Charles Stodart

When more than 190 nations gather in Paris next month for the UN Climate Change Conference, there is a strong hope that new targets on greenhouse gas emissions can be set down. If forthcoming, a new binding agreement would almost certainly be a catalyst for further policy initiatives and a strong incentive for fresh investment in ‘renewables’, including solar and wind, as part of the energy solution. However, even if an agreement is not formalised – and prior summits have fallen short of expectations – there are promising commitments already being delivered by leading individual countries, including the US and China.

The storage solution

The last five years has seen a significant increase in the installation of solar panels globally, largely driven by top-down government policy and strongly supported by generous tariff structures and subsidies. Also helpful has been a steady improvement in panel efficiency and a sharp fall in costs. These factors have combined to prompt broad take-up – there are now 1.4 million Australian households that have installed a solar system; that’s nearly 15% of all households nationally.[1] There has also been rapid adoption overseas, particularly in Germany and in the US, where residential solar installations last year increased by 51%.[2]

However, one of the challenges to date for renewables has been around its relative inflexibility. The conditions required to generate power (eg daylight) do not always coincide with when power is needed. The answer has been to use the power as it is generated and feed any excess back into the grid – often not the optimal solution.

While still early days, one exciting development that is getting closer to commercial viability is a battery solution for energy storage, which would allow households to store electricity during low-cost periods for use during peak times. Taken to an extreme, having sufficient solar power-generating capacity and storage would allow a household to go ‘off-grid’ – given that network costs make up nearly half of a typical electricity bill[3], the incentive to become self-sufficient is interesting.

Smarter grids

The effective use of storage is also being explored as a way for businesses and utilities to more practically use larger-scale renewable energy sources (like solar farms) in a way that doesn’t threaten the grid, and which can also help lower greenhouse gas emissions. It could also help make the infrastructure more reliable. Whatever the pace of introduction of energy storage solutions, utilities are already developing a better understanding of how they can incorporate large – and small – renewable energy projects into a regular utility grid network. 

The investable opportunities in New Power

Companies that seek to provide solutions to the questions posed by a more challenging environmental outlook stand out as interesting investment candidates. Energy storage battery manufacturers, forward-looking utility companies, renewable energy hardware manufacturers and solution providers – especially those suppliers that are supporting the move to ‘smart grids’[4] — are among the investable opportunities.

Some companies which are already pioneering this landscape include:

Tesla – The US-listed electric vehicle manufacturer has already launched its residential ‘Powerwall’ solar storage battery product, and is planning imminent deliveries in the US, EU and Australia. The company recently teamed up with battery-manufacturer Panasonic, investing $5 billion to build a ‘gigafactory’ that will supply battery packs for both Tesla’s cars and the ‘Powerwall’ products.

Other battery providers (such as Samsung SDI and LG Chemical, both listed in Korea) are watching developments closely. It’s also worth monitoring 24M (not yet listed), which has developed an advanced manufacturing process that reduces the cost of manufacturing a battery significantly. The price of energy storage is expected to drop sharply over the next five years.

Leading utility companies, such as NextEra Energy, are also interesting. Subsidiary FPL has overhauled its grid network by integrating advanced technology through the installation of smart meters, smart devices, sensors and monitors, resulting in increased reliability and lower costs. Subsidiary NextEra Energy Resources is the largest generator of wind and solar power in the US.

Swiss-listed ABB offers solutions that efficiently incorporate renewable sources within an existing grid. ABB’s solutions include multi-directional power flow, digital substations and more efficient transmission cables. ABB sees high-growth opportunity in micro-grids – smaller grids that combine energy storage, renewable and conventional power generation with smarter automation.

The overall energy storage market is expected to grow rapidly over the next few years and could reach $1.5 billion by 2019. While the market is still in its early stages, there is significant and growing interest in the household energy storage market. Utilities companies that have sufficient experience of renewable energy and which have upgraded their grids accordingly will also be well-placed to take advantage of the introduction of energy storage solutions. Factors that may impact the pace of growth include how economical it is to retrofit existing solar systems as well as whether current tariff structures need to be overhauled.

