4 key megatrends and a handful of ASX stock ideas to play them

Recently, I had the good fortune to moderate a panel discussion for the institutional investor sentiment research company MarketMeter.

The panel, featuring prominent fund managers Jun Bei Liu of Tribeca, Hugh Giddy of IML, and Kirsty Mackay-Fisher of WaveStone Capital, provided insights into four key investment megatrends: 

• Economic regime change,
• AI and digital innovation,
• Public versus private markets, and
• An ageing population. 

Below are some of the highlights. The full session can be watched using the media player at the top of this wire. 

The panel was held as part of MarketMeter's inaugural Insights Lunch, held on Tuesday 3 December 2024. 

Economic regime change: Inflation and growth in Australia

Inflation's Persistent Shadow

Giddy outlined the impact of inflation on Australia's economy. He described the global shift from free markets to interventionist policies, with governments relying on money printing and credit growth.

"We live in a paradigm where free markets are almost a thing of the past," he remarked.

Despite high debt levels, he predicted inflation would remain sticky in Australia, driven by labour costs in a service-based economy. This dynamic pressures companies to manage rising costs. For instance, "Woolworths (ASX: WOW) has broad consumer exposure, and if their sales growth doesn’t outpace wage growth, they go backwards," Giddy noted.

Growth stocks and economic outlook

Liu highlighted the resilience of growth stocks, which often outperform regardless of GDP trends. However, she acknowledged that Australia's economy has navigated challenges like high inflation and a consumer recession over the past 18 months. Liu expressed optimism, noting improving consumer sentiment and stabilising inflation:

"Inflation is trending the right way, and rate cuts next year should boost confidence."

She also pointed out corporate Australia's strength, represented by robust cash flows and increased M&A activity.

Interest rates and two-speed consumers

Mackay-Fisher emphasised the nuanced impact of interest rates, noting the contrasting experiences of retirees benefiting from higher savings returns and younger workers grappling with inflated rents and mortgage costs.

"The cost-of-living crisis is very real," she said.

Mackay-Fisher commended the Reserve Bank of Australia's (RBA) data-driven approach to monetary policy but acknowledged its challenges in managing inflationary pressures stemming from population growth and supply-demand imbalances.

Public vs private markets: Shrinking opportunities

A concentrated and shrinking public market

The panellists noted a concerning trend: a shrinking public market as companies delist or stay private longer.

"The ASX is one of the most concentrated markets globally, with four banks making up 25% of the index," Giddy observed.

This limits investment choices and creates challenges for stock pickers, particularly with fewer IPOs offering value opportunities. "Sometimes the buffet isn't as appealing," he quipped.

The rise of private equity

Liu explained the growing appeal of private markets, driven by investors seeking less volatile, long-term returns. However, this has created a valuation gap between private and public assets.

"Private markets don't mark-to-market as quickly as listed markets," she said, noting that while public markets quickly reflect economic shifts, private valuations remain artificially high.

This dynamic fuels private equity takeovers of public companies, which perceive listed assets as undervalued.

Infrastructure is providing a case study in private appetite

Mackay-Fisher, with her background in infrastructure and telcos, highlighted the sector as one being increasingly targeted by private equity. Assets with long-term cash flows, such as those in transport and utilities, align well with the superannuation sector's investment horizon.

However, she cautioned against overly aggressive private equity exits, citing IPOs like Adore Beauty (ASX: ABY) and Lynch Group (ASX: LGL), which left limited upside for public investors.

"At the end of the day, our funds need to deliver returns," she remarked.

Opportunities in healthcare and ageing populations

Aging demographics present significant opportunities, particularly in healthcare. Mackay-Fisher noted Cochlear (ASX: COH) as a standout investment, emphasising its expansion into adult hearing implants:

"About 70% of new implants are going into adults, with half for those over 65, growing at 15% per year. This reflects increased awareness of hearing's role in overall health."

Fisher & Paykel Healthcare (ASX: FPH) was another company highlighted as benefiting from an ageing population's vulnerability to respiratory illnesses such as COVID-19 and RSV.

Giddy highlighted Sonic Healthcare (ASX: SHL), a leader in diagnostics using artificial intelligence. Sonic has capitalised on its government-funded COVID testing windfall to pursue acquisitions, positioning itself well in an ageing society where regular testing for chronic conditions like cholesterol is vital.

Medibank Private (ASX: MPL) was also discussed and praised for innovatively managing healthcare claims. By shifting post-surgery rehabilitation to patients' homes, the company has reduced costs and increased margins. As Giddy observed:

"Rehab in the home is not only cost-effective but also highly popular with policyholders."

Travel and lifestyle in the silver economy

The panel underscored the leisure travel industry's resilience, even during economic downturns, with older demographics driving growth. Liu spotlighted Flight Centre (ASX: FLT):

"Older demographics have more discretionary income and prioritise travel. Leisure travel remains a defensive and consistent sector."

She also touched on IVF, noting its relevance to ageing trends as more people delay parenthood.

Monash IVF (ASX: MVF) is benefiting from rising demand for egg freezing, a practice increasingly supported by employers globally.

"The frozen cycle trend is transforming IVF from a cyclical to a structural growth story”, said Liu.

AI and digital innovation: transformative potential

AI emerged as a key megatrend, likened by Mackay-Fisher to the revolutionary impact of the iPhone:

"AI is a completely new product, sparking investment across sectors and transforming productivity."

Goodman Group (ASX: GMG) was a popular pick among panellists for its focus on data centre development. Mackay-Fisher noted its 35-year history and low-risk strategy, "mining existing properties for high-value uses rather than speculative investments."

Liu praised GMG’s execution: 

"With a blue-chip client portfolio, Goodman offers compound growth opportunities."

Liu also highlighted Pro Medicus (ASX: PME), a leader in radiology imaging software, as AI enhances diagnostics in cardiology and other fields.

"Pro Medicus’ role in training AI models positions it at the forefront of healthcare innovation,” said Liu

Value-driven perspectives on AI

While many panellists viewed AI as a transformative trend, Giddy advocated for a value-oriented approach, warning against thematic overpricing:

"Investment is about quality and value, not chasing trends. Many AI-exposed companies are overpriced."

He identified Orica (ASX: ORI) and Telstra (ASX: TLS) as compelling options. Orica has integrated mining technologies to optimise operations, while Telstra is building intercity fibre networks to connect data centres, tapping into the surging demand for data infrastructure.

Giddy emphasised Telstra’s potential:

"Their intercity fibre business, with hyper-scaler clients like Google and Microsoft, is undervalued. It’s a promising earnings driver."