Fake megatrends: The big themes to avoid

Has dependable, authoritative knowledge ever been more valuable? After all, we live in an age where our trust in things has never been so tested, and so often, where second-guessing and investigation is demanded of us on a daily basis. 

Online it seems almost anything can be called Fake News, whether it is or isn't. So-called "deep-fake" images, audio and videos are increasingly indistinguishable from the original. And every day we are on our guard against scammers knocking on our digital door with emails, texts and calls pleading with us to (you name it) urgently contact the ATO, pay an outstanding eBay shipment bill, invest in high yield bond scams and countless other online cons. 

For retail investors, there are subtler false signals to be aware of that can be every bit as damaging to your financial security: “FOMO” frenzies fed by the financial press, or social media forums such as Reddit, pushing pump and dump stocks, fleetingly fashionable cryptocurrencies,  provoking greed, creating bubbles, courting hazard.

To negotiate tricky terrain you need expertise. So, whereas in the previous wire in this series I asked four experts to nominate an investment megatrend to look out for in the coming years, in this wire I ask them to nominate a “false megatrend” to look out for – an investing theme that may appear to have merit but is perhaps over-valued, by the market. 

You’ll find out:

• What Munro Partners’ Nick Griffin thinks of “greenwashing” and commodity shortages;
• How Montaka Global Investment’s Chris Demasi feels about the COVID reopening trade;
• What Credit Suisse’s Steve Cabot thinks of Crypto; and
• Whether ETF Securities Australia' Kanish Chugh thinks the work-from-home trend is sustainable.

Questionable climate credentials, commodity shortages

Nick Griffin, chief investment officer, Munro Partners

Within the climate area, there is no shortage of greenwashing. We’ve done a lot of work over several years to try and understand who's greenwashing and who's not, who's really reducing emissions.

Outside of that, I also struggle with this commodity trade sometimes and the claims that the world's running out of food, copper or lithium. Yes, that happens for three and five year periods all the time, but there's no evidence over a 20-year time horizon that it is actually going to happen. The supply always adjusts in the end. And so those are areas that we don't end up looking at as much as people might think we do.

In the resources space, oil is an example where looming shortage issues were solved by technology (via advancements such as horizontal drilling and enhanced oil recovery techniques). I think it just comes back to capitalism, quite frankly. The demand for oil today is the same as it was 10 years ago, so demand hasn't come down.

Like everything in life, if the price goes up enough, someone smart enough will find a solution, and that's what happened. In commodities generally, yes, I can see lithium might get tight here for five or six years; or copper can get tight for three to five years. But ultimately, if the money's there, capitalism will solve the problem.

Shutting down the "reopening" trade

Christopher Demasi, portfolio manager, Montaka Global Investment

At the end of last year, I was explaining to our team how I regard this whole idea of the “reopening” as greatly overplayed, and I still hold that view. It’s less a megatrend and more a theme.

I believe the potential for investors in this reopening to make money has been greatly overstated. You're seeing a lot of companies whose earnings would benefit from the reopening of economies around the world, but I think they're being priced for that. For example, a lot of cyclical industrial companies are already sitting at some very lofty multiples.

The year-on-year growth of 40% to 50% that you're seeing in some companies – maybe even double their earnings – that's a one-time deal. A continuance of those sorts of growth rates is going to prove elusive for investors.

But when you focus your investments around really multi-decade mega trends, they're the sorts of things that persist for a long time. These are paradigm shifts where the compounding becomes exponential and can lead to fantastic returns for investors for a long time to come. The reopening trade is being overblown and has almost become a very risky place to play.

And when you look at the companies that are going to benefit, there's only a few of them around the cloud computing – infrastructure- and platform-as-a-service. We're seeing 30, 40, 50% growth rates out of those businesses and out of that industry, and it’s going to continue for a long time.

Those growth rates are going to be persistent for the next decade. That's the difference, whereas a reopening trade is only fleeting but has almost been priced as though it's going to be sustainable.

Alarm bells around short-term ETFs

Kanish Chugh, head of distribution, ETF Securities

Most of the thematics that are being covered right now (in Australian ETFs) have a long-term view, for example battery technology. Maybe people didn’t initially understand how that would be a long-term megatrend, but I think they do now. The fading out of combustion engine car sales by 2030 in the US, that government support, also means corporate support and it becomes entwined in people’s shifting views on the environment. These demographic changes intertwining with government policy are a long-term, multi-decade, structural driver, not something that’s going to move over after a few years.

In the US, with the scale and volume of the market for passive funds, ETFs launch and close very quickly. For example, last year I saw a COVID ETF and a work from home ETF – people may have thought of that as another long-term theme. Yes, COVID and remote working has changed corporate life. But it’s not a long-term trend as such, because there’s going to be a balance between people going into an office and working remotely.

COVID is something investors do need to focus on, but It’s not a long-term, multi-decade theme. There will be very strong names in these various ETFs, such as Microsoft and Docusign in that work-from-home ETF I mention. But am I going to be investing in those names, and for that same reason, for 10 years? I don’t know. That’s something to be cognisant of when looking at thematics.

Crypto is questionable and even "nefarious"

Stephen Cabot, investment consultant and director, Credit Suisse

Cryptocurrency is something that we're seeing a lot of discussion about, including commentary about what impact it will supposedly have. And we're still a bit skeptical for a few reasons:

• We struggle to understand how to value it, there’s no fundamental basis on which to do this.
• What's standing behind cryptocurrency is questionable.
• It's used for a lot of nefarious purposes.

The fact that there's so much of it that can be lost so easily is also a concern. So, cryptos is one so-called megatrend that we're not big believers in. It's definitely a topic that people are focused on, so we need to be aware of it and understand that it's out there, but we're not going to get too caught up in it.

The wrap-up

Whether you’re fiercely contrarian or not, no true investor aspires to join crowded trades. But piling into stocks that have caught short-term investing themes, under the misguided assumption they’re part of the next big evolution, is a sure way to do just that. In line with this, understanding what is NOT a megatrend is arguably just as important as knowing (to the best of one’s ability) what IS – something that is outlined in the insights our contributors shared here.