficción se han convertido ahora en ciencia real. Las megatendencias están cambiando el rumbo de la economía global al cambiar las prioridades de las sociedades, impulsar la innovación y redefinir los modelos de negocios. En este episodio de The BID, Evy Hambro, director global de Inversiones Temáticas y por Sectores, analiza las cinco megatendencias que están transformando la manera en que vivimos y trabajamos.

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    Mary-Catherine Lader: Movies don’t exactly reflect reality. But there’s a lot they can tell us about how our society is changing.

    For example, in the 90s, as we were first mapping genes, Jurassic Park showed us an amusement park of dinosaurs brought back to life through the inconceivable magic of DNA. I’m not sure what it costs to map a dinosaur’s genome these days, but since that movie came out, the cost of mapping a human genome has dropped 99.9% from 14 million dollars to one thousand, and that’s enabled scientists to tailor breakthrough medical treatments to our individual DNA.

    Another example: The Terminator, or any other movie where robots threaten to take over the world. In a way, that’s right. Robots are a 15 trillion-dollar market worldwide. But they’re not a threat; many would argue they’re an opportunity. They help us avoid the dangerous jobs in resource exploration and manufacturing. 

    On this episode of The BID, we’re discussing megatrends – topics once the stuff of science fiction but now becoming science fact. Megatrends are the long-term shifts in society that transform the way we live and work. They continue to capture our imagination on the big screen, but also every day, for example we see self-driving cars in San Francisco or read about China producing more billionaires than any other country in the world. They’re also changing the way we invest.

    Today, we’re going to talk about the five megatrends we see shaping the way we live, work and invest with Evy Hambro, Global Head of Thematic and Sector investing. I’m your host, Mary-Catherine Lader. We hope you enjoy.

    Evy, thanks so much for joining us today.

    Evy Hambro: Thank you. It’s a great pleasure to be here.

    Mary-Catherine Lader: So, Evy, what makes a trend mega?

    Evy Hambro: The megatrends really are opportunities that we’ve identified, where we see significant structural, long-term drivers of change in the global economy that are matched to things that are fundamental beneath them. And what we think the output of that change is, that it would generate opportunities for companies to adapt and evolve their business, and new companies to start up, and they will benefit from the kind of tailwinds of growth that are driven by the changes and the trends that we see. So, as a firm, BlackRock has identified five key megatrends. One is related to technological breakthrough, the big shifts in demographics and social change around the world, the very rapid urbanization that we’re seeing of the global population. Clearly, climate change and resource scarcity are ones that are fronts of mind for most people. And the last one is obviously the big shift in wealth around the world, where there’s growing importance and emergence of the kind of middle class and increasing wealth concentrations in emerging economies.

    Mary-Catherine Lader: So let’s talk about urbanization for a minute. Infrastructure investing and infrastructure spending aren’t really new. So what’s different this time?

    Evy Hambro: The big driver is more people living in urban environments and the associated change with that. It can be related to infrastructure, so the obvious things that you would think about in terms of construction and so on. But, actually, you know one of the big trends of today’s world comes back to the concept of convenience and when we think about urban populations and the desire for convenience, one of the big shifts recently that we’ve seen with regards to eating habits is the reduced desire to eat out, and to have food delivered. That is a consequence of technology, which is one of the megatrends playing into or attaching itself to urbanization. So, the ability to be able to get cost-effective, efficient distribution of food to a point of consumption that is more convenient for the end-consumer, is clearly sitting at the kind of confluence of two big megatrends that are happening at the same time. You think about the concentration of people in urban environments and how they like to get around, whether it’s the sharing of mobility through different business models of ownership or transportation, whether it’s the evolution away from the combustion engine towards an electric vehicle, this is a huge subject.

    Mary-Catherine Lader: So, basically megatrends point to more food delivery. So, as a New Yorker, food delivery is a pretty familiar concept to me, but how is urbanization different in a developed country like the U.S. versus an emerging country or market like India or China?