By Charles Stodart, Investment Specialist, Zurich Investments

Read other Zurich ‘Megatrends’ articles:

• Megatrends: Technology and the ‘Smart’ Corporate
• Megatrends: Demographics and the ageing world
• Megatrends: Technology and the connected consumer
• Megatrends: Asia rising

[1] Clean Energy Report 2014.
[2] Solar Energy Industries Association
[3] Energy bills explained; ACCC and Australian Energy Regulator
[4] A smart grid is an electricity supply network that uses digital communications to detect and react to local changes in usage

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Important information: The content of this publication are the opinions of the writer and is intended as general information only which does not take into account the personal investment objectives, financial situation or needs of any person. It is dated October 2015, is given in good faith and is derived from sources believed to be accurate as at this date, which may be subject to change. It should not be considered to be a comprehensive statement on any matter and should not be relied on as such. Neither Zurich Australia Limited ABN 92 000 010 195 AFSL 232510, nor Zurich Investment Management Limited ABN 56 063 278 400 AFSL 232511 of 5 Blue Street North Sydney NSW 2060, nor any of its related entities, employees or directors (Zurich) give any warranty of reliability or accuracy nor accept any responsibility arising in any way including by reason of negligence for errors and omissions. Zurich recommends investors seek advice from appropriately qualified financial advisers. Zurich and its related entities receive remuneration such as fees, charges and premiums for the financial products which they issue. Details of these payments can be found in the relevant fund Product Disclosure Statement. No part of this document may be reproduced without prior written permission from Zurich. Past performance is not reliable indicator of future performance.

The post Megatrends: New power appeared first on AdviserVoice.

Charles Stodart

The former CEO of General Electric Jack Welch once said that “if the rate of change on the outside exceeds the rate of change on the inside, the end is near.” Corporates have always been subject to forces for change, whether regulatory, economic or financial. But it’s the current challenge of technological change, driven by the ongoing shift to the digital economy, that’s proving especially testing.

To recognise how disruptive this can be, you need only consider the well-documented stumble and near-demise of Kodak – a one-time dominant leader in camera film sales – which severely misjudged the advent of the digital era on their analogue photography business. There’s a sense that the accelerating pace and pervasiveness of technological change today makes it even more disruptive. Certainly, several other ‘consumer-facing’ industries, such as retail, travel and journalism, are feeling heightened challenges to their business models.

While technological change can often be a disruptive force in the corporate world, it need not be all ‘doom and gloom’. Companies that can figure out how to adapt to these forces or even exploit these changes for their own competitive advantage and embrace the digital economy will be well positioned to stay relevant and even thrive.

Many will have heard of the ‘Internet of Things’ (IoT); an environment where ‘machines talk to machines’. In the manufacturing world, adoption of IoT is an example of how companies can benefit from the digital era. And while the adoption of IoT is still in its relative infancy, we’ll probably see a much faster and far wider acceptance in the next five years. Broadly speaking, IoT adds an information or ‘data layer’ on top of a company’s physical assets or systems that allows increased operational efficiency and improved asset management potential.

The investable opportunities within the ‘Smart Corporate’ megatrend

Within the manufacturing industry, the companies to keep an eye on will be those embracing IoT and successfully combining lean manufacturing principles, integration of IT systems and machine automation infrastructure. Within the services industry, companies that leverage the data layer to their logistical advantage or incorporate it into their current processes will have an advantage. These may be companies in industries as diverse as finance, pharmaceuticals, and security.

There are also investable opportunities within those companies that are offering the solutions that enable the implementation of IoT. Providers that can create their own ecosystems of support will have a strong competitive edge. Some of these companies already have the capability and are starting to exploit this massive opportunity.

The Smart Factory

Over the last few decades, the big developments in manufacturing have been around the steady improvements in automation and the broad adoption of lean manufacturing principles with the integration of enterprise IT systems. Going forward, there will be a merging of IT systems and machine automation infrastructure; dubbed the fourth industrial revolution, or ‘Industrial 4.0’ – a collective term for devices, machines and materials that communicate with and control each other cooperatively. IoT is an important early part of this process in terms of optimizing asset utilization. The idea is that IoT can help improve overall equipment effectiveness.

