The 5 megatrend super highways to the future

OSCAR PULIDO: What comes to mind when you hear the words transformational industries? From robotics to transportation to the supply chain, today we’re uncovering clues around how megatrends are revolutionizing the very fabric of our economy.

Welcome to The Bid, where we break down what’s happening in the markets and explore the forces changing investing. I’m your host, Oscar Pulido.

I’m excited to welcome back to the podcast Jeff Spiegel, US Head of BlackRock Megatrend, International and Sector ETFs and also joining this episode is Tanya Chanda, Senior Investment Strategist on the BlackRock Megatrend team and they just put out a new paper – name to come. Together we’ll explore how megatrends are changing the way we navigate supply chain disruptions, what robots labor means for human employees and whether or not millennials – in their prime spending years – are able to impact the economy to the same degree as older generations.

Jeff and Tanya, thank you so much for joining us on “The Bid.”

JEFF SPIEGEL: Thanks for having us, Oscar.

TANYA CHANDA: Thanks, Oscar.

OSCAR PULIDO: Jeff, I know we talked about this last time. I think you are now, perhaps, the record holder of famous podcast appearances to talk about megatrends, and great to hear you've brought a colleague of yours along as well.

JEFF SPIEGEL: I am honored. I actually wasn't sure what the count was going into this, but it's a big deal for you to share that with me and our listeners at the same time. And it's a pleasure to be here with Tanya for this session.

OSCAR PULIDO: So Jeff and Tanya, let's talk about megatrends, which is a popular topic for our listeners over the last couple of years and, perhaps, a quick reminder, which are that there are five megatrends. These are technological breakthrough, demographics and social change, rapid urbanization, climate change, and emerging global wealth. And last time, we talked about these topics on “The Bid,” it was June of 2021. And look, at that time, there was still a lot of uncertainty around COVID. I suppose you could say, maybe there still is, less so, but we were starting to re-emerge in terms of economic activity. And, so give us an overview of how have things changed in the megatrends landscape since we last spoke.

JEFF SPIEGEL: Well, they've changed a lot, and I think that's actually one of the features of megatrend investing is, we're looking to capture exponential changes. And I would argue that, actually, the changes we've seen are permanent, fundamentally permanent. And one thing we know for certainty, as investors, in the megatrend space is that permanent changes tend to create exponential opportunities.

We saw that during the pandemic. And actually, many of the themes that investors focused on most in 2020, in 2021, and which had the strongest returns were about virtualization. And now, even as we head back to offices, and movie theaters, to restaurants, that permanent change continues. We'll now always be more virtual in how we shop, how we bank, and even how we date.

So we think the exponential growth curve of these technologies is absolutely going to continue apace, but who wouldn't have wanted to get in before the market started, to appreciate and price in that impact of virtualization, that permanent change. So for megatrend investors, the question becomes, what are the next set of exponential growth opportunities in front of us, born of this next set of permanent changes?

Now, recent transformational events, the emergence from COVID's peak, conflict in Eastern Europe, disrupted supply chains are really the drivers of that next set of opportunities. And specifically, we would identify these across industry, health care, and consumption. So much like the trajectory of virtualization and its related technologies, the associated themes are going to enjoy years, if not decades, of outsized growth. We actually think the moment is right now to embrace some of these forward-looking investment themes before the market really recognizes their full potential.

OSCAR PULIDO: Jeff, within these five megatrends, there are sub-components of each, right? There are numerous examples of how the climate change megatrend manifests itself. Or there's numerous examples of how technological breakthrough manifests itself. So as you think about what changed through COVID, how the world is changing coming out of COVID, are there specific areas within these megatrends that are more important as we move forward?

JEFF SPIEGEL: We've actually just published a paper on exactly this subject, and there are the three that I alluded to, a moment ago, So we can actually take the three, one by one. So first, just as the leap to lockdowns really drove virtualisation technologies, the leap back is going to drive physical technologies.

