Three global megatrends and some ways to play them

Megatrends are powerful transformational forces that have wide-reaching effects on our world. They’re also keenly anticipated by many of the most successful investors. In this editorial feature, we look at:

• how a few different industry insiders think about megatrends
• the megatrend they’re watching most closely
• some ways to invest in them.

Megatrends – or supertrends, as Credit Suisse refers to them in its annual thematic equity investment report – build on deep societal changes that we all experience. These are then translated into structured investment ideas. 

That’s according to Andrew McAuley, managing director of Credit Suisse Wealth Management Australia. The big one he regards as probably the most important “Supertrend” in the next few years – which will potentially affect 37 million people worldwide – is discussed a little later.

But first, let’s focus on another theme that’s been splashed around since late last year: Artificial Intelligence - particularly Generative Artificial Intelligence (Gen-AI), which underpins ChatGPT. Global venture capital firm Antler believes this technology is a game changer.

Generative AI (or “what the hell is ChatGPT?")

Venture capital firm Antler believes Gen-AI will have a significant and wide-ranging effect on many aspects of our lives. The VC is currently seeing early signs of that in the US$100 billion Creator Economy, which it believes is poised for continuous disruption.

What is it?

Gen-AI is a specific type of AI focused on creating new content, such as text, images, or music. The technology does this by using machine learning algorithms. The example mentioned earlier – ChatGPT – is a “chatbot” developed by OpenAI, a San Francisco-based startup co-founded by Elon Musk and Sam Altman. It’s also backed by Microsoft, among others.

This can be useful in a variety of applications, such as creating art, music, or even generating text for chatbots.

(And just quickly, Grammarly is another startup singled out as a Gen-AI “unicorn” by Antler in recent years. Every page you read on Livewire Markets has been proofread by this technology (after we humans have written and edited them ourselves, of course).

The biggest categories of Gen-AI are:

• Text: Summarising or automating content.
• Images: Generating images.
• Audio: Summarising, generating or converting text in audio.
• Video: Generating or editing videos.
• Code: Generating code. 

Why should you care?

“Two years ago, few investors were paying attention to the creator economy. Since the pandemic, the tables have turned completely,” says Antler’s Ollie Forsyth.

He says many types of creators – music artists, podcasters, gamers, and those who are providing personal travel advice on platforms such as TikTok – are scrambling to find new ways to monetise the platforms they create.

How does Gen AI make money?

Antler highlights several revenue models for Gen-AI, including:

• Licensing the technology to other companies or organisations that can use it to improve their products or services.
• Selling the outputs of the AI system, such as generated images, videos, or text, to customers
• Subscriptions to access AI services, with a user-pays system to generate our own stuff

Challenges

The big one is the need to build not just a product, but also a defensible business model with the capacity to endure. As with any company selling products or services, AI companies need sustainable competitive advantages.

More unique to the AI space are the ethical concerns technologies such as ChatGPT are already raising.

• What if creative jobs are replaced by AI machines?
• Who owns the copyright of AI-generated content?
• What’s the effect in traditional education and academic circles?
• Disinformation and misinformation.

Credit Suisse: A “supertrend” that could displace 37 million people

“Probably the most important Supertrend in the next few years is climate change,” says Credit Suisse’s Andrew McAuley.

It’s particularly relevant in our part of the world, the Asia Pacific region, where a one-metre lift in sea levels could displace 37 million people – 23 million in China alone.

What is it?

“China and our other major trading partners in the region are aiming for carbon neutrality. Achieving this will require a combination of cleaner transition energy sources such as LNG, as well as renewables such as wind, solar and green hydrogen.

The transition to decarbonised economies presents an opportunity for Australia.

“Especially given our abundance of the raw materials required to produce renewable energy, Australia is attracting and will continue to attract investment,” McAuley says.

“In addition, gas producers are in a unique position to facilitate the change as the technology evolves and the availability of carbon-neutral energy increases.”

Why should you care?

Because of the skyrocketing power prices faced here in Australia and around the world, for one thing.

“Looking at short-term developments in this area, the recent increase in energy prices should act as a catalyst to cut the world’s dependence on fossil fuels for electricity production and transportation,” McAuley says.

And then there’s the stuff we eat. The global food system produces well over 20% of global greenhouse gas emissions and is also in the process of reducing its carbon footprint.

“This offers long-term opportunities for a broad range of industries. Energy transition and related infrastructure is being fast-tracked in China’s long term development plan,” McAuley says.

“The country’s commitment to energy transition should keep business opportunities in solar, wind and EV-related sectors well supported in coming years.

How does this generate money?

McAuley lists the following to highlight how different sectors and industries are tackling climate change and turning a profit from the theme.

• Food production companies providing technologies to improve sustainable food production, such as precision agriculture, vertical farming technology, gene editing, waste management and food waste reduction.
• Meat processors with low GHG emissions and plant-based food product providers.
• Transport companies with a strong commitment to a greener future.
• Vehicle manufacturers (car, shipping, aerospace) offering solutions to reduce the environmental footprint, such as electric vehicles, sustainable fuels, hydrogen, or other technologies.
• Energy companies that can square the circle by cutting GHG emissions while maintaining dividend yields.
• Carbon-capture technology companies and firms involved in blue and green hydrogen capacity enhancements.
• Renewable power companies and other CO2-free power generation and electricity-storage technology providers.
• Building and construction companies that accelerate building efficiency to reduce energy consumption.

