Transcript

Oscar Pulido: The world is already starting to shift because of the coronavirus and there's no doubt this will continue in the months and years to come. Healthcare companies and researchers around the world are mobilizing to create a vaccine, technology has shifted to emphasize solutions for working at home, and clean energy has become even more in focus as companies and individuals think about their impact on the environment.

Today on The Bid, we're talking about megatrends. The long-term societal shifts that we believe will persist through the pandemic. We'll talk to Jeff Spiegel, U.S. Head of Megatrends and International ETFs about the long-term investment themes that emerged from the 2008 financial crisis, which megatrends are resonating most in today's pandemic and how to think about investing for the long term. I'm your host, Oscar Pulido. We hope you enjoy.

Jeff, thank you so much for joining us today on The Bid.

Jeff Spiegel: Oscar, thanks so much for having me. It wasn't a long commute as we're coming in live from my apartment in New York City.

Oscar Pulido: Oh, for sure. I'm in my home studio as well and been getting used to it over the last couple of weeks. So, I can definitely relate to that. Let's talk about the megatrends. It's actually been a topic that has come up a couple of times on The Bid, certainly a topic of interest for our listeners. Now, these are, as I understand, long-term structural forces that are shaping the way we live and work. But perhaps you can give us a quick refresh on what are the exact megatrends that we're watching.

Jeff Spiegel: So, as you said, megatrends are long-term transformational forces that are really changing the way we live and work. And these are structural opportunities with long-term catalysts that really make them feel almost inevitable, and that's in contrast to more purely cyclical opportunities as captured through traditional sector strategies and the like. Today, a number of them are actually having really once-in-a-lifetime moments where those long-term forces are aligning with short-term cyclical drivers.

Simply put, the world will be different after COVID-19. One example of that is going to be the acceleration of key megatrend themes that were already coming and are now going to arrive even faster. So, really to your question, as part of a firm-wide effort across active investors, index investors, the BlackRock Investment Institute, key external innovators and thought leaders, we've identified five. The first is technology: areas like AI, cybersecurity, networking, data. They're not mutually exclusive though, so tech does play a role in all five. The second is demographics. Here, we're talking about aging populations. For the first time in less than 10 years, there will be more grandparents than grandchildren in the U.S., more over 65s than under 18s, and that will be true worldwide shortly thereafter.

Third is urbanization, which is about the move to cities. Over 75% of people live in the cities and developed markets in Latin America. In the EM markets in Asia and Africa, that number is less than half. We're seeing that drive a massive catch-up effect as these places urbanize, and at the same time, the U.S., Japan, Europe, other developed areas seek to revitalize their own infrastructure. Fourth is climate change. Here, we're talking about firms on the cutting edge of driving a clean green tomorrow through clean energy, electric vehicles and the like. And lastly emerging global wealth. One to two billion people will enter the middle class in the coming decade or so and 90% of those people live in emerging market countries in Southeast Asia.

Oscar Pulido: So, Jeff, as you mention these five megatrends, it sounds like investing in any one of these is really about investing in multiple sectors of the economy. In other words, it doesn't sound like just technology companies capture one of these trends or just healthcare. It feels like you would have sort of cross-sector type investments if you were trying to pursue these megatrends. Is that the right way to think about it?

Jeff Spiegel: Exactly. So, we think that megatrend strategies should be designed in a way that they're unconstrained, and what I mean by that is you've got to go global, you've got to get across sectors. So much technological innovation is getting adopted in non-technology areas. Think about the use of robotics in industrials, the use of artificial intelligence in communication services, the use of big data techniques in medicine. Traditional sector strategies tend not to really capture megatrends, which again, gets back to that point that they tend to be cyclical.

Oscar Pulido: So, if megatrends are long-term and structural and meant to persist over many decades, you mentioned your commute is quite short these days. We're all living in a very new and different reality these last few weeks and it's difficult to think about the long term when it feels like we're just thinking about day-to-day and what the news flow is going to look like. So, do we have examples from the past where we've had these crises or these downturns where we've actually seen a long-term structural trend emerge?

Jeff Spiegel: Yeah, so it's absolutely hard to think long term right now and investors around the world are looking at their portfolios and seeing declines at the same time as they have real fears from job security to health and safety, and that make this moment especially tough. But we know that market downturns are also opportunities, rebalancing the equities during these declines allows investors to recoup their losses and often then some when the market does eventually come back and it always has.