    Evy Hambro: That, again, is a good question, and it varies hugely by country. If you think about the developed world and developed world nations, they have lots of infrastructure, lots of kind of traditional ways of doing things, whereas in the emerging world, there’s a desire not to be constrained by what they see in the developed world, but there’s an aspiration to have a standard of living that is similar. So, they didn’t want to go through all the iterations of development because they want to go to the best that’s available today, without trying to kind of put the historic infrastructure in place and then upgrade it, which is the burden that the developed world is having to carry. So, when you go to many of the emerging cities that are kind of under construction and evolving, you see phenomenal infrastructure being put in place immediately. The concepts to accommodate growth rather than the constraints of the fact that we used to have streets that were created because of the horse-drawn carriage and the weights that were attached to it. You know, they’re thinking about, “How do we get people moving around most efficiently, and what will that look like in the future?” So, I think there is a fundamental difference that we’re seeing playing out here between the developed world and what’s happening in the emerging economies.

    Mary-Catherine Lader: I’m curious how do you see the demographic change that you’re talking about playing out differently in different countries and markets?

    Evy Hambro: Yeah. So, this is a fascinating one and it’s a huge, huge topic. Longevity is clearly something that we’re all facing. It’s a benefit to us. The statistics say we’re likely to live for much longer than our ancestors did. There are consequences of that and there are benefits of that. The consequences is, it’s going to cost a lot more to sustain your standard of living throughout the duration of your life. And to go into old age with dignity is I think a desire for most people. So, you need to think about how you are invested, to be able to support your life post the most active periods of employment. You also need to think about the costs. What are the costs of living longer, whether likely to be, is likely to be a high-cost at the start, and it’s going to come with things that you aren’t incurring as a younger person. So, for us, as an investor, we need to think about what does that mean for business, what does that mean for the pharmaceutical companies, what does it mean for the care homes, how does society evolve? What does it mean for older people coming back into the workplace? What roles can they do? And we’re also thinking about it from the other thing, if I want to talk about the millennials or the younger population. How do they act as a consumer today that is different to how their ancestors acted as a consumer? Are they much more focused on not owning things? Do they want to go into the kind of restrictions of being committed to a mortgage and home ownership and everything else? Would they rather spend on an experience with technology or a luxury good? All of these things around the consumer and the shifts in pockets of the consumer because you have now a group of people that are living for much longer and you have at the other end of the spectrum a new group of consumers who are consuming in a different way.

    Mary-Catherine Lader: How is a demand for green solutions with the effects of climate change and other megatrend changing the way that cities are built?

    Evy Hambro: We’re definitely going to see change happening in that way and you’ve just got to travel the around the world to see that. You’re seeing much more renewable power generation being consumed and I think that’s a really great way for society to be thinking about the future. I think also, when you are thinking about the urbanization, you’re thinking about the impact of having more people living in a confined environment and how people are going to get on, how are they going to be transported, how are people going to act as consumers in that environment. Are we going to see changes in property prices? If we’re going to have a fleet of automated vehicles, we don’t need the parking spaces. What does that do for freeing up space in urban environments? So, I think technology is going to be impactful on the trend of urbanization. It’s going to allow us to live in a closer environment in a way that is different to the past and probably better than we would have imagined a few years ago when we look to the solutions of the future.

    Mary-Catherine Lader: So, it seems like technology underpins the five megatrends you mentioned, is that right and how do you think about that?

    Evy Hambro: So, we think about the megatrends as A, independent but also linked. Each one of them on their own is powerful. But when they converge is when you get the most change. So, technology is hopefully finding solutions to climate change. It’s changing the urban environment that we live in. But demographics are also driving urbanization. Demographics are also changing the way that we spend our money and changing how consumers consume and technology is also changing how people consume. So, the trends are identified on their own, but where they link up, it’s most powerful. And then when we think about the themes that we are using to play exposure to the megatrends, we think of three factors that are kind of the key parts of identifying a theme. The first one really is regulatory change. When we have governments coming into a business or to an industry and they are forcing change through regulatory powers, then that is an incredibly powerful kind of push factor that we see. When we have the next factor which is society, when society wants change, then you get two factors: that kind of pull factor coinciding with the push factor regulatory. And that will result in kind of the emergence of an inflection point for businesses to identify with. And then the last factor is really the economics. When the business today identifies a solution and they come up with something that is superior, either its lower cost or it does things better and you combine that with those other two factors, regulatory and society. When you get the convergence of all three together, you get to that inflection point of change in market share. And then you get these incredibly rapid growth rates that emerge. And that’s when the businesses really start to reflect the changes in the fundamentals that they’re seeing.