Global inflation and supply chain disruption are making industrial investments in areas like automation and infrastructure, in the future of transportation, immediately critical. Second, we think the future of health care has been transformed by what happened during the pandemic. So if you look at the COVID mRNA vaccines, as we've discussed in previous bids, mRNA vaccines were used for the first time during the pandemic.

These had 90%, 95% efficacy compared to traditional vaccines that had 60%, 70% e-fficacy at best.^1,2 So we're actually going to see is this huge shift, where we're not going to have to get our flu shot every year, and then wake up to get the flu anyway, just a couple of weeks later, because we're going to be seeing mRNA vaccines deployed against influenza and, obviously, far more critically, against some of the most menacing diseases out there like HIV.

So the lessons learned during the pandemic in that investment of mRNA technology is going to pay dividends, as we'll accelerate approval processes in areas like precision medicine that we see paying off in the fight against cancer and neurological disorders.

The third area is that millennials and developing market consumers are emerging from lockdowns as the major spenders driving the global economy. Their ascendance means that their own unique preferences for decentralized digital ecosystems and greener goods is really going to transform commerce as we know it.

OSCAR PULIDO: So Jeff, everything you said makes a lot of sense but help me understand. You have the five big megatrends which we talked about at the beginning of the podcast. How did these three themes fit into those five megatrends?

JEFF SPIEGEL: Actually what's super neat about the megatrends is the themes associated with them can cut across one, two, three, four, or even five of them at the same time. So when we think about industrial technologies and infrastructure, that relates to our urbanization megatrend. When we talk about robotics, that relates to technological breakthroughs. And we talk about supply chain disruption, that relates to emerging global wealth. So what's really important to keep in mind about the megatrends is there are five superhighways to the future but actually investors are lucky enough to be able to ride in all five lanes at once through some of what we're talking about today.

OSCAR PULIDO: Great. I love that, the five superhighways to the future. And so Tanya, maybe I can bring you into the conversation here. It feels like a running joke these days that if you're late to something or something is late in arriving to you is you just blame it on supply chain issues. recent topic is inflation, which has been something we haven't had to spend a lot of time talking about in the world economy, but now it's the top headline in many newspapers. So talk us a little bit about how this is impacting industries, these supply chain and inflation topics.

TANYA CHANDA: Thanks Oscar. These are topics that are at the forefront and headlines every single day. And we see these issues persisting in the coming years. But this presents some pretty compelling opportunities for innovations to help solve these challenges.

And since the start of the pandemic, average shipping times from Asia to North America have risen by 125%.³ Domestic freight costs have been increasing as well. They have risen 42% this year versus last.⁴ And input costs are skyrocketing, too. Lumber prices are 165% above pre-pandemic levels.⁵

And let's put this all into the global context. That's important as well. Geopolitical uncertainty and trade conflicts are leading more firms to reshore production and diversify supply chains. And all of this is occurring amidst substantial wage inflation.

Transforming the way goods are produced and transported are critical now more than ever. We believe that automation infrastructure and electric vehicles can help drive this next wave of transformation.

JEFF SPIEGEL: And really more than that are going to remove that excuse for why the birthday present you're sending to someone is late. We're going to fix that.

TANYA CHANDA: Exactly.

OSCAR PULIDO: And you talk about automation. So I have this image of robots in factories assembling cars. And I think this is kind of where you're going when we talk about the automation process helping perhaps kind of reduce some of these bottlenecks. But the reality is of automating production processes is just kind of a key part of how businesses are transforming themselves. But what does it mean for the human employee like us?

TANYA CHANDA: Yeah. I think robotics have been driving change for some time now. And it almost feels prime time for their role in helping transform production processes and logistics operations. This is not new. Automation from areas such as production to packaging can meaningfully help address supply chain disruption and inflation.

