Private markets: The four key megatrends

The following is an extract from our recent publication: The future of private markets.

Advances in technology, changes in population structures, geopolitical pressures and the drive toward decarbonisation are catalysing the development of new industries and rendering some assets and investment behaviours obsolete.

We believe there are four core megatrends that will influence the investment environment over the short, medium and long term: demographics, decarbonisation, digitalisation and deglobalisation.

We expect these megatrends to be significant determinants of long-term investment performance and capital allocations in real assets for the remainder of this decade – and beyond.

1) Demographics

To an extent, demography is economic destiny.

Tailwinds deriving from the post-war baby boom played an important role in many major economies’ development in the decades after the 1950s. Alongside a growing and healthier workforce, improving life expectancy and increasing urbanisation contributed to a period of reasonable economic growth, improving living conditions and rising disposable incomes.

In most developed economies, this demographic tide is now receding. Many face the dual challenges of shrinking labour forces and increasingly elderly populations. Declining fertility rates and ongoing political sensitivities around immigration mean these issues are likely to become entrenched. In the absence of the natural boost delivered by a young, growing population, these economies will need to increase their productivity to maintain living standards.

This should in turn require greater adoption of technologies like robotics and AI, which can take the place of a shrinking workforce.

We think these trends will create increased investment opportunities in emerging markets that display growing labour forces and favourable demographic characteristics. Weak fertility rates in both high income countries and China mean their share of the global population is expected to fall from 15.7% and 17.8% respectively in 2022, to 12.6% and 12.0% in 2060[1].

Meanwhile, sub-Saharan Africa’s share of the global population is forecast to balloon from 14.6% in 2022 to 24.4% in 2060, with India and Southeast Asia’s proportion remaining relatively stable over this period[2].

In developed markets with ageing populations (and shrinking workforces) we are already seeing increasing physical and capital requirements for healthcare facilities and technologies, and a need for more specialist accommodation for elderly communities.

From a lifestyle perspective, we expect a growing emphasis on wellbeing and leisure, which should stimulate associated industries.

2) Decarbonisation

There is a growing consensus among policymakers of the urgent need to debarbonise the global economy.

According to the Intergovernmental Panel on Climate Change (IPCC), the world must reach net-zero emissions by 2050 if we are to limit global average temperature increases to 1.5oC above pre-industrial levels.

This is the threshold outlined in the 2015 Paris Agreement and committed to by almost every country in the world.

However, progress in decarbonisation has been patchy and global greenhouse gas (GHG) emissions are yet to meaningfully decline. One of the key challenges impeding progress is decoupling emissions from economic growth in emerging nations, where rapid increases in population and GDP have in recent decades been correlated with large expansions in GHGs released.

That said, decarbonisation has received significant policy focus in the EU and US, with considerable subsidies now introduced in support of constructing the infrastructure required for achieving net-zero carbon emissions. This is resulting in increased electrification as transport, home heating and certain industrial processes substitute burning fossil fuels for electricity.

Simultaneous decarbonisation efforts in the power sector have accelerated the buildout of renewable energy capacity, mainly in solar and wind farms. Increased deployment of renewables is placing pressure on power networks and demanding increased battery storage to deal with the intermittency of wind and solar output; addressing both challenges will require significant investment. However, constraints in technology and remaining carbon budgets will likely lead to build-out of carbon capture and storage assets in certain sectors such as cement and power generation. This is likely to contribute to a greater focus on nature-based climate solutions that can assist in offsetting the impacts of hard-to-abate emissions.

However, constraints in technology and remaining carbon budgets will likely lead to build-out of carbon capture and storage assets in certain sectors such as cement and power generation. This is likely to contribute to a greater focus on nature-based climate solutions that can assist in offsetting the impacts of hard-to-abate emissions.

3) Digitalisation

The digital revolution is set only to gather pace.

We define 'digitalisation' as the integration of new digital technologies into existing business processes[3].

These technologies have already radically altered business practices across many industries; the pace of development in big data, AI and machine learning is only likely to accelerate, with the scope of their impacts set to grow in parallel.

The growth of robotics, automation and AI-assisted design is likely to facilitate the modernisation of a range of industries and ultimately deliver broad-ranging efficiency savings.

At the same time, the enormous computational demands of generative AI alone are likely to support long-term demand for associated services like data storage, cybersecurity, connectivity networks and hardware components. This should have follow-on impacts for materials, labour and real estate.

Digitalisation is also likely to reshape the global labour force, with some jobs being replaced, and others requiring new skillsets to develop and deploy emerging technologies. As with demographics, this should create opportunities in further education and vocational training and could usher in a new era of productivity growth in economies burdened with unfavourable demographic trends.

4) Deglobalisation

What do fraying global connections mean for private markets?

We use the term 'deglobalisation' to describe the weakening global integration of trade, capital flows, people, intellectual property and cooperation.

So far, we have seen a slowdown in globalisation, rather than a reversal. Nevertheless, the consequences of weakening global economic integration and political cooperation, particularly between the US and China, represents a material shift in the world’s economic landscape. Growth in global trade has stagnated since the Global Financial Crisis; with protectionism on the rise, as exemplified by the USA’s Inflation Reduction Act and China's weakening international trade, we believe that ‘peak globalisation’ may well be behind us.

We believe this will result in the permanent reconfiguration of supply chains, with resilience and diversification of supply prioritised over efficiency, and supply risks mitigated with larger inventories. We anticipate a trend towards onshoring, where supply chains that were once international are reshaped to favour domestic production that carries less political risk, or 'friendshoring' in countries with more stable relationships with companies’ home nations.

In our view, this should translate into more real estate demand, with onshoring and friendshoring likely to be highly selective and focused on key strategic sectors where diversification of supply will remain a priority. Meanwhile, weaker global cooperation and heightened geopolitical tensions are likely to create more macroeconomic risks and volatility, favouring more needs-based and countercyclical asset classes.

The above is an extract from our recent publication: The future of private markets.

[1] Source: UN, 2022 Revision of World Population Prospects, https://population.un.org/wpp/

[2] Source: UN, 2022 Revision of World Population Prospects, https://population.un.org/wpp/

[3] By contrast, we define ‘digitisation’ as the conversion of information and documents from analogue to digital formats.