In manufacturing, IoT is largely enabled by sensors monitoring and tracking data, which is then gathered and communicated for real-time analysis to improve efficiencies. For the smart factory of the future, this will impact across supply chains and right through the manufacturing process, with IoT being a core enabler across key areas of the whole.

Technology company Cisco is a key player in this space. The company has invested heavily to develop IoT products – specifically an ‘end-to-end’ IoT solution that combines network connectivity, fog computing, data analytics and security. Other key players in the related factory automation space are Fanuc, a leading robot manufacturer and Rockwell Automation, which is looking to develop a product eco-system. The key aim is to raise asset efficiency to improve returns and competitiveness.

Leveraging the data layer

Within the services industry which is typically ‘asset light’, the aim is to use the data layer to build a dominant platform or standard. A service company can leverage the information that it gets from its customers to enhance its product.

One example is internet security provider Check Point Software Technologies, which has been able to exploit first mover advantage and now counts all Fortune and Global 100 companies among its customers.

Driverless vehicles

Google is currently championing the driverless car capability. The concept of the ‘connected car’ is already here, enabled either via your smartphone or directly through partnerships with a telecom operator, though with a focus on entertainment, media and relevant updates. The driverless car aims to automate the operation of the car itself, while at the same time communicating with other

cars and central traffic monitoring information points to optimise traffic flow. Notwithstanding yet-to-be-resolved ethical issues, this is expected to advance much further over the next five years. There are also possible investment opportunities in the technology that makes it possible, including sensors, cameras and lenses.

FinTech

Digital innovation is increasing in importance in the financial services space, with many potentially transformational changes on the way. The launch of Fintech hub ‘Chalk & Stone’ in Australia, acknowledges the arrival of one of the fastest growing sectors in the financial services industry globally. FinTech includes things like mobile payments, crowd-funding, peer-to-peer, automated advice, capital markets and cryptocurrencies. But while many FinTech companies have been successful, they are still largely operating only at the edges of banking at this point.

While the early focus of FinTech has been around leveraging social media type platforms to create specific solutions and even automated advice, one area that’s been relatively modest to date has been the incorporation of IoT. IoT could be leveraged to enhance fleet management; streamline

contractual processes in trade finance, and improve risk management through the provision of real-time data analysis and other automated systems relating to physical assets.

From manufacturing to service companies, the adoption of the digital economy is a broad theme that will impact across multiple sectors. Companies to watch over the next few years include those that are investing in IoT; those which provide IoT solutions; security companies and FinTech.

By Charles Stodart, Investment Specialist, Zurich Investments

Read other Zurich ‘Megatrends’ articles:

• Megatrends: Demographics and the ageing world
• Megatrends: Technology and the connected consumer
• Megatrends: Asia rising

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Important information: The content of this publication are the opinions of the writer and is intended as general information only which does not take into account the personal investment objectives, financial situation or needs of any person. It is dated September 2015, is given in good faith and is derived from sources believed to be accurate as at this date, which may be subject to change. It should not be considered to be a comprehensive statement on any matter and should not be relied on as such. Neither Zurich Australia Limited ABN 92 000 010 195 AFSL 232510, nor Zurich Investment Management Limited ABN 56 063 278 400 AFSL 232511 of 5 Blue Street North Sydney NSW 2060, nor any of its related entities, employees or directors (Zurich) give any warranty of reliability or accuracy nor accept any responsibility arising in any way including by reason of negligence for errors and omissions. Zurich recommends investors seek advice from appropriately qualified financial advisers. Zurich and its related entities receive remuneration such as fees, charges and premiums for the financial products which they issue. Details of these payments can be found in the relevant fund Product Disclosure Statement. No part of this document may be reproduced without prior written permission from Zurich. Past performance is not reliable indicator of future performance.