    Mary-Catherine Lader: So, you mentioned thematics, and the notion of being able to invest along a theme is so logical. How long has this been around, how big is it now, and why is it getting particular attention at this point in time?

    Evy Hambro: I think the main thing that I have noticed, as a result of this role, is that we couldn’t have done what we do today a few years ago. We just didn’t have the access to the data. It wasn’t available to us. We couldn’t identify the subthemes of revenue that we can now look at using the tools and information that we have right now. So, for example, we can, rather than looking at a company’s set of accounts and looking at one revenue line, we can now dig into that revenue line for a company and we can see the different points of sale, and we can break down that revenue line into a whole range of different subcomponents, and we can therefore see if we’re targeting a certain theme, how much a company is exposed to that theme as a percentage of its sales. That is an area that we’ve never had the level of visibility that we have today. We haven’t had that before and so, therefore, our ability to construct portfolios more accurately to give the desired outcome that we’re trying to solve for is just brand new.

    Mary-Catherine Lader: So, you talked about getting granular about revenue, you can probably also get a little more granular about cost. As companies are pushing for more automation and robots are getting more sophisticated, there is a growing narrative that there is an opportunity for a lot of cost saving and perhaps a lot of job loss unfortunately with more automation. On the flipside, an optimist could suggest that humans will just do more engaging work and robots can do the things that we don’t want to do anyway. What’s your view, data-driven or not on that particular question about the impact of AI and automation on work?

    Evy Hambro: Yeah, I think this is a very emotive subject and you can have a polarization of views here as you’ve said. You can have a landscape that looks quite scary with people being put out of work. Think about the automation of driving and what that does to transportation and the jobs that are attached to that. But I think one of the things that gives me a kind of more optimistic outlook is that we’ve seen increasing levels of automation and change over many, many decades, centuries and things going back into the past. Each time, the human workload hasn’t changed massively. There’s just been new roles, new jobs that are being created on the back of this, and new industries arise, people go into different skillsets. So, I think that rather than looking at it too pessimistically, I would think more optimistically and think about what are the benefits to society of automated driving? What will happen to the cost of transportation? It will probably fall beyond everyone’s imagination to incredibly low levels as cars get high utilization rates. You remove the cost of the driver, you reduce the cost of insurance because of the reduced frequency of accidents and so on, the increased safety on the roads. What does that mean for access? People who couldn’t afford the level of transportation that they were able because the cost was too high, can now get access to it at a much, much lower entry point. And so, what does that mean for their standard of living? How does that improve? So I think there’s a whole range of consequences that are incredibly difficult to forecast accurately when you’re thinking about very big subjects like this. But I would tend to look more optimistically because that’s what has happened in the past.

    Mary-Catherine Lader: That makes sense, it sounds good. So, some of this is driven by innovation and innovation doesn’t necessarily do a sustainable business. There’s plenty of examples of that in today’s market with lots of early stage funding and a focus on innovation perhaps over the business at times or in economics. Where do you see innovation not occurring? Are there areas that are overlooked?

    Evy Hambro: This is a question that often we raise in company meetings and we talk about it to management teams. We say, “What threats are you seeing as business?” Because innovation is both an opportunity and a threat, and if you are not ready for change as a business and as a management team, then you probably are about to be out of business. So today, we’re in an environment where the cost of technology is much lower than it was in the past. The productivity that’s going to come through technology is going to continue to increase. So therefore, that’s going to change people’s perspectives on how they can do business, the cost of doing business and what they can actually do and achieve. So, I continue to be incredibly excited about the benefits of innovation and when we think about it, everything is available to be changed, to evolve, to be disrupted. That’s what makes investing thematic so exciting because when you think about it from an active investment point of view, you’re always looking forward, you’re always trying to think about what’s next? You’re trying to think about which companies are going to grow faster? What opportunity sets are going to come along? You’re also thinking about which companies are going to be disenfranchised. And so having a portfolio that’s able to evolve as the markets evolve and hopefully before they evolve, because we anticipate that change and look to benefit from it, then that to me is a real source of true investment management.

