By Gregory Zuckerman
Investors often try to profit by betting on short- and
medium-term shifts in stocks and bonds. But the real money comes
from anticipating long-term trends, the kinds of changes that take
place over many years.
That's why some experts encourage investors to focus on shifts
that may develop over the next decade or so.
The largest profits come from investing "across multiple
business cycles" and on themes that last many years, argues John
Brynjolfsson, who runs hedge fund Armored Wolf.
Below is an attempt to identify a few trends in the global
economy and financial markets that could affect investments over
the next decade or so, along with a few ways to take advantage of
them. These shifts are hard to predict, but if they pan out, big
profits can result.
Demographic Shifts
Investors will have to grapple with aging populations in many
developed economies, something that could weigh on economic growth
by boosting health-care and other costs, reducing the number of
workers and draining the pool of entrepreneurs.
The trends are especially troubling in Asia and Europe. In
Japan, the sale of adult diapers began to exceed those for babies a
few years ago, and more than 25% of the population is at retirement
age. The birthrate also has fallen in the U.S. Immigration to this
country has offset some of the problems, but the nation's
working-age population is growing at less than 1% in recent years,
down from 2% between 1960 and 1985, according to Wells Capital
Management.
"The biggest long-term trend investors should consider is aging
developed-world demographics," says James Paulsen, chief investment
strategist at Wells Capital Management. "Expect perpetually weaker
average growth in the developed world, including the U.S."
Population trends aren't a reason to exit developed-market
investments. Slower growth doesn't mean no growth. Still, the
populations of emerging-market nations are growing at a fast clip,
a good reason to maintain exposure to those economies, which will
become a larger part of global demand despite setbacks over the
past year. The Vanguard Emerging Markets Stock Index Fund (VEIEX)
is a low-cost way to wager on those markets.
Jared Dillian, an ex-trader who publishes a financial
newsletter, says investors should focus on so-called frontier
markets, which are among the smallest and least-advanced of the
emerging markets.
"The only place you will get growth in the next 10 years is in
frontier markets, with growing populations and massive productivity
increases, along with huge improvements in the rule of law and
property rights," says Mr. Dillian.
He recommends the iShares MSCI Frontier 100 ETF (FM).
Conquering Cancer
Innovations in fracking and horizontal drilling have transformed
the world of energy and elevated the U.S. as an energy power. The
next American breakthrough appears to be in the world of cancer
research, which already is causing a frenzy of interest among
investors and excitement in the medical world.
Advances in immunotherapy, which uses the body's own immune
system to fight cancer, have helped those suffering from melanoma
and will likely be applied to other cancers, experts say.
Immunotherapy has disappointed in the past, but recent advances
seem to offer breakthroughs that patients and investors have been
waiting for.
Making money as a biotech investor is a challenge. Many of the
companies leading the way with these treatments, such as
Bristol-Myers Squibb (BMY) and Roche Holding (RHHBY), are so large
that even successful immunotherapy products would provide only a
modest boost to their stocks. A group of smaller companies
developing their own immunotherapy approaches, such as Juno
Therapeutics (JUNO), Kite Pharma (KITE) and Bluebird Bio (BLUE) are
already at expensive levels.
The best approach: Buy Bristol-Myers and Roche, and wait for
shares of the upstarts to fall a bit before wagering on them.
Energy Prices
Oil prices have tumbled below $50 a barrel as rising crude
supplies overwhelm meek global demand, upending financial markets
and giving consumers a lift. Analysts don't think the shift will
last very long, though. Eventually, they say, global demand will
outstrip the new supplies. The U.S. Energy Information
Administration recently predicted that benchmark Brent global oil
prices would hit $235 a barrel by 2040 as global consumption grows,
amid a growing middle class around the world.
Experts were caught flat-footed by the remarkable supply of oil
pouring out of U.S. fields, though. They could be just as wrong
about demand over the next few decades.
For one thing, consumers and companies are becoming more
efficient in their use of energy. The average American new car and
truck will get nearly 55 miles a gallon by 2025, up from 24 miles
in 2012. Chinese oil demand is starting to slow. Alternative-fuel
vehicles, such as all-electric cars and hybrids, are gaining
popularity. If the Chinese government can push citizens to embrace
electric cars, an expected source of new oil demand could
evaporate.
Google expects to roll out a self-driving car in the next five
years. Any widespread embrace of self-driving cars could also
cripple oil demand. Meanwhile, demand for urban living also will
reduce auto use.
Ed Morse of Citigroup, one of the few analysts to anticipate the
U.S. energy revolution, predicts global oil demand could drop to
around 74 million barrels a day from about 93 million today, as
global transportation shifts from a reliance on oil to plentiful
natural gas.
The upshot: Be wary of investing in energy shares in the years
ahead.
Low Interest Rates
Investors assume interest rates, held down by an aggressive
Federal Reserve, eventually will rise, making it harder to make
money. But Darren Pollock, portfolio manager of Cheviot Value
Management, says rates could stay low for years to come, to bolster
markets and deal with debt that's built up throughout the economy.
Tepid inflation also could sideline the Fed, some say.
"The U.S. held interest rates low from the 1930s into the late
1950s," he says. "Japan has suppressed rates since the early 1990s.
Markedly higher rates in the U.S. may not be something we see for a
very long time."
Write to Gregory Zuckerman at gregory.zuckerman@wsj.com
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