The post Megatrends: Technology and the ‘Smart’ Corporate appeared first on AdviserVoice.

Charles Stodart

We live in an increasingly connected world. We’re more informed and more connected to the world around us than ever before. Faster internet, cheaper smartphones, smart wearable devices and the ‘Internet of Things’ have built what’s now a new and exciting generation of ‘digital natives’. In fact, digital innovation is pioneering new ways we do business and, in doing so, is changing the way we interact with each other.

As a global community, we’ve eagerly embraced the ever-accelerating pace of technology. You need only count the number of labour-saving appliances or sources of digital entertainment you own to understand the extent of its influence in our lives. Having evolved into a generation of digital natives, our comfort and fluency using the web continues to reach new heights.

The rise of mobile internet

It’s no surprise that most of our online activity is now performed on mobile browsers and apps. The smartphone as we know it today is rapidly becoming a delivery system for further and faster innovation. Key to this has been the massive improvements in smartphone functionality, with consumers now getting much more capability ‘bang’ for their buck, as well as huge advances towards near ‘always-on’ connectivity.

The conditions have been ripe for an explosion in user-generated content, embodied for example by Facebook and YouTube. The next stage will see both our network of devices and our digital footprint expand further.

The investable opportunities in connected technology

Each of these trends presents significant investable opportunities, with overseas equities offering a broader universe of candidates. Several growth areas to call out include wearable smart devices, the Internet of Things and the On-Demand economy.

Introducing ‘smart wearables’

You don’t have to look very far to find someone who owns a fitness tracker. Miniaturisation enables more powerful technology to be incorporated into smaller spaces, resulting in increased convenience, data collection and connectivity. Fitness trackers and smartwatches are pioneering examples.

Fitbit – Currently a clear market leader. Its devices can track the distance you’ve travelled, calories burned, and even captures sleep patterns, which is then wirelessly synced to your smartphone or laptop for easy monitoring. With a 68% market share, the success of its US stock performance reflects in part, the strong expectations for continuing company growth.

Apple – Another competitive player with the recent launch of its iWatch. Features include phone calls, text messages, emails and activity-related monitoring (watch out Fitbit). While only a small part of the business portfolio currently, the strength of the Apple brand and its track record for making products consumers want makes it a powerful competitor to monitor.

Other companies to watch are those in the health monitoring and wellbeing sector that are incorporating wearable technology into their products. It’s even being extended to clothing in which we’re seeing the early stages of development of intelligent fibres that can keep track of vital signs.

Despite being in its early stages, the growth prospects of this market are appealing. When considering the investment opportunities in this space, investors should consider factors such as the sustainability of market position, patent protection, and the opportunity to enhance the offering.

The ‘Internet of Things’

Past generations predicted that machines would one day rule the world. And while it’s not exactly an accurate reflection of our world today, there’s an element of truth in it. The ‘Internet of Things’ (IoT) as it’s called, is about ‘machines talking to machines’. With the embedding of uniquely identifiable computing devices into everyday items like household appliances that allows for connectivity and the input of data, the Internet no longer needs humans to supply information. Smart fridges that can monitor food life or furniture items that monitor health – these are the developing opportunities. Progress towards common technical standards which govern how all devices communicate with each other, will further aid growth in this area.

Some companies which are pioneering this landscape include:

Nest – Bought by Google last year, its current suite of products include a thermostat that can be controlled from anywhere; a smoke alarm that can “think, speak and alert your phone”, and a remotely-viewable, camera that can connect to your smartphone when you’re away.

Harman International – A market leader in high-end infotainment systems, delivering navigation, information, driver assistance, entertainment and connectivity into the car – to clients such as Audi, BMW and Mercedes-Benz. Another investment opportunity lies in the companies that help facilitate this connectivity, with data itself set to grow strongly – E.g. Cisco.

