Spotting the next great investment wave by using macro trends is often how alpha investors, those with a track record of performance, pick winners.
What are the macro trends?
Macro trends are long-term directional shift which has an impact on a large population, often on a global scale.
Some current examples of macro trends include urbanization, automation, changing demographics and climate change.
Macro trends can be distinguished from fads in that the latter causes a spreading and widening shift
Even sectors, such as information technology IT, cloud computing, social media and the internet of things can create macro trends and provide a wave of investment opportunities.
Macro trends can also be described in terms of their life span
The most pervasive and persistent phenomena are megatrends. The Copenhagen Institute for Future Studies defines megatrends as developing trends that predict “the probable future – or express what we know with great confidence about the future. Megatrends are certainties”.
Climate change is a political hot potato. The climate is indeed changing but is it being triggered by human activity or part of the earth evolutionary cycle? If you believe humans are responsible then perhaps cavemen rubbing sticks together to burn wood to keep warm should also be blamed for causing the last ice age which wiped out the dinosaurs.
But back to the theme that climate change is causing macro trends, or better said megatrends.
The jury is still out about the causes of climate change but most would agree that the climate is indeed changing.
Climate change is not only an example of a macro trend it is also a megatrend because it impacts everybody everywhere to a varying degree
The last 19 years included 18 of the warmest years on record.
Moreover, climate change is ongoing and likely to continue unless some unforeseen event forestalls the process.
Climate change as one of many macro trends impacts industry in both a negative and positive way
For example, agricultural productivity could be reduced by up to a third in large parts of Africa over the next 60 years.
Ski resorts are also projected to have over 50% shorter winter seasons by 2050. The positive impact of climate change could come from “Green” sectors where the use of “green” energy has increased due to consumer and government support.
Natural disasters caused by climate change could also trigger a boom in transport and infrastructure construction.
Government policies help to change and shape macro trends which create investing opportunities
For instance, Obama’s Recovery Act fueled the growth in renewable energy with a $90 billion investment. The legalization of cannabis in the US has created a garden of opportunities in pot stocks. Meanwhile, anti-tobacco policies have acted as a headwind on tobacco investments.
A shift in foreign policy can also impact defense companies by restricting arms exports to former export markets.
Macro trends can also be identified in economic cycles
The cyclical nature of the economy means that investors can also use history to identify macro trends.
For example, let’s consider fiscal and monetary policy, which is implemented in response to economic data. So in an expanding economy, the central bank raises rates and the government reduces fiscal stimulus. As a result, inflation is moderated. In a contracting economy, the reverse occurs.
The central bank lowers rates and the government increases fiscal stimulus. As a result, growth is stimulated.
Macro trends are a key tool for investors searching for long term investment opportunities
Furthermore, there are numerous advantages to using macro trends as an investment tool.
For example, macro trends are unbiased and data-driven. Investors who use macro trend analysis are not swayed by daily headlines. These investors also tend to avoid riskier, niche industries and are better diversified by sectors and regions.
How many macro trends are currently at play?
The Trump administration’s deregulation efforts and tax cuts have helped lift the US economy, lifting GDP growth to a 13-year high of over 3% in 2018 Q3. But American tax reductions has also made its neighbor Canada less competitive. It’s estimated that 4.9% of Canada’s GDP is at risk due to ripple effects from US tax reform.
Moreover, some argue that Trump’s decision to sign the biggest rollback of bank rules since the Dodd-Frank Act could put the financial system at risk.
The legalization of cannabis, as explained above is yet another one of many current macro trends.
From a macroeconomic stance the current slowdown in the global economy and the walk back of the Fed’s monetary tightening are yet more macro trends currently at play.
Macro trends help investors distill this wealth of information into a future wealth by spotting the next investment wave
In a hyperconnected world with news available 24 hours a day and seven days a week investors can frequently get lost in data overload.
Macro trends are the big pictures which enable investors to see opportunities through a wider optic because they are long term, affect a large population and create a clear vision of the future.
In short, macro trends can help long term investors identify future capital flows, the holy-grail of forecasting future asset prices