Challenges

Political will is a big challenge tied to the other major difficulty: it’s one thing to establish ambitious “net-zero” targets but another thing entirely to fund these. We’ve seen that in Australia, where underlying sentiment around the need for government-led action to reduce climate change has shifted. It was arguably a key reason why the Scott Morrison government was overturned in favour of the Anthony Albanese government last year.

And while the science on climate change might be regarded as settled, at least according to the United Nation’s Intergovernmental Panel on Climate Change, there’s a strong view that it isn’t. That’s something that’s played out in the passionate debates on several recent climate-change, net-zero-themed articles on the pages of Livewire Markets.

“The most important technology of the next century”

Returning to high technology, the final megatrend mentioned here comes from another venture capitalist – Michael Tolo, principal of Blackbird Ventures.

“I’m excited about the opportunity for frontier technologies emerging, and Australia has a deep and storied history in software, with Atlassian (NASDAQ: NASDAQ: TEAM) and Canva the standard bearers over the last decade or so,” he says.

Quantum computing is what Tolo believes is the new game-changer.

“The potential consequences of the applications a utility-scale quantum computer could unlock are generational. This could be the most important technology of the next century, not just the next 10 years,” Tolo says.

What is quantum computing?

Cloud computing, which was one of several megatrends nominated in this editorial series previously, relies on networks built on what Tolo terms “classical computing systems”. The biggest players in cloud computing are Microsoft Azure and Amazon’s AWS.

“Those types of systems can’t compute within a reasonable period of time – so there are many aspects of the physical world that we can’t compute,” Tolo says. That's where quantum computers come in.

Tolo highlights areas such as quantum information and physics, synthetic biology, “interventional medical devices” and drug development in the medical therapeutics field.

“We’re seeing platforms and new technologies that can perform computations and calculations that current computers can’t and are unlikely to ever be able to perform,” he says.

Why should you care?

“We’re seeing new companies created at a much faster pace in these categories. We’re also seeing much more substantial investment at both a State and Federal Government level,” Tolo says.

Some processes intrinsic to the creation of new drug compounds, or uncovering more efficient materials for industrial applications, are simply unable to be completed using what Tolo terms, “classical computing systems.”

“The hope is that, with large-scale quantum computers, there are new insights about the living world we can uncover,” he says.

“The hope is that, with large-scale quantum computers, there are new insights about the living world we can uncover.”

How do these companies make money?

Three of the sectors or industries Tolo mentions as potential beneficiaries of quantum computing are:

• Industrial materials and design
• Pharmaceuticals – the exponentially greater computing power can help unlock new drug development and therapeutic treatments
• Financials - For example, in the types of simulations used for derivatives pricing – high-frequency trading-based types of calculations stand to benefit.

Tolo knows of at least five companies with full-stack quantum computing projects that are either based in Australia, or are run by locally-born founders. And Sydney has become one of the most critical cities in the local quantum computing landscape.

Challenges

The big question for quantum computing is existential: Can we build one or not?

In short, we don’t yet know. But in the eyes of Tolo and some of the biggest thinkers in the space, the odds point towards “yes”.

“If over the long-term we demonstrate we can, it has wide-reaching implications across a wide range of industries. That’s why we’re so excited,” he says. And as Tolo highlights in the final section below, he’s optimistic one of the companies his team is backing can build the world’s first utility-scale quantum computer.

How to invest in the themes

To recap, the megatrends we’ve discussed above are:

• Generative AI
• Climate change
• Quantum computing

Gen-AI unicorns

Antler has been investing in Generative AI – which it emphasises is an emerging space – since around 2019. The three most recent “unicorns” in the field it highlights are:

• Glean – Founded in New York by ex-Google and Facebook engineers, it’s a workplace search tool using context, behaviour and relationships to find relevant information and people
• Jasper Technologies – A San Francisco-based startup using a cloud-based platform to help different types of companies to launch, manage, and monetise “Internet of Things” services.
• Stability AI – A collective of developers of open-source Gen-AI tools to create images, text, video and music, it’s based in London, UK.

An ASX-listed net zero play

Credit Suisse’s McAuley names ASX-listed mining services company Worley (ASX: WOR) as one way his team’s diversified discretionary portfolios are playing the climate change theme.

Why does he like it? “One of the key reasons for this is its direct exposure to expenditure on facilitating the move to net zero,” McAuley says.

“As a consultant, engineer and contractor in the energy and transmission sector, Worley will benefit over the long term from the massive investment required to reduce emissions and create the means to produce renewable energy.”

"One of the most exciting companies on the planet"

As Blackbird's Tolo explains, he's wary of saying "here’s this megatrend, now go and invest in it."

"It’s very nuanced, not all quantum computing companies are created equal. They’re still relatively unique technical approaches to solve a problem that is currently unsolved," he says. 

And it needs to be reiterated again that it's not yet definitively proven that a large-scale quantum computer can even be built. 

But Tolo believes PsiQuantum, a Sydney-based company led by a multinational team of big thinkers and developers, has the very best chance of building one.

“It’s built the best team on the planet, led by an Australian. Over the coming years, some of the fundamental technical challenges are on the path to becoming engineering challenges," Tolo says.

PsiQuantum also tops Blackbird's list because it believes the company is the most advanced on its journey and is headed straight toward building a utility-scale quantum computer, instead of making smaller systems on the path to the ultimate machine. 

"We have very high hopes, this is – in my view – one of the best, most exciting companies on the planet," Tolo says.

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