The birth of the ‘On-Demand’ economy and ‘peer-to-peer’ services

As consumers in the digital marketplace, we’re now demanding immediate and convenient access to goods and services. On-demand companies typically combine their own specialised software with applications provided by other tech companies that allow previously complicated logistical challenges to be overcome. Companies that have flourished in this arena include:

Uber – Uber’s technology has effectively cut out the middle man to allow a consumer to connect directly with a driver with more immediacy, transparency and ease than was possible before. While not yet a listed company, Uber already has an estimated market value of over US$40 billion.

Amazon – offers a cloud computing platform that ‘on-demand’ service providers can use. It offers large computing capacity, more quickly and cheaply than could be built physically.

There’s no denying that companies who support the growth of the on-demand economy, such as Amazon, are already investable candidates. We’ll definitely see a lot more technology being incorporated over the next few years as business models mature and companies become publicly listed.

The ever-accelerating pace of technology has delivered faster internet, cheaper smartphones, smart wearable devices and the ‘Internet of Things’. Companies that can effectively tap into these opportunities will be able to accelerate their earnings growth – linked to both revenue expansion and margin opportunity as economies of scale come into play.

Read other Zurich ‘Megatrends’ articles:

• Megatrends: Technology and the ‘Smart’ Corporate
• Megatrends: Demographics and the ageing world
• Megatrends: Asia rising

By Charles Stodart, Investments Specialist, Zurich Investments

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Important information: The content of this publication are the opinions of the writer and is intended as general information only which does not take into account the personal investment objectives, financial situation or needs of any person. It is dated September 2015, is given in good faith and is derived from sources believed to be accurate as at this date, which may be subject to change. It should not be considered to be a comprehensive statement on any matter and should not be relied on as such. Neither Zurich Australia Limited ABN 92 000 010 195 AFSL 232510, nor Zurich Investment Management Limited ABN 56 063 278 400 AFSL 232511 of 5 Blue Street North Sydney NSW 2060, nor any of its related entities, employees or directors (Zurich) give any warranty of reliability or accuracy nor accept any responsibility arising in any way including by reason of negligence for errors and omissions. Zurich recommends investors seek advice from appropriately qualified financial advisers. Zurich and its related entities receive remuneration such as fees, charges and premiums for the financial products which they issue. Details of these payments can be found in the relevant fund Product Disclosure Statement. No part of this document may be reproduced without prior written permission from Zurich. Past performance is not reliable indicator of future performance.

The post Megatrends: Technology and the connected consumer appeared first on AdviserVoice.

Charles Stodart

The centre of global economic activity has seen a clear shift away from Developed Markets and towards Emerging Markets since the turn of the century. China has been at the heart of this. However, the traditional drivers of growth that have propelled Emerging Markets to this prominence are becoming unsustainable. The next stage of growth will be driven by the rapidly growing middle class and should ultimately prove both more sustainable and more significant.

Emerging markets are becoming a powerful force within the global arena and their contribution to global growth has become significant. China is undoubtedly the dominant player in this space.[1] China’s significance is perhaps unsurprising, given her massive population advantage[2] but what has been startling is her continued pace of growth since market reforms were introduced in 1978, driven by a period of rapid industrialization and urbanization, and she has subsequently overtaken such global powerhouses as Germany and Japan.

A change in direction

China’s recent growth has been led by capital-intensive fixed investment, particularly infrastructure, buildings and equipment. This has been a boon for commodity-exporting countries, such as Brazil and Australia, as they have fed China’s voracious appetite for materials, including iron ore and coal – the so-called ‘commodity super-cycle’.

However, China’s reliance on Fixed Asset Investment as the primary driver to her growth is now becoming unsustainable. China’s economy has become unbalanced, debt levels are high, the allocation of resources has been sub-optimal and pollution has become a challenge. While demand for materials will not evaporate, the next stage of China’s development will see growth increasingly led by other parts of the economy.

A burgeoning middle class

While this transition will not be without its challenges, certain factors already in place are supportive. China’s strong GDP growth has fueled significant expansion in GDP per capita, which has roughly doubled every 5 years since 2000. More importantly, wage growth has also been strong and income per capita is now reaching a level at which domestic consumption typically starts to grow quickly.

