The big investment themes to drive markets for the next decade

Note: This episode was recorded on 28 June 2024.

What separates good investors from great investors?

Is it better information? Sure, that helps. Is it natural ability? Again, it doesn’t hurt. But those who are successful over long periods (decades, not years), typically exhibit two characteristics that set them apart.

A big-picture mindset coupled with the patience required to allow trends to evolve, as well as aggressive opportunism.

Warren Buffett’s long-time partner, Charlie Munger, spoke of these two traits, noting that they were an “odd combination, but it’s what works best”.

It appears that Westpac Private Bank Chief Investment Officer, George Toubia, is a student of such thinking. Toubia takes a medium to long-term approach (at least five years, if not longer) and is focused on identifying and capitalising on a curated suite of high-probability, high-impact trends and their beneficiaries before they are widely acknowledged.

“There is a temptation in our world to invest in trends without thinking about the qualities that you need”, notes Toubia.

Toubia also speaks of having a “laser-sharp, relentless, ongoing discipline” which reflects the rigorous assessment and review of investment solutions that he and his team present to their high net worth clients. It is this discipline that provides confidence to pursue opportunities with high conviction once they are convinced of their merits.

So, where is Toubia focusing his energy now? You can find out in the following episode of The Pitch.

Edited transcript

Can you just please explain your role at Westpac Private Bank and the process that you follow for identifying opportunities?

Toubia: We as a team at the private bank, we have one singular mission, which is really help our clients grow and sustain their wealth. And the approach that we chose to employ to achieve that objective is a thematic approach to looking at the world. 

The goal here is to try to stay at the right level in terms of understanding the big picture, the structural changes that will have profound impact on shaping the opportunity. 

And we do that on a global basis and we do that across public and private markets. 

And once we identify those themes and those major shifts, then we really try to identify the underlying investments and the opportunities that really correspond to those themes to help our clients invest and generate wealth. But the more important part of our process is to have a laser-sharp, relentless, ongoing discipline and test our thought process on a quarterly basis and a frequent basis to see where our thinking is - is it evolving correctly or otherwise?

Do you find that things are changing more rapidly from one quarter to the next these days?

Toubia: I would say things are changing rapidly, but they are changing rapidly within a sphere of clarity from our point of view. And the reason why we believe that is the case is that when you have the ability to step back a little bit, away from quarterly, monthly, daily developments and really focus on those major shifts, it's very clear from our point of view what is happening. And that's defined by a number of things.

First, we are in a completely different regime since two years ago that we believe is the exact opposite of the last 15 years. 

That shapes our thinking about the quality of capital, the discipline needed - businesses that were able to survive on low cost of money will not anymore. 

And then when you think about it globally, geographically, without a doubt, we see some significant changes happening in Asia and in the US. We've always held a view that the US is constantly underappreciated for its resilience.

And we've always held the view that China is completely misunderstood for the maturity of its credit and investment business model that's worked for 30 years and that it is entering roughly a new era of maturity and structural stagnation, and then add the supremacy from a technology war perspective, add the supply chain issues and so on. It becomes quite clear what is the path forward in terms of evolution.

Then we use those short-term developments to identify whether they are in line with our thought process or otherwise. And that gives us sanity and visibility. Visibility in the sense that short-term information that markets react to, I certainly don't focus on. I like to look at developments on a rolling basis. And I think a lot about the decision-making by corporates and where capital is going and regulation and so on, and innovation. Those are more profoundly important to us than what's happening from just a simple macroeconomic stance that usually is backward-looking in nature.

What are two or three of the big trends you're observing that you think will influence the investment landscape over the next two years?

Toubia: I think two years is short, but let me just share with you a couple of observations. For China, it went through a 35-year cycle of incredible, miraculous growth. For the next 10 to 20 years, China, for us, will be defined by significant debt deleveraging, demographics of ageing, and potentially more permanent pace of deflation. And thinking about population being at 1.4 billion right now, going to 1 billion in 20, 30 years, you can appreciate how the opportunity is shifting. South of China, Japan has gone through 35 years of being a sleeping giant, through deflation and lack of corporate governance. Now it's emerging from that and will create multidimensional opportunity.

When we think about supply chains, we think there is an irreversible trend from globalisation to localisation. And I think that is completely misunderstood. And what I mean by that, it is reality transforming into opportunity on a short-term basis. Today, when when you look at Southeast Asia or India or Mexico or the US, the effects of localisation are creating incredible new pools of opportunity that are really visible in front of us, 12, 18, 30 months. And just to take the reader on a big picture on how powerful that is, thinking about semiconductors, which is a very well-understood notion, the US has had zero presence in production of advanced semiconductors up until now. Within five years’ time, it will produce 35% of the most modern semiconductor chips for the whole world.

