Ten Investment Trends for the Future

The McKinsey Quarterly recently included a web-only article on ten trends for the coming years. You can subscribe for free to their online version if you are interested. I thought it would be worth mentioning these trends to help identify any investment implications.

Trend 1: Centers of economic activity will shift profoundly, not just globally, but also regionally. Asia’s GDP (excluding Japan accounts for 13 percent of world GDP, while Western Europe accounts for more than 30 percent) will catch up with Western Europe within the next 20 years. As a result we should see a growing demand for consumer goods as the people in these nations gain more disposable income.

Investment idea: Consumer companies with a strong presence in Asia and transportation companies that have a strong presence in the region and have global reach.

Trend 2: Public-sector activities will balloon, making productivity gains essential. The unprecedented aging of populations across the developed world will call for new levels of efficiency and creativity from the public sector. The demand for health and retirement security will overwhelm a nation’s ability to support these services through taxes. Proven private-sector approaches will likely become pervasive in the provision of social services in both the developed and the developing worlds.

Investment idea: Companies that can provide these services in a cost effective manner; firms that can leverage technology to outsource these services to low cost countries.

Trend 3: The consumer landscape will change and expand significantly. Almost a billion new consumers will enter the global marketplace in the next decade as economic growth in emerging markets pushes them beyond the threshold level of $5,000 in annual household income–a point when people generally begin to spend on discretionary goods. By 2015 consumer’s spending power in emerging economies will nearly match the spending power of western Europe. It is estimated that 100 million Chinese households will achieve European income levels by 2020. Further the Hispanic population in the United States will have spending power equal to that of 60 percent of all Chinese consumers.

Investment ideas: Consumer & luxury goods companies with a strong presence in Asia and other developing countries that are achieving economic success. Companies that are able to identify and target the consumer market niches that will continue to evolve. Transportation companies that are able to move the raw materials and finished goods easily throughout the world.

Trend 4: Technological connectivity will transform the way people live and interact. We are still in the early stages of this revolution. Geography is no longer the primary constraint to social and economic organization. As new developments in biotechnology and nanotechnology come forward, people throughout the world will find new ways to leverage their promise. More transformational than technology itself is the shift in behavior that it enables. We work not just globally but also instantaneously. We are forming communities and relationships in new ways (indeed, 12 percent of US newlyweds last year met online). More than two billion people now use cell phones. We send nine trillion e-mails a year. We do a billion Google searches a day, more than half in languages other than English. For perhaps the first time in history, geography is not the primary constraint on the limits of social and economic organization.

Investment ideas: Software companies with expertise in joining together diverse capabilities to create new products and services.

Trend 5. Ongoing shifts in labor and talent will be far more profound than the widely observed migration of jobs to low-wage countries. The shift to knowledge-intensive industries highlights the importance and scarcity of well-trained talent. The increasing integration of global labor markets, however, is opening up vast new talent sources. The 33 million university-educated young professionals in developing countries is more than double the number in developed ones. For many companies and governments, global labor and talent strategies will become as important as global sourcing and manufacturing strategies.

Investment ideas: Outsourcing of all types of professional talent, not just low wage workers to educated talent pools in India, China, and other places with and educated talent pool.

Trend 6. The role and behavior of big business will come under increasingly sharp scrutiny. As businesses expand their global reach, and as the economic demands on the environment intensify, the level of societal suspicion about big business is likely to increase. The tenets of current global business ideology–for example, shareholder value, free trade, intellectual-property rights, and profit repatriation–are not understood, let alone accepted, in many parts of the world. Scandals and environmental mishaps seem as inevitable as the likelihood that these incidents will be subsequently blown out of proportion, thereby fueling resentment and creating a political and regulatory backlash. This trend is not just of the past 5 years but of the past 250 years. The increasing pace and extent of global business, and the emergence of truly giant global corporations, will exacerbate the pressures over the next 10 years. Business, particularly big business, will never be loved. It can, however, be more appreciated. Business leaders need to argue and demonstrate more forcefully the intellectual, social, and economic case for business in society and the massive contributions business makes to social welfare.

Investment ideas: Companies that find ways to make good profits and be socially responsible.

Trend 7. Demand for natural resources will grow, as will the strain on the environment. As economic growth accelerates–particularly in emerging markets–we are using natural resources at unprecedented rates. Oil demand is projected to grow by 50 percent in the next two decades, and without large new discoveries or radical innovations supply is unlikely to keep up. We are seeing similar surges in demand across a broad range of commodities. In China, for example, demand for copper, steel, and aluminum has nearly tripled in the past decade. The world’s resources are increasingly constrained. Water shortages will be the key constraint to growth in many countries. And one of our scarcest natural resources–the atmosphere–will require dramatic shifts in human behavior to keep it from being depleted further. Innovation in technology, regulation, and the use of resources will be central to creating a world that can both drive robust economic growth and sustain environmental demands.

Investment ideas: Water filtration, pollution control, and energy companies, especially those that offer new forms of clean energy.

Trend 8. New global industry structures are emerging. Even basic structural assumptions are being upended: for example, the emergence of robust private equity financing is changing corporate ownership, life cycles, and performance expectations. In many industries, a barbell-like structure is appearing, with a few giants on top, a narrow middle, and then a flourish of smaller, fast-moving players on the bottom. Similarly, corporate borders are becoming blurrier as interlinked “ecosystems” of suppliers, producers, and customers emerge. Even basic structural assumptions are being upended: for example, the emergence of robust private equity financing is changing corporate ownership, life cycles, and performance expectations. Winning companies, using efficiencies gained by new structural possibilities, will capitalize on these transformations.

Investment ideas: Companies that offer special capabilities in important process networks and supply chains that are able to offer substantial improvements and capture premium profits.

Trend 9. Management will go from art to science. Today’s business leaders are using highly sophisticated software to run their organizations. Bigger, more complex companies demand new tools to run and manage them. Indeed, improved technology and statistical-control tools have given rise to new management approaches that make even mega-institutions viable.

Long gone is the day of the “gut instinct” management style. Today’s business leaders are adopting algorithmic decision-making techniques and using highly sophisticated software to run their organizations. Scientific management is moving from a skill that creates competitive advantage to an ante that gives companies the right to play the game.

Investment ideas: Methods and tools (software) that match skills to the job needs and training requirements. Corporate software and business consulting companies that offer special capabilities that help manage the mega companies.

Trend 10. Ubiquitous access to information is changing the economics of knowledge. Knowledge is increasingly available and, at the same time, increasingly specialized. The most obvious manifestation of this trend is the rise of search engines (such as Google), which make an almost infinite amount of information available instantaneously. Access to knowledge has become almost universal. Yet the transformation is much more profound than simply broad access.

New models of knowledge production, access, distribution, and ownership are emerging. We are seeing the rise of open-source approaches to knowledge development as communities, not individuals, become responsible for innovations. Knowledge production itself is growing: worldwide patent applications, for example, rose from 1990 to 2004 at a rate of 20 percent annually. Companies will need to learn how to leverage this new knowledge universe–or risk drowning in a flood of too much information.

Investment ideas: Companies that offer new ways to capture and distribute specialized knowledge. Also, companies that possess specialized knowledge that can be employed to lower costs or create innovative ways to differentiate products or services.

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