Discretionary spending is expected to account for close to 50 per cent of a household’s total expenditure in urban China by 2025, up from a third in 2000[3]. More broadly in Asia, the middle class is expected to rise from 525 million in 2009 to over 1.7 billion by 2020. This megatrend is about the rise of the middle class and, with it, the rise of aspirational demand.

The investable opportunities from a rising middle class

This next stage of growth in Emerging Markets present significant investable opportunities. Several interesting sectors are already appearing, including fashion, technology and financial services, though it will also require a more direct investment approach.

Household consumption

Identifying companies that can respond to the growing consumer demand for things like clothing, food or technology will benefit from a rising Asian middle class. They’re more likely to be local companies that can provide affordable local brands. Companies such as Anta Sports – the leading domestic sportswear brand, or Cosmo Lady – the leader in ladies intimate wear, are worth calling out. Other locally-listed sectors to watch are food and beverages.

Technology platforms

More than 50 per cent of the Chinese population (roughly 700 million people) has access to the internet, with mobile devices having recently overtaken traditional broadband. As discretionary consumption grows, several local internet giants have already established strong platforms and are looking to extend their dominance as they now shift their business models to a mobile platform. These companies are set to benefit from the growth in the continued take-up of mobile internet in China and, more broadly, from the expansion in consumer discretionary spending. Baidu, for example, is the leading search engine company in China, with close to 85 per cent of all search engine advertising dollars in 2014, and continues to invest heavily in its mobile platform.

Financial services

A growing demand for savings products is also expected from the growing Asian middle class. This includes savings and transactional banking, insurance, and wealth management. It’s worth noting that low insurance penetration across the Asian region, coupled with favorable demographic changes, means there is strong growth potential in the medium term. A company set to benefit is Hong Kong-listed AIA Group, the market leader in the Asia-Pacific region based on life insurance premiums

Services

Other investable areas to call out are based around services including healthcare, technology, tourism and logistics.

The significance of emerging markets as a contributor to global growth has become quite evident. China has seen a period of startling growth fueled by rapid industrialization and urbanization but this hasn’t been without its challenges. The need for economic returns and a better allocation of capital is a challenging but important part of much needed economic reform. Within the next few years we’ll see a widening middle class with consumer discretionary spending and aspirational demand expected to grow substantially as a result. China’s determination to open its capital markets suggests that there are strong medium-term growth opportunities in sectors like household consumables, technology, financial services and other services like healthcare and tourism. Investors need to consider what sectors offer the most promising growth opportunities from here, and how they can participate in a way that reasonably protects their capital.

By Charles Stodart, Investments Specialist, Zurich Investments

Read other Zurich ‘Megatrends’ articles:

• Megatrends: Technology and the ‘Smart’ Corporate
• Megatrends: Demographics and the ageing world
• Megatrends: Technology and the connected consumer

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[1] Greater China, including China, Hong Kong and Taiwan, accounts for nearly 40% of the MSCI Emerging Markets benchmark. Total Asia accounts for nearly 70%.

[2] Asia’s population numbers 4.4bn in total (or 60% of the world’s population), led by China at 1.37bn (19%)

[3] McKinsey & Co (2010)

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Important information: The content of this publication are the opinions of the writer and is intended as general information only which does not take into account the personal investment objectives, financial situation or needs of any person. It is dated September 2015, is given in good faith and is derived from sources believed to be accurate as at this date, which may be subject to change. It should not be considered to be a comprehensive statement on any matter and should not be relied on as such. Neither Zurich Australia Limited ABN 92 000 010 195 AFSL 232510, nor Zurich Investment Management Limited ABN 56 063 278 400 AFSL 232511 of 5 Blue Street North Sydney NSW 2060, nor any of its related entities, employees or directors (Zurich) give any warranty of reliability or accuracy nor accept any responsibility arising in any way including by reason of negligence for errors and omissions. Zurich recommends investors seek advice from appropriately qualified financial advisers. Zurich and its related entities receive remuneration such as fees, charges and premiums for the financial products which they issue. Details of these payments can be found in the relevant fund Product Disclosure Statement. No part of this document may be reproduced without prior written permission from Zurich. Past performance is not reliable indicator of future performance.