So we look at the US Chips Act, which is funding $40-45 billion in grants. On top of that, there's $400 billion coming through across 25 states in the US that's creating that. Thinking about what jobs it creates, thinking about the high-paying jobs it's creating for life, and those ecosystems never existed in those countries before. So that is an important consideration from our point of view that shapes thinking. And, of course, geopolitics for us for the next five to 10 years is going to be far more confronting than the last 20 years. And it has implications and we don't talk about it for the sake of talking about it, we talk about it from a practical viewpoint, what it means for pace of innovation and investments by governments and local governments, will that increase it or decrease it, where there is going to be lack of labour, which was enabled by ill-integrated immigration, where the door could shut down, what does it mean for businesses with or without pricing power and so on.

And just when you talk about supply chains, and I use the example of semiconductors, thinking about defence, for example, never used to be a thriving industry. Now it will be for the next 10 years. 

Of course, the most important thing from our point of view is innovation. 

It is the single most important driver of our thinking, and all of your audience know what's going on in the world of AI, but that is just the starting phase. 

But innovation, for us, is even far more powerful in the world of science and healthcare and the world is yet to see some major progress over the next five to 10 years. So lots to consider.

One of the aspects of your investment process is ensuring you're very targeted in your approach. Can you explain why that will be so important as these big themes unfold?

Toubia: Absolutely. I think being targeted reflects our desire to set a high bar on ourselves, such that when we are really bringing opportunity to our client, that it meets ideally what we're looking for in skills and attributes in totality. 

I think there is a temptation in our world, as you and I know, to really invest in trends without thinking about the qualities that you need that go along with that. 

We think this is so important because our baseline thinking is that the world is not straightforward and investments will face pockets of difficulty. That's normal behaviour.

So what we are looking for is the amalgam of as many important skills as possible that can make that opportunity survive pockets of difficulty and see it through to the good times for the benefit of our clients. 

We are quite high conviction when it comes to that because we think talent, expertise, inefficiencies are a very scarce skill. We would love to see more of it and we're students of markets and students of our clients, but we think it's hard to find the totality of the right skills to navigate through. And I'm sure we'll speak further about some of the practical examples of what that means.

What areas of the market are you most excited about?

Toubia: Without a question, we think we are in an era that is defined by scientific innovation and significant change to the care model that's moving from the hospitals and the provision of care to the patient at home. That is a major long-term shift. And I urge everybody who's just listening to this discussion to just think about all the innovations that you've read about in the last six months or one year and we all get excited about, to understand that it's only enabled by incredible tenacity and commitment of large organisations that spend billions every year to get to that point. And if you extend that to some other major disease groups that are, unfortunately, not yet solved, there is good pipeline of promise and innovation in the whole world of immunology, in the whole world of oncology, let alone the significant change in the model of care that's taking shape over the next 10 years. That is going to make us rethink what that opportunity in healthcare is about. That is very pivotal from our point of view.

I know we'll touch on other things in different segments, but one thing that's really important for us is the rise of US advanced industrial renaissance in its shape, but more broadly the bigger role of advanced industrials. And I mention that because those are areas that are not specifically popular in the mind of investors or investment banks or providers of opportunity, because people tend to quickly move towards technology or consumer business models or so on. But there is a rise of what we consider as a critical hub to enable innovation in all the forms that you and I speak about through advanced industrials and something that the world is not used to because the world in the last 20 years has moved from industrialisation to consumption. Consumers are 70-80% of economies, 60% in Australia, 70% in the US. That now is rising above to become the critical enabler, or the lack thereof, of so many popular themes that people are thinking about. And we think a lot about that within our global resilience theme.

Does it help that an ageing and affluent demographic desires to live longer while technical innovations are meeting that demand?

Toubia: The short answer is yes…if. Yes in the sense that if we are positive people by our nature, if we can be preventative to allow people to live healthier and have less pressure on healthcare systems, that is fantastic. Okay. Now, other schools of thoughts that challenge that view are saying if you live longer, the needs on the healthcare system will last further. Then it's a question of, this is where the ‘if’ comes, the ‘if’ is if you remodel the care model to deliver that efficiently and cost-manageably, then that works.

And I want to go one step further and just highlight the power of automation with ageing. Two points that we've just spoken about a few seconds ago. Places like Germany, they have significant ageing populations, Europe, by and large. But what they have decided to do is to bring robotics and automation to work alongside an individual on a plant that manufactures cars alongside that individual and say, "You do the easy part of the job. The machine will do the tougher part of the job and instead of you retiring at the age of 65 and put pressure on the public purse, you can work for another 15 to 20 years." So education, knowledge and knowing how to use technology is also very important to my answer being yes…but.

To find out more about Westpac Private Bank’s Global Investment Services, visit us here