This Article is From Jan 15, 2020

How To Invest: Ten Big Trends Of The 2020s - By Ruchir Sharma

In every decade since World War II, a new country or region has dominated the global economy and markets. The 1950s saw the spectacular recovery in Europe following World War II. The 1960s saw the rise of an early generation of American corporate giants. The 1970s were about emerging world exporters of commodities like oil. Japanese stocks surged in the 1980s, but gave way to American tech in the 90s, and to emerging markets again after 2000. The 2010s were another American decade, dominated by its "mega caps" - companies with a total stock market value of more than $200 billion. But note the pattern: a dominant theme does not dominate two decades in a row.

Typically, investors get more and more bullish on one big bet for a decade, pushing prices up to levels that defy reason, and the collapse comes on or around the end of the decade (the Japan bubble popped in 1990, the American tech bubble in 2000, emerging markets after the global crisis of 2008.) Through the first years of this century, on average, the market returns of trendy themes rose 600 percent in their hot decades, then dropped by more than 10 percent in the next decade. Hot bets don't just lose speed, they go cold. With that lesson in mind, here are the top 10 trends of the 2020s:

1. The Rest Will Rise Again: The 2010s were another American decade. Defying the many pessimists who thought it had fallen into terminal decline after the crisis of 2008, the United States expanded its share of the global economy - from 23 percent to 25 percent - over the course of the 2010s. Europe lost ground, Japan lost ground. Outside China, emerging countries as a group actually lost share too. (India was an exception, and saw its share of global GDP rise about a point to 3.5 percent.)

In the markets, America dominated even more completely. Its stock market gained more than 250 percent, or more than three times returns in Europe and China, and five times those in emerging markets as a group including India. By the end of the decade, the United States accounted for 56 percent of the total value of stock markets worldwide, up from 42 percent in 2010. Meanwhile, emerging stock markets had suffered their worst decade of returns since the 1930s.

Why not expect another American decade? Many signs suggest its run can't last much longer. The state of the US economy is about as good as it can get, with the expansion entering its 11th year and unemployment at 50-year lows. The country is growing complacent, with rising corporate and government debt.

Meanwhile many other countries, particularly emerging ones, spent the last decade putting their financial houses in order. Smaller economies are those poised for a rebound, and the markets are likely to follow.

2. Smaller Companies Will be Beautiful Again: The 2010s were a great decade not only for the largest economy, but also for the largest companies. Today, the world's top 10 companies account for 14 percent of the total value of global stock markets, up nearly half from just nine percent at the start of the decade. In India, the top 10 have long dominated the stock market, but they account for an even larger share of it: 55 percent.

There are many reasons to expect the 2020s to see a comeback of smaller companies. One is that over the 2010s, smaller stocks gained 110 percent in the US - less than half the gains of large companies. In India, smaller stocks were up just six percent, compared to 115 percent for large companies. Historically, small companies tend to outrun or at least keep pace with large ones, so the dominance of the big is not likely to last.

Other forces favouring the small: the political mood is growing less friendly to trade and more nationalistic, both of which encourage "buy local" movements and undermine big multinationals. Surveys show growing distrust of large companies in nations from India and China to France, Germany and the United States. And today's leading companies are internet platforms, such as Amazon and Flipkart, which give small companies instant access to a broad audience - and instant credibility with consumers. All of this could help make smaller beautiful again in the 2020s.

3. Tech Giants May Fall: Leading American tech giants like Apple, Amazon, Alphabet and Facebook aren't going anywhere anytime soon but if history is any guide, most of them are likely to fall out of the global top 10 this decade.

Going back to the 1950s, companies have less than a one in five chance of making the top ten two decades in a row. On average, companies gain more than 2,100 percent in decades they finish in the global top 10, but in the next decade gain a mediocre 65 percent.

And no industry has ever dominated two decades in a row. Tech last dominated in the 1990s, when seven tech companies finished the decade in the global top 10; only one of them (Microsoft) survived in the top 10 the next decade. The others, like Cisco and Nokia, faded badly, as did the tech industry in general after the year 2000.

The 2010s were another great decade for tech and ended with tech companies again accounting for seven of the world's top 10. Now, however, the market expects them to continue delivering sky-high profits, which will be difficult, given their size and the shifting political winds. Regulators treated these companies with a light touch when they were start-ups, but that is changing fast now that they are giants.  

4. Deglobalisation Will Give Way to Localisation: The deglobalisation of the 2010s, marked by the slumping cross-border flows of goods, money and migrants, will give way to accelerating localisation. Campaigns to protect domestic markets focus increasingly on favouring locals, not just limiting outsiders, spurred by rising nationalism. Local brands of natural toothpaste, shampoo and skincare products doubled their share of sales in India to 17 percent in the 2010s. In China, survey respondents cite "national loyalty" as the number one reason they would "rethink U.S. brands."