So, cyclical downturns are often pivotal moments for megatrends. They may suffer with the broad market in a sell-off when selling can appear kind of indiscriminate across asset classes and market segments. Sometimes they can sell-off even harder than the overall market, but they tend to outperform in the aftermath. So, e-commerce is a really neat example of that. Before the financial crisis of 2008, 2009, we all knew e-commerce was coming, more shopping was happening online, firms were starting to dominate retail sales. Nonetheless, at the lows of that downturn, e-commerce was down nearly 70%, even more than the S&P 500 at its lows during that same period, but not only did e-commerce recover harder and faster than the S&P, it out-performed over the next 10 years through to today by well over 20 times the returns of U.S. equities broadly1. That means the financial crisis was a huge opportunity to buy the e-commerce megatrend at significantly reduced valuations. We think it's not unlikely that a new set of megatrends, today's equivalent to e-commerce, have the same potential coming out of this downturn.

Oscar Pulido: Well, you're certainly right, e-commerce was a trend that persisted throughout 2008 and judging by the lobby of my building, it seems to be doing pretty well during the corona crisis as well.

Jeff Spiegel: Yeah, so I would say that the farthest I am traveling on most days is to go down and get those packages and that is one of the highlights of my day at the moment to be sure.

Oscar Pulido: You mentioned that we'll likely see some new megatrends that will persist through today's market volatility. So, give us a sense of what are some of the things that you're seeing that you think we'll be talking about in the months and years ahead.

Jeff Spiegel: The megatrends we're focusing on right now are actually being accelerated by the crisis itself, and therefore the long-term structural shifts we've been anticipating seem likely to come to pass even faster. And this is true in a few areas in particular, and I'll break it down by megatrend. Within our technological breakthrough megatrend, we're seeing a huge move to virtual work, that's driving networks and computing systems, big data, cybersecurity, and at the same time, AI is being deployed to understand the pandemic's course, track infections and accelerate the testing of treatments. In demographics and social change, we're seeing the two most game-changing areas of medical breakthrough, genomics and immunology, stand unsurprisingly on the forefront of understanding and treating the disease. And then as far as urbanization and climate change, these are places where we expect that subsequent rounds of government stimulus have the potential to drive outperformance as people are put back to work in these areas. So, we know the long-term structural theses behind these megatrends. In addition, we've got these catalysts coming out of this crisis where some of these key areas of innovation are really playing a role and offering some hope and helping.

Oscar Pulido: You mentioned a number of interesting themes. So, let's deep dive. Let's start with the genomics and immunology. There's obviously a race around the world to produce a vaccine in pretty short order. So, how are we seeing this play out and what implications does this have for after a vaccine is ultimately developed?

Jeff Spiegel: So, the vaccine is a key question for society and our safety. In a lot of ways, I think there's actually a lot more to unpack there for investors. We saw genomics and immunology as key areas of medical innovation before all this started. Now genomics is helping researchers understand the coronavirus' RNA. Breakthroughs in mRNA sequencing are allowing scientists to decode the disease at an incredibly rapid pace. That's not actually the vaccine development itself, but it's enabling quick drug development and experimental trials for vaccines. So, the major drug companies at the forefront of vaccine development are relying on a range of firms in the field of genomics to enable them. For investors, that's a reason to think about the theme versus betting on the individual company that makes it to the vaccine, it's also a lot less risky than trying to pick that single stock winner.

Likewise, immunology is helping to incubate treatments that work directly with our immune systems. One of the most promising potential areas here is stimulating the body's immune system by replicating and transferring antibodies from those who have already successfully beaten the virus. Not to mention, repurposing drugs in immunology that are used in places like rheumatoid arthritis, an autoimmune disease; not to create vaccines, but to treat those who are already infected. Again, a range of firms across the theme are set to benefit rather than the one firm with the end product that's ultimately adopted. The latter, that one firm is really hard to identify. It's no coincidence that these exciting areas of medicine are providing the solution to this challenge. The crisis is really only hastening the realization that will see more innovation and investment in these spaces that were the most promising in delivering personalized medicine via genomics and areas like cancer treatments through immunology and immunotherapy long before today's crisis and that will continue to play a role long after.

Oscar Pulido: Let me also ask you about the technology side of this. When you were mentioning some of the megatrends that we think will persist throughout this volatility, we're working from home, we're doing more video conference, audio conference these days just to stay connected at our respective jobs or with our families. Do you think that even after people begin returning to working in offices, will there be more remote work than there was prior to the crisis?

Jeff Spiegel: So, I think the short answer is yes, right? If we think about this, in a matter of weeks, virtually all corporate employees around the globe started working from home, non-essential medical visits became virtual, so did learning for hundreds of millions of students, maybe more than that. So, companies leading in remote software have therefore seen their products leveraged at record rates. 5G and networking connectivity are also therefore in focus. So are data center wreaths which have seen surging demand for their services which power the transition. Is it the short term, is it long term? The answer is both.

