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:
Geopolitical Shift
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.
Black Swans
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.
In order to play this trend, a look to broad markets with a
hedge could be the way to go. In this respect investors could look
at VQT or the newly launched
PHDG.
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’.
Population Growth
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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ISHARS-MS AS-JP (AAXJ): ETF Research Reports
ISHARS-SP GL IN (IGF): ETF Research Reports
MKT VEC-AGRIBUS (MOO): ETF Research Reports
PWRSH-SP5 DHP (PHDG): ETF Research Reports
BARCLY-SP VEQTR (VQT): ETF Research Reports
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