Friday 29 Mar 2024
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This article first appeared in Forum, The Edge Malaysia Weekly on January 10, 2022 - January 16, 2022

While the conversation around Covid-19 has segued from managing a pandemic to living with it as endemic, some of the economic, behavioural and societal changes that the pandemic has wrought are here to stay.

As vaccination rates around the world increase, so too have expectations of an economic recovery: the Organisation for Economic Co-operation and Development (OECD) has projected the global economy to grow by 5.7% in its latest report in September 2021. However, the OECD has cautioned that the emergence of new Covid-19 variants will pose downside risks to the recovery.

Amid ongoing uncertainties, investors would be wise to act on the longer-term structural shifts or megatrends that are affecting the global economy and society at large. The awareness of megatrends will offer insights into macro investment opportunities that are expected to thrive.

New economic powers

Asia has seen phenomenal economic growth and transformation in the past decade. According to the World Economic Forum meeting in 2019, the region is expected to contribute about 60% of global growth by 2030. The bulk of the growth will come from developing economies such as China.

The country’s rapid growth has been a result of the Chinese government’s aggressive dual circulation strategy — bolstering its domestic market alongside its traditionally strong export market. Despite ongoing trade tensions with the US, China’s exports are expected to remain strong thanks to its burgeoning domestic market and trade relations forged through the Regional Comprehensive Economic Partnership.

Domestically, the desire for higher standards of living has increased demands for better-quality education, healthcare and other social services. Technology has also been earmarked as a growth sector, as infrastructure development projects, including large-scale data centres and 5G networks, are built to reduce the country’s dependence on foreign technology. With an annual 7.0% increase in research expenditure in the next five years, China is investing heavily in technology to drive future economic growth.

China has gradually opened its financial markets to foreign investors and is slowly making state-owned enterprises more competitive through privatisation and ownership reforms. As one of the largest economies in the world, the country’s financial reforms will lead to its being a key financial market.

Recent regulatory tightening has impacted many sectors, such as internet platforms, online education and real estate, resulting in elevated uncertainty for investors. As China implements these reforms to improve business practices and achieve desired social goals, investors concerned about further regulatory risks can consider investing in sectors that are more aligned with the Chinese government’s strategic goals.

Demographic changes

We are also seeing demographic shifts amid higher life expectancy. According to the World Population Prospects 2019 by the United Nations, one in six people globally will be above the age of 65 by 2050, up from one in 11 in 2019. Population demands will impact the future of healthcare and global healthcare spending is expected to see a 3.9% compound annual growth rate between 2020 and 2024.

The changes in demographics, particularly in developed markets, will also drive changes in consumer expectations for fast and accessible healthcare services. Improvements in innovation, artificial intelligence (AI) and cloud computing will inevitably herald new methods of treatment, service and care to cope with the changing demands.

Telemedicine, for example, saw an accelerated take-up during the pandemic and is expected to grow 21% annually, to US$176 billion by 2026, while certain Covid-19 vaccines were created from breakthroughs in mRNA research empowered by increased computing power and AI.

While the healthcare sector is subject to policy changes that could limit the profitability of pharmaceuticals and services, these risks are offset by growing global demand and the advances in diagnostics and treatments promised by emerging technologies such as tele-surgery and 3D bio-printed organs.

Technological advancements

The rapid adoption of digitalisation during pandemic lockdowns has accelerated the use of new technologies such as AI, which enables businesses to create intelligent products or services. The demand for automated customer communication via AI-powered chatbots has increased in tandem with the demand for digital services. According to Juniper Research, 90% of customer queries will be handled by chatbots within the next five years.

Businesses and governments are increasingly adopting AI, cloud computing, the Internet of Things and 5G to increase efficiency and productivity. For example, AI can be applied as machine learning to process customer data to identify transactional patterns so as to improve customer engagement. Given the range of applications — from smart cities and energy reduction to gaming and medicine —the long-term potential of investing in innovation is evident.

From a risk perspective, the potential for greater regulatory oversight and digital taxes could pose headwinds for investors but overall, the momentum behind innovation is strong.

Sustainability

An increasing focus on sustainability around the globe has created investment opportunities in both sustainability itself and in companies that embed environmental, social and governance (ESG) considerations into their business practices.

Governments in China, the US and Europe have spearheaded investments in projects and funds to combat climate change. Companies are also increasingly adopting measures to reduce waste, conserve energy and reduce their impact on the environment, both for reputational reasons and in recognition of the cost savings.

Investors are also increasingly allocating capital to companies with sustainable business practices such as diversity and inclusion, risk management and corporate social responsibility rather than focusing on a “growth-at-all-costs” approach. This rise in responsible investing promises longer-term sustainability in investment returns and limits exposure to reputational damage, lawsuits and fines associated with ESG violations, all of which can have a negative impact on returns.

Risks and opportunities abound

Alongside the opportunities, there remain investment risks during the recovery phase. The realities of new Covid-19 variants and reduced vaccine efficacy may hamper economic recovery. US-China tensions will likely continue as the US seeks to contain the rise of China. Continued regulatory tightening in China may also affect new sectors and dampen global investor optimism.

Despite the risks, megatrends offer potential for investors looking to allocate capital in an uncertain world by tapping the opportunities of long-term structural drivers that will persist beyond near-term risks. Diversify your portfolio and gradually build up positions in these megatrends over time to reap the benefits of these multi-year drivers.


Jacquelyn Tan is head of group personal financial services at United Overseas Bank

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