The application of robotics to today's challenges go far beyond just production. The acceleration of e-commerce has pinched supply chains. I know we've all experienced that delayed shipment just like Jeff mentioned about the late birthday gift. We really see robotics as driving logistics innovation in the coming years. Strained warehouse operations because of increasing consumer demand is really going to necessitate the use of robotics going forward.

And all of these innovations to your point, Oscar, enable the employee. Driving efficiencies not just for firms and producers but employees as well by working side by side with them and empowering them to focus on higher value tasks. These innovations not only help industries move forward but provide for a new wave of opportunity for employees as well.

OSCAR PULIDO: Tanya what you're saying makes a lot of sense. Do you think companies are doing enough or striking the right balance between bringing technology into their processes and doing that for the benefit of their business and at the same time upskilling their human employees?

TANYA CHANDA: Yeah. Companies are really trying to address this challenge and they've been pushed to do so more urgently with the current market environment. Data from the last year suggests a recent uptake of automation. In 2021, robot sales had their strongest year ever and interestingly enough, the auto industry was historically the largest consumer of robots.⁶ Now non-automotive manufacturers represent the majority of sales. That really shows the proliferation of automation across a wide swath of industries. This is the next generation of industry.

And what a time for this to all be playing out. Hourly earnings in the US are up 11% since the start of the pandemic⁷, and labor shortages are challenging many firms who are struggling to find workers. This makes the upfront investment in automation far more attractive today. Evolution in this space will invariably push companies to invest in upskilling which could have a real meaningful impact on labor productivity.

OSCAR PULIDO: So Tanya, maybe we can talk about infrastructure. Because everything you're talking about with respect to the production process becoming more automated, the use of robotics. But on the other hand, I think when we look at infrastructure and transport systems sometimes these things are a little bit out of date, right? And they're not keeping up with some of the very futuristic type production processes that you're talking about.

TANYA CHANDA: Well Oscar, this is a topic that's quite near and dear to me. In a previous life I covered private infrastructure investing so I'm particularly passionate about this topic. I really do find infrastructure to be quite sexy. Underinvestment in infrastructure has added to the fragility of global supply chains and we are starting to see the cracks emerge as the economy restarts.

US ports had a record year in 2021. The Port of Los Angeles and Long Beach, responsible for 40% of the nation's containerized imports, moved more goods than ever before.⁸ As a result, transit times to ship goods from China to Los Angeles have doubled.⁹ This is exactly why upgrading infrastructure is critical.

We've seen this topic dominate national headlines last year with the passage of the $1 trillion Infrastructure Investment and Jobs Act, far before the height of supply chain challenges emerged.

But now, we're seeing the dire need for this investment. The act includes $17 billion for ports as well as a focus on rehabilitating freight and intermodal rail. $10 billion for surface transport and rail networks, to be exact. As these projects advance and maintenance and operations improve, we expect asset owners, in other words port or rail operators, as the next beneficiaries of this historic federal investment

Bridging the need for greater automation and infrastructure together, we see spaces like industrial machinery, commodity chemicals, building products, specialized REITs, as key areas of spending. These are the types of industries that will play a significant role in revitalizing our nation's infrastructure.

And lastly, since we're talking about transforming our transportation systems, I'd be remiss if I didn't mention the role that autonomous vehicle technologies will play in the future. Truckload volumes on busy routes such as Los Angeles to Chicago are up 130% year over year.¹⁰ And at the same time, the truck driver shortage has hit a historic high at 80,000 drivers in 2021. That number is expected to double by 2030.¹¹ Autonomous vehicle technologies can help alleviate these challenges in the trucking industry through lower trucking costs and reduced capacity constraints. That can be powerful.

Electrifying surface transport will be a game changer as well and a key beneficiary of federal spending as Infrastructure, Investment, and Jobs Act funds nationwide expansion of charging stations. A shift from electric transport for medium and heavy duty vehicles has the potential to not just reduce 25% to 40% of energy use from trucking each year, but also offset anywhere from 70% to 90% of spending on fuel.¹² Now that will be transformational for the trucking industry.

