Tomorrow's world: How to invest like a futurologist
Instead of trying to predict the next 12 months, it might be more effective to look further into the future.
Saturday 18 February 2012
There are just six weeks left before the curtain comes down on another Individual Savings Account season, so where are you planning to put your remaining allocation? Are you going for broke with equities or looking to play it safe with fixed interest?
Depending on your age and investment goals, it could be an idea to look to the long term and pick stocks and sectors that could handsomely reward your faith over the next few decades. After all, putting your money in the next Microsoft or Apple could help secure your financial future.
So where should you put your money? What areas are likely to produce the highest returns? Are there any particular multi-year trends that are worth considering? Is it worth gambling all your money on one sector or geographical region?
Consult the crystal ball
The first step is to gain an understanding of what life could be like in the future. This can seem like mission impossible but the reality is that it's easier to predict what will happen a long time ahead than in the coming months, according to Richard Watson, the founder of nowandnext.com.
"I normally list 10 trends for each year but the only serious ones for 2012 would be volatility, uncertainty and anxiety," he says. "You can't see the next 12 months but there's more clarity over 30 years if you consider some of the advances we're seeing in computing and biotechnology."
The one trend from which we cannot escape is the pace of change, according to Ian Pearson, founder of futurizon.com. Developments are happening at breakneck speed, he points out, but people are more ready to accept these changes.
"Even five years ago there used to be a period between a gadget coming out, a few geeks buying it, and then everyone else jumping in," he says. "That's pretty much gone now and you now see big queues when new gadgets become available."
However, you are likely to be able to make money from new developments as well as hardy perennials, according to Graham Spooner, an investment research analyst at the Share Centre, who divides future investment themes into defensive names and growth areas.
"In the defensive side of the portfolio I'd have essential areas, such as pharmaceuticals, that people will always need," he says. "I'd have the other side devoted to smaller companies on which I'm willing to gamble on them coming to fruition over the next 20 or 30 years."
So what sectors – and companies – look to be interesting for those with longer-term investment horizons? We asked a selection of futurologists, fund management groups, economists and independent financial advisers where they would put their money.
This might not seem very exciting but for those seeking longer-term returns, having exposure to defensive companies whose products and services are in high demand makes an awful lot of sense as they can be relied on to deliver the goods year in, year out. Often these stocks are characterised by reliable demand, stable cash flows and strong corporate infrastructure.
For Graham Spooner at the Share Centre these names will include pharmaceutical giants, such as GlaxoSmithKline, as well as utility companies. "We are always going to need drugs and Glaxo will also benefit from moving into the emerging markets," he says. "I also like ports and harbour operations because exports will still need to be transported by sea."
He also cites water supply as a favoured sector, pointing out that the lack of it could be a reason for future conflicts, especially as populations grow around the world. "Companies such as Modern Water [involved in the availability of water and the disposal of waste water] are in this area," he adds.
Then there are mining companies. "These are very cyclical but you would have thought the underlying product will always have demand, although the timing of investment is important."
There is also a lot of potential created by ageing populations, says Richard Watson. "Anything that allows an older person to stay in their home for longer is going to do extremely well."
Ian Pearson at futurizon.com predicts we will see the same pace of technological development over the next 20 years as we have enjoyed over the past three decades. "Look at how many changes we've seen since 1980, at which point we were only just getting used to the idea of a fax machine," he says. "It is possible for whole industries to change beyond recognition."
Even ubiquitous items such asmobile phones, he suggests, will become redundant.
"I'd be happy to put money on the fact you won't have a phone in 20 years," he insists. "Most of the IT will be replaced by tiny little pieces of digital jewellery. You will be able to do away with televisions, iPods and Kindles as all you'll need is a visor or a pair of contact lenses with 3D high resolution displays."
So how can investors take advantage? Carl Melvin, the managing director of Affluent Financial Planning, suggests hunting out investments in companies that are concentrating on making things faster, cheaper and more efficient. "It's worth looking at high-growth areas such as electronic payments systems and radio-frequency identification (RFID)" – which has applications in everything from tagging livestock to payments by mobile phone to healthcare.
One fast-growing company that is worth a look is Asos, the independent online retailer for men and women, according to Graham Spooner, who is interested in the fact that it takes a totally internet-based approach to shopping. "I also like Monitise Group which provides the technology for making payments over the phone," he says. "You've got to have some things techy and mobile phones are set to dominate our lives even more, so companies such as Monitise could benefit."
It might not seem a very innovative or ground-breaking theme, but having exposure to the emerging markets makes sense for the simple reason that these countries are growing at a much faster rate than those in more developed areas of the world. Geoff Penrice, an independent financial adviser with Honister Partners, believes we will continue to see the developing economies of China, India, Russia and Brazil expand more rapidly, as well as some of the poorest areas, such as Africa. "As they continue to develop and increase their wealth the nature of their economies will change and we will see an increase in demand for things which we have in the West," he says.
Philip Poole, the global head of macro and investment strategy at HSBC, believes the future for China and other Asian countries that have previously relied on external demand, is linked to building up their own domestic consumption.
"That's the only way they are going to continue to grow," he says. "We own shares in companies in China, India and Thailand, where these themes are playing out, as well as companies in developed markets that are associated with them."
He cites Procter & Gamble as an example, pointing out that its second most important market after the US is Brazil. "We also like Colgate Palmolive, which is a US multinational but very focused on the emerging markets," he adds.
Tom Stevenson, the investment director at Fidelity Worldwide Investment, believes another key sub-theme of the emerging markets story will be food. "How the world responds to the challenge of feeding a growing and more affluent population is set to become a prominent theme over the next few decades," he says. "By investing in companies that allow us to grow or create more food, investors can take advantage of these secular trends."
The fact is that no one knows precisely what is going to happen in the future, so the best you can do is make an educated guess, effectively, about which areas will perform well. The biggest mistake, however, is to simply extrapolate current trends and project them into the future.
The danger of prediction is doing it on the basis of past experiences, so that you extrapolate from what you've already seen. But that can get you into trouble when events or inventions come out of nowhere and end up completely changing the landscape.
So where do the financial advisers suggest investing? Geoff Penrice at Honister Partners favours developing regions. "Over the next 10 or so years I think the M&G Global Basics fund run by Graham French will tap into some key trends," he says. "I also think JPM Natural Resources Fund is a good long-term bet."
The best advice for investors is not to try to be too clever, according to Patrick Connolly, the head of communications at AWD Chase de Vere. The last thing you need is to commit every penny to chasing an ongoing trend or theme that ends in disappointment.
"The right approach is to have a balanced and diversified investment portfolio which aims to take advantage of a wide range of investment trends and themes, yet at the same time provides protection if they don't come to fruition as expected," he says. "The easiest long-term trend that investors can benefit from is the rise of the emerging markets, and the best way to achieve this is through broad-based funds such as JPM Emerging Markets, First State Emerging Market Leaders and Schroder Global Emerging Markets funds."
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