    Mary-Catherine Lader: So much of what we’ve been talking about feels very contemporary, very current. I’m curious, do you see these megatrends as generational in some way?

    Evy Hambro: Yeah, I would say that the trends that we’ve described at the start of this are likely to be around beyond generations. We talked about demographics, demographics are multi-generational. Urbanization has been happening over many, many generations. I think resource scarcity, hopefully, we get to start solving some of the problems around climate change and resource scarcity so that we have generations in the future to look forward to. To live in a world that isn’t too badly impacted by the way we’ve been doing business in the past from an industrial point of view. So, I would like to think these megatrends are going to be around for a very long time.

    Mary-Catherine Lader: One last question before we wrap up with a rapid-fire round. What does this mean for the retail investor?

    Evy Hambro: I think there’s multiple things here. When I talk to kind of my parents about investing, they’re not interested when I start talking about long duration currency swapped products and things, you know, I don’t think they’re interested about factors and so on. When I start talking about, “Oh, my goodness it’s amazing young people today. They don’t want to go to a bank, they want to bank online. Or it’s likely that the next car is going to be an electric car, not a combustion engine.” It brings the themes to life, but it also brings the investments to life. You create stories that people can relate to and they say, “Oh, actually, I’m seeing more electric vehicles on the road. This has to be a growth opportunity. You know, I haven’t been to a restaurant this week because I had all my food delivered to me through some kind of delivery service.” When you can create a portfolio that allows you to invest directly in what you’re seeing and how it’s affecting your life, that really makes investing tangible and I think that’s incredibly powerful.

    Mary-Catherine Lader: So, I’m going to end with the rapid-fire round. I’m going to ask a series of questions, this or that questions related to some of the megatrends and themes that we talked about today. Are you ready?

    Evy Hambro: Yeah, absolutely.

    Mary-Catherine Lader: Real meat or fake meat?

    Evy Hambro: There’ll always be a market for real meat because there’s always a legacy market but I think the direction of travel is that people’s spending habits are going more towards the kind of the alternative because they are thinking about the impact, not just the cost but the actual impact of food production. Also, I think technology has allowed to create the alternatives. Having experienced some of these new products, they taste just as good. So, as a traditionalist, I know which way I would naturally lean but I’d been amazingly impressed by the alternative.

    Mary-Catherine Lader: Interesting, okay. Real assets or crypto assets or both?

    Evy Hambro: Yes. I’ve been skeptical of crypto assets for a very long time and I think that’s because they’ve been described to me in a very straight forward fashion with regards to crypto currencies. But I think the underlying technology behind them has a role to play and clearly, we’re seeing more and more business aligned in this way. So, I think the technology behind it is likely to be a winner, but I’m not so sure about the underlying coins.

    Mary-Catherine Lader: Combustion engine or electric car?

    Evy Hambro: We have to evolve away from the combustion engine. The world can’t continue in a way that it’s done so for the last hundred years. So, we have no choice but to move away from the combustion engine. I think the next step is electric and then maybe beyond that we have another alternative. Maybe it’s a fuel cell-driven vehicle or something like that. But the key to solving for this and for many of the other things that we are looking at with regards to, say, renewable power is cracking the chemistry of batteries.

    Mary-Catherine Lader: Last one, ownership or sharing?

    Evy Hambro: I would like to think that society wants us to move towards a more of a circular economy and it’s something that I’m very passionate about. I think we are in an environment where resources might not necessarily be scarce in terms of the true definition. But the cost of production isn’t just about the money, it’s about the impact of production. And if we can find a way of making sure that we’re getting the maximum out of the above ground resources, whether they are using a car today that sits still for 95% of its life, we can find a way of getting capacity utilization up to 50% and that has to be more efficient. It has to be better for the world. It has to be better for people and the costs of use. I am very much in favor of moving away from the kind of full ownership and going towards a much more circular economy and one of the areas that I would be sharing.

    Mary-Catherine Lader: Thank you so much Evy for joining us today. It’s been a pleasure having you.

    Evy Hambro: No problem. Thank you for the opportunity.

    Mary-Catherine Lader: Visit ishares.com/megatrends to find out more about megatrends and how to invest.