The post Megatrends: Asia rising appeared first on AdviserVoice.

Charles Stodart

It’s been dubbed the ‘Age War’. We’re now living longer than ever before thanks in large part to advances in healthcare and the adoption of healthier lifestyles. Our rapidly changing demographics – both here and globally – will have a far-reaching impact across all areas of our lives, bringing with it some unique investment opportunities.

Australia is currently navigating its way through unchartered waters. Faced with longer life expectancy and lower fertility rates, the gradual increase in the ‘aged cohort’ is increasingly accounting for a larger and larger percentage of the overall population.[1] And while it’s no secret that we’re living well beyond the retirement age, what’s interesting (or alarming, depending on how you choose to look at it) is that a boy born in Australia today can expect to live to be over 80 years old – or more than 10 years longer than his grandfather.[2] Perhaps of even more significance is the gradual decline in the Dependency ratio (the number of people of working age per retiree). This ratio is an important consideration for the Government in assessing the sustainability of Australia’s welfare and pension programs. Falling fertility rates have also played a part in slowly changing this ratio. What we will likely see in the longer-term is low fertility rates playing a big role in eroding working age populations. Japan provides an example of what might happen. The country saw its working age population peak in the late 1990’s, but since then it has fallen by over 10% to 77 million.[3] What we’re ultimately seeing is that an ageing population, combined with low fertility rates, forces people away from relying on government and family assistance; turning instead to financial markets to fund their own retirement. This longevity risk – the risk of outliving the spending power of your savings – needs to be well-managed now more than ever before. This is especially true when you consider that a decline in the workforce places greater pressure on other economic factors to drive growth, such as productivity. The risk here is that (all else being equal) structural GDP growth could fall.

The investable opportunities in an Ageing World

While it poses many challenges, an ageing world also presents significant investable opportunities. The two key areas of opportunity revolve around:

• wealth creation in retirement, and
• aged care services and pharmaceuticals.

Income products are an investment solution for retirees

Traditionally, pre-retirement has been a time to begin reducing your risk exposure from more volatile equities to an asset class that offers more stability and income (fixed interest as an example). But in today’s unprecedented low interest rate environment, this has become a challenging investment strategy. Fixed asset securities are offering less stability and lower income than in the past. Income products have now become the ‘golden child’ of interesting investment solutions. They offer the potential for capital growth, which is vital for managing longevity risk and offsetting the impact of inflation over the drawdown phase. The challenge though, is that while equities can offer both attractive yields and capital growth, they can also add more volatility. A good solution is to identify an unleveraged, low volatility equity product that’s able to use exchange traded options (ie. a product that can be managed to generate attractive levels of income at lower levels of volatility than the overall market). Equity funds with global exposure would offer broader diversification opportunities through a greater universe of investment candidates.

The investable opportunity in healthcare

Healthcare and pharmaceuticals is a significant investable area that’s benefiting from an ageing population. The rapidly increasing number of elderly Australians accessing aged care services is putting a significant strain on resources, and the healthcare industry is currently exploring new ways to allow more people to remain in their homes for longer, while still upholding a good standard of care. The investment opportunities that Zurich is seeing are in the more cost-efficient areas like monitoring, ‘prediction’ and diagnosis. For example, we’re seeing the rise of ‘telehealth’, which is the delivery of health-related services and information via videoconferencing to patients who live in remote areas. Remote monitoring is made possible by the introduction of ‘wearables’. The number of wearable medical devices in the market, which can detect early warning signals for those with acute medical conditions, is expected to continue to increase. The broad adoption of smartphones, which ‘speak to’ these wearables, certainly facilitate this introduction. Within the pharmaceuticals world, huge advancements in medical research in the last few years have opened up significant investment opportunities for today’s investor. Pharmaceutical companies are now incorporating this new information into their research process. Two companies that are worth monitoring include: AstraZeneca: The world’s fifth largest pharmaceutical company has 14 cancer drugs which are in a relatively advanced state of development. It’s believed they will experience peak sales potential of over $12 billion in the next few years. Roche: The global leader in cancer treatments and ‘in vitro’ diagnostics is pioneering ‘personalized healthcare’, with two thirds of their Research and Development budget being spent to improve the efficacy of their drugs. Other sectors to watch include regenerative health, seniors care facilities and grey tourism. The significance of demographic change over time remains undisputable but just how quickly we’ll start to see these changes is harder to predict. It will likely be the way that governments choose to deal with these shifting demographics within their own borders that will decide the pace of change. For investors, the ageing demographic will be likely to influence investment strategies in two key ways. Namely, that investments and the ability to create wealth for retirement will be a growth area, and that servicing our older population (considering sectors like hospitals, health care, aged care, retirement services and even travel) will become increasingly important. By Charles Stodart, Investments Specialist, Zurich Investments