The fact that the internet of things is expected to double from 30 billion devices now to over 75 billion in coming years, that was true before this pandemic, but it's not any less true today. In fact, we see the cyclical tailwind pushing connectivity forward, meaning that the future is actually coming faster. So, companies have invested in work from home tech. They are learning what many tech companies have known and been adopting for years that virtual work is actually effective and therefore likely to proliferate after this massive unplanned beta test that was effectively sprung on the world.

Oscar Pulido: And I imagine this has implications for cybersecurity, right? If companies have more of their employees working from home, they have to be thinking about the security risk. So, obviously more people on the networks and more people on the internet. How are companies thinking about the risks to this?

Jeff Spiegel: So, before we moved into a work from home world or WFH as the kids are calling it. Though I'm not entirely sure why since that's actually more syllables rather than fewer. Before that, only 15% of U.S. risk executives felt their firms were well-prepared for cyber threats. So even as the number of cyber criminals on the FBI's most wanted list went from a handful to over 40 in just the last few years, there is still that feeling of unpreparedness. That's pretty scary at a time when we're that much more exposed through virtual work. It means firms are massively investing in the space. And so, if we're right that virtual working actually grows and is accelerated once we're able to return to our offices then that investment in cybersecurity only continues.

Oscar Pulido: Jeff, you've also alluded to AI a couple of times or what we call artificial intelligence. It was a topic of interest even before we got into this corona crisis, but it seems to also be playing a role in a variety of ways in which we're responding to this crisis.

Jeff Spiegel: Yeah. This is a great example of where the structural and cyclical are colliding and really pushing megatrends forward. Year after year, we've been applying artificial intelligence to solving new problems from chess to logistics, to voice-activated assistance, that's a long-term trend. And today, AI is being applied to a range of crisis areas: understanding and mapping the pandemic, keeping track of those under quarantine. Not to mention, many leading AI firms are actually lending their AI super computing power to drug companies enabling testing of treatments in days versus the months it would take using natural or more traditional computing power.

Oscar Pulido: And lastly, you mentioned clean energy, and you also touched on climate change being one of the five megatrends. We've definitely seen a growing interest in sustainability and BlackRock has certainly been very vocal about the belief that climate change represents investment risk in portfolios. But can you talk a little bit about the growing interest in sustainability and maybe more specifically renewable power. How do you see this continuing through the pandemic?

Jeff Spiegel: So, over the last few years, we've seen a surge around clean energy adoption and usage. In fact, governments have pledged two trillion dollars of renewable investments in the near term. In a push driven by governments themselves, businesses, consumers, all around the world looking to go more green. Another stat I really like, 80% of U.S. consumers aged 18 to 34 are actually willing to pay more for a low or zero emission vehicle. That's the long-term trend. Short term, the stimulus the government is focused on so far is getting cash into the pockets of those who need it and ensuring the financial system keeps functioning.

In the midterm, in subsequent rounds of stimulus, governments around the world are likely to put people back to work through infrastructure projects and a lot of those, we think, will be focused on clean energy. So, despite the precipitous decline of oil, clean energy has been doing well and we expect that to continue or even accelerate even further when we see those later rounds of stimulus putting people back to work in helping us build out a green economy.

Oscar Pulido: So, a recurring point that you've made is that these investment themes, these megatrends, are much more structural than they are cyclical. Meaning, that they're meant to last over many years as opposed to just a short time period. So, I guess with that, what's the most important thing for investors to know?

Jeff Spiegel: The most important thing for investors to know unquestionably is that staying invested and rebalancing the equities is critical in a downturn. As we discussed, it's also hardest in a downturn. Long-term structural shifts do present an opportunity to do that. So, I would encourage investors to look at areas with a wide range of names poised for that long-term outperformance and names that were poised for it even before this crisis. Just take as a bonus, if they're being accelerated forward, by helping us manage the pandemic at the same time. Think long term, that's always the key.

Oscar Pulido: Well, and it's sound advice, Jeff. Particularly these days when we're sort of thinking about the day-to-day and the pandemic. But when it comes to investing, thinking long-term has proven to be a recipe for success. So, thank you so much for joining us today. It was a pleasure having you on The Bid.

Jeff Spiegel: Pleasure to be here. Thanks, Oscar.

1 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.

This post originally appeared on BlackRock.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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Megatrends: 5 Ways To Think Long Term In The Downturn - Seeking Alpha