OSCAR PULIDO: I'm reminded of this phrase from last year that you would hear, the future is running at us. And when I hear, Jeff, you and Tanya talk about some of these transformations that are going on in the economy, they're not immediate. They're not tomorrow. But they are occurring. And I guess that's the point of the megatrends is to try and identify these companies that are going to help with that transformation.

Jeff, let me come back to you. Let's talk about demand. The pandemic has obviously impacted economic activity and put many people in difficult situations. And traditionally the population cohort between the ages of 35 and 55 are those in their peak spending years. I think that's where the millennial generation is now starting to enter, right? The oldest millennials are starting to get into that age range. So what should we expect from them as a consumer cohort? Aren't they kind of dealing with high college debt levels? And aren't they dealing with the impacts of COVID and the financial crisis back in '08? Should we expect a lot from them?

JEFF SPIEGEL: So speaking as one of the oldest millennials, I will say you're jumping a little bit ahead to the other three themes that we talk about in this paper we just released really about the power of the new consumer as I had mentioned earlier. But I think it's OK to give you a sneak preview of that now assuming you'll commit to inviting us back for a deeper dive on the subject?

OSCAR PULIDO: You're a regular guest. I think it's will you have me back?

JEFF SPIEGEL: That's a deal. All right, so the bottom line is while lockdown slowed economic activity, they couldn't actually derail major demographic trends, right? That's, again, part of the power of megatrend investing. Structural long-term changes that really are going to play out pretty much no matter what happens around us. Aging is certainly one of those phenomenons. And so amid the pandemic, millions of US millennials entered their peak spending years, right? That age 35 to 55 that you were just referring to. And actually what we've seen is enhanced spending from this group. Sort of pent up savings that happened during the lockdown are enabling them to really express what we're sort of thinking of as the power of the purse in driving what the future of consumption is going to look like.

But I should also mention there's another group that's really transforming consumption at the same time, and that's emerging market consumers. Some overlap there. But the EM consumer is also cementing their place now representing over 50% of global spending.¹³

So when you put these together as a result of the two trends combined, right, millennials and EM consumers, they are now and will be for several decades to come the truly essential drivers of the global economy. And consequently their unique needs and preferences, and let's be specific. I'm thinking of the early adoption of decentralized finance, the prioritization of sustainable products, all of this is set to surge as a result of their consumption power. So yes, we do think the entry into peak spending years holds true and even more so is going to be transformative as these consumers start voting with their wallets and really deciding how and what is marketed and sold.

OSCAR PULIDO: Tanya, Jeff, maybe just one last question, which is there's a number of megatrends, there's a number of interesting subcomponents to those megatrends. We're talking about healthcare, robotics, and infrastructure. What would you say to an investor who's thinking about investing in these in terms of when is the right time and how patient should they be?

JEFF SPIEGEL: So patience is absolutely critical to megatrend investing. Those superhighways to the future that we talked about, we see them as really five to 10 year opportunities. And they're our north star when we think about building long term exposure to exponential growth. That said, we have to be realistic. Certainly any one of us would have loved to have been a very early investor in cybersecurity right before the pandemic started because cybersecurity was a huge beneficiary of some of the permanent changes that happened there.

So even though a theme like cybersecurity remains a powerful, durable, long-term investment aligned with our megatrends, we think it's also important for investors to look at moments where permanent changes are occurring and to find opportunities to add to their allocations to these sorts of themes when they see those permanent changes really taking place right before their eyes. And what we're really trying to illuminate in today's conversation and in this paper that we've released is exactly that. The three big, permanent changes that we think set up the next set of exponential growth curves.

OSCAR PULIDO: Well Jeff and Tanya, thanks as always for fascinating insights on the superhighways to the future. Thank you for being on The Bid.

[00:28:26.86] Thanks Oscar.

JEFF SPIEGEL: Pleasure as always, sir.