China leads the way in creating a national internet, sealed off from the wider web, but nations from Russia to Indonesia are following its lead. The European Council for International Political Economy tracks a growing welter of internet rules, bans and subsidies worldwide, including "localization" policies designed to ensure that data is stored locally, and cannot be transferred abroad easily. In the 64 countries monitored by ECIPE, the number of data localisation rules nearly doubled in the 2010s to a total of 84. And if governments can localise data, they can localise just about anything.

5. Depopulation Will Slow Economic Growth: The impact of population on economic growth is direct - fewer workers, less growth. It is also easy to forecast, since population trends depend on just three relatively easily measured factors: births, deaths and migration. And the forecasts remain unpromising.

Largely as a result of falling birth rates, the growth rate in the working population (age 15 to 64) started to fall sharply two decades ago and has since slumped from 1.8 per cent to 1 per cent worldwide, and even more sharply in India, where it has dropped by nearly half to 1.4 per cent.

Many nations are even worse off, demographically speaking. Economies are particularly hard-pressed to grow rapidly if the working age population is shrinking; the number of countries in this predicament more than doubled in the 2010s to 42, including major powers like China, Russia, Germany and Japan. That number is on track to reach 56 by the end of the 2020s.

The upshot of weakening growth in the labour force: countries at all income levels need to lower their definition of rapid economic growth by a full point or two. The new benchmarks are one to two percent for rich developed countries, three to four percent for middle-income countries like China, and five percent for poor countries such as India.

On a ranking of 190 national economies by growth rate, India slipped in the 2010s from 14th at the start of decade to 44th in 2019 - and that ranking uses official Indian data which is under review and may be subject to significant downward revision. Pressure will remain intense to push growth above the official reported rate - currently just under 5 percent - but that is no longer realistic for a country even at India's level of development.

Very few countries with a working age population growing below two per cent a year have been able to sustain a growth rate above five per cent.

6. New Generations Will Shape Economic Trends: The only way to boost growth when the labour force is shrinking is to raise the productivity of the workers who remain, but generational shifts may make that difficult.

In the 2010s, millennials and Generation Z overtook baby boomers as the largest age groups in the global population. The oldest members of Gen Z are under 21, and have yet to fully reveal their buying habits. The oldest millenials are 37, and they are very different from older generations: much more likely to make investment decisions based on social values, to share information in exchange for perks, to own a smartphone or a gaming machine.

Increasingly, their tastes will shape consumer trends. Already, they have helped make digital gaming the world's favourite pastime, with total global revenues of $138 billion, or more than music and movies combined. India is a hotbed of the gaming explosion, with the number of companies making gaming apps up from 25 to 275 over the course of the 2010s. And one of the leading explanations for slumping productivity worldwide is that people waste more time - on games and cat videos - than they work online.

7. Polarisation May Peak: A complex cocktail of economic dislocation and hostility to the established order underpinned the spike in voter support for populists, particularly at the close of the 2010s. These movements are increasingly polarised, the right more proudly nationalistic, the left more unabashedly socialist, both sides less open to the other. An astonishing 91 percent of Republicans, against only six percent of Democrats, approve of President Donald Trump. That partisan gap has been widening steadily since the 1960s, when the records began.

Similarly, sharp polarisation is visible in democracies from Latin America to India, but the depth of these partisan divides raises a question. After widening for half a century, how much longer can this trend last? Polarisation may be nearing its peak.

8. Inflation May Stage a Comeback: Under pressure from the central bank's war against it, inflation began to fade in the 1980s, and by the last decade, was so quiet that people began to forget it ever existed. Since inflation was falling in just about every country, India saw its rate fall from nine per cent to five per cent in the 2010s, but still ended up 145th on a ranking of 190 countries by inflation rate - down only slightly from 161st at the end of the previous decade.

Inflation's long ebb feeds the expectation that central banks can keep interest rates at historic lows. The average short-term interest rate (adjusted for inflation) is at a lowest point since we have data going back 80 years. But the expectation that rates can stay this low indefinitely may be too complacent when upward pressures on inflation are building.

Labour markets are tight, with unemployment at long-term lows in many western countries, and a half-century low in the United States. Wages have begun to tick up in the United States, despite weak productivity growth. Worldwide, government debt is at an all-time high of 90 percent of the GDP. And while globalisation increases competition and helps contain inflation, deglobalisation and localisation could have the opposite effect.

These pressures are not at all likely to bring back the bad old days of double-digit inflation, but they could eventually push inflation back above the single-digit target rates of central banks, and force rate hikes that would rattle global markets.

9. The Fifth Estate Will Rule: It is not news that the pillars of the Fourth Estate - TV, radio, newspapers and magazines - have been steadily losing their audiences and advertisers to social media. At some point, the old Fourth Estate will likely cede its role as the dominant source of news to social media, and a new Fifth Estate.

That tipping point may still be some years off. In the US, social media is currently the number one source of news only for one age group - people under 30 - but its influence will keep growing as younger generations age.

Eventually, however, the growing calls for tighter regulation of social media could force it to