Deglobalization, decarbonization and technology diffusion could provide investment opportunities in the years ahead.
Many investors are increasingly focused on the short term, with the average equity holding period at just six months versus eight years in the 1960s. In this environment, there’s significant value in taking the longer view.
In fact, most investors would probably do better to focus on “secular” themes, which are major trends that play out over a number of years and affect multiple sectors, rather than try to outwit the market on quarterly earnings or economic releases.
There are three trends that have been on the radar for Morgan Stanley Research for some time, and are bolstered by changes in the macroeconomy, recent geopolitical events and continued technological transformations. Investors should be taking these into consideration in their investments across asset classes.
The global economy is changing, and we expect a new approach to global commerce to take hold. Companies and countries have recognized that they can no longer seek efficiencies through global supply chains and market access without factoring in geopolitical risks. Morgan Stanley first flagged this secular trend in 2018 and believe it became the consensus following Russia’s invasion of Ukraine and the West’s policy response, which created fresh trade barriers and incentives to realign supply chains.
A recent example of the complexities created by this kind of secular trend is in the semiconductor industry. On one hand, fresh export controls meant to protect U.S. intellectual property created a need for companies to near-shore production, resulting in higher costs. On the other hand, capital equipment companies could benefit as their goods and services are likely in more demand as part of this supply chain realignment.
Still, the market may not fully grasp the practical implications of this rewiring. It raises questions around how long it will take, whether it will lead to higher inflation, how such a transition will be financed and which companies and countries could benefit or suffer because of it.
The transition from fossil fuels to clean energy is a theme that has been gaining momentum. It is now headed toward new milestones with growing EU policy support for energy transition infrastructure and the U.S. appropriation of $400 billion+ to speed the adoption of clean energy technology.
It's fair to say that the developed world is accelerating its efforts to reduce carbon emissions. Still, this is a tall order. To reach net zero by 2050, carbon emissions would need to start falling by about 8% per year. Even during 2020, when COVID-19 lockdowns limited mobility and global GDP shrank, emissions fell only 5%.
To that end, investors will need to grapple with both the positive and negative impacts of this transition. Our assessment of which companies, sectors and macro markets will benefit or be challenged will be shaped by answers to the following questions: What are plausible scenarios for timelines? Which technological and policy developments and failures could speed or slow the transition? Which markets will finance it and how must they change and expand? Which companies will benefit, and which are exposed to downside risks?
One obvious beneficiary has been and will likely continue to be the clean tech industry. With the recent passing of the Inflation Reduction Act, which provides significant federal support for wind, solar, hydrogen, energy storage and carbon capture, there is potential for long-term growth in this sector.
Tech diffusion—or the widespread adoption of new technology—is hardly a new theme. What’s different and noteworthy, however, is the speed and breadth with which tech diffusion can affect sectors that were previously untouched.
In fact, fragmented industries or those with high regulatory barriers have typically not reaped as many benefits from tech-driven productivity, but suddenly look poised for a multi-year transition via tech diffusion.
Some examples of these opportunities include embedded finance changing the consumer experience and payments, tokenized assets allowing for greater global financial inclusion, the modernization of healthcare data ownership and biopharma research and development breakthroughs.