Read other Zurich ‘Megatrends’ articles:

• Megatrends: Technology and the ‘Smart’ Corporate
• Megatrends: Technology and the connected consumer
• Megatrends: Asia rising

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[1] US Census Bureau, International Database

[2] Australian Institute of Health and Welfare; Female life expectancy today exceeds males by @ 4 years

[3] Economic Research from Federal Reserve Bank of St Louis

SOURCES:

• “No Ordinary Disruption: The Four Global Forces Breaking All the Trends”, R Dobbs, J Manyika, J Woetzel (Public Affairs, May 2015)

• Digital Care Services; Harnessing ICT to create sustainable aged care services

• Australian Institute of Health and Welfare

• Australian Bureau of Statistics

• Pew Research Centre, January 2014

Important information: The content of this publication are the opinions of the writer and is intended as general information only which does not take into account the personal investment objectives, financial situation or needs of any person. It is dated August 2015, is given in good faith and is derived from sources believed to be accurate as at this date, which may be subject to change. It should not be considered to be a comprehensive statement on any matter and should not be relied on as such. Neither Zurich Australia Limited ABN 92 000 010 195 AFSL 232510, nor Zurich Investment Management Limited ABN 56 063 278 400 AFSL 232511 of 5 Blue Street North Sydney NSW 2060, nor any of its related entities, employees or directors (Zurich) give any warranty of reliability or accuracy nor accept any responsibility arising in any way including by reason of negligence for errors and omissions. Zurich recommends investors seek advice from appropriately qualified financial advisers. Zurich and its related entities receive remuneration such as fees, charges and premiums for the financial products which they issue. Details of these payments can be found in the relevant fund Product Disclosure Statement. No part of this document may be reproduced without prior written permission from Zurich. Past performance is not reliable indicator of future performance. KJUC – 010468-2015

The post Megatrends: Demographics and the ageing world appeared first on AdviserVoice.

Mr. Stodart has more than 18 years of experience in the financial services industry, having most recently served as an Investment Analyst at Five Oceans Asset Management, covering Asian equities and global telecom stocks. He has previously served as a Fund Manager for Pengana Capital’s Asian Equities Fund, with additional responsibility for the Telecom and Technology sectors across Asia including Japan, as Deputy Portfolio Manager and Investment Analyst at Perennial Investment Partners, and Investment Manager at Murray Johnstone in Glasgow, covering global equities.

Zurich’s Senior Investment Strategist, Mr. Patrick Noble says Charles’ background will be a valuable asset when communicating Zurich’s strong investment capabilities to financial advisers, research consultants and the broader marketplace.

“Charles brings with him a wealth of knowledge and experience in financial markets to our team. His profound expertise covering equity markets will no doubt provide great insights for our clients and investors, that will be hard to find elsewhere in the market”, said Mr. Noble.

“With continued growth in Zurich’s product offerings, Charles’ appointment ensures that our clients will have access to a product market specialist, who understands the unique needs of advisers and dealer groups.”

Mr. Stodart also holds a Masters in Modern History from St Andrews’ University and is a CFA charterholder.

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