As we have seen in the past few years, the global political and economic landscape can change quite rapidly and in a very short period of time. This shifting picture doesn’t appear to be slowing down anytime soon either, as intense weather events, geopolitical crises, and a scramble for resources could make the next several years just as volatile.
To prepare for this potentially uncertain timeframe, the National Intelligence Council recently laid out an extensive report of hopes and pitfalls that look to change the world from now until 2030. In the 140 page document, the intelligence industry player also identified a few ‘megatrends’ which look to be at the heart of the world’s shift over the roughly next two decades as we experience more globalization, conflict, and fights for top resources and talent.
While some of the trends highlighted in the paper aren’t exactly good news for U.S. investors, there are several ways that you can prepare a portfolio for the seismic shifts that are in many ways already taking place in the global economic and political picture (read Five Great Global ETFs for Complete Equity Exposure).
For these investors who look to remain ready for these developments, we briefly highlight four of the biggest trends that the study brought to light below, and a few ETFs to play them. While these ETF picks might not be great in the short term, if the ‘megatrends’ described below come to pass they could be excellent long-term choices over the next decade:
Thanks in part to the financial crisis and political ineptness, many in the study are forecasting America’s dominance over the global stage to wane. Instead, they look for Asia to continue its rise as China surpasses America from a GDP perspective, while total population, military spending, and technological investment all tilt decided in favor of the East as opposed to the West.
For a broad play on a rising Asia, investors could look to the iShares MSCI All Country Asia ex Japan Index Fund (AAXJ). This popular product holds nearly 600 stocks in its basket, has a robust $2 billion in AUM, suggesting modest bid ask spreads (read Asia Ex-Japan ETF Investing 101).
From a country look, rising giant China takes the top spot at 22% of assets, followed closely by Korea at 20%. Taiwan and Hong Kong account for another 25% of the fund, while sectors tilt the product to financials, tech, and consumer discretionary firms.
The past few years has certainly seen a few black swans hit the market, the biggest of which was the 2008 meltdown while the debt ceiling scare of 2011 and the Fiscal Cliff debacle of 2012 both threatening to do the same. Geopolitical worries in the Middle East, oil shocks, or a breakup of the euro zone all could act as coming black swans, suggesting that while the markets may rise, there could be intense periods of extreme volatility.
Both of these products look to broadly invest in the markets, but then dynamically allocate to volatility when levels are elevated (see PowerShares Debuts Hedged Broad Market ETF). In this way, the two products can beat out ‘regular’ funds during shaky market environments, although they could underperform in the absence of ‘black swans’.
By 2030, the world’s population is expected to rise over 1.2 billion people to just over 8.3 billion. If that wasn’t enough, the global middle class is expected to hit two billion by that time, while life expectancy will also rise by several years.
With people richer and living longer, food demand looks likely to skyrocket, putting a big focus on agribusiness and the top agribusiness ETF MOO. This product holds a variety of firms that play on the projected trend of soaring food demand both in terms of quantity and quality (see Three ETFs for Insatiable Global Food Demand).
The product has a global focus too, has just 37% of assets go to American stocks, although large caps do account for 81% of the fund. Agricultural chemicals like potash and fertilizer, account for 50% of the fund’s industry exposure, while farming/fishing stocks (25%), and industrial engineering (15%), round out the rest of the top three, suggesting good diversification for this ETF across business segments.
Cities Continue to Grow
Currently, 50% of the world’s population resides in cities and this figure is expected to hit 60% by 2030. While this might not sound like a big increase, it represents nearly one billion people more in cities, putting a heavy strain on infrastructure systems like water, electric grids, and transportation networks.
As this trend takes hold, governments will have to spend more on infrastructure in order to prevent a complete shutdown of life in many of these massive metropolises, suggesting that funds that focus on infrastructure could be a great bet. One of the most popular in this respect is the iShares S&P Global Infrastructure Index Fund (IGF), a product with over $370 million in AUM (also see Five Emerging Market Infrastructure ETFs for the Coming Boom).
The ETF holds about 75 securities, pays a solid yield above 4%, and charges investors a modest 48 basis points a year in fees. The ETF is well spread across different countries—with a focus on developed markets—while the industry exposure is tilted towards transportation, although electric utilities and gas/energy receive at least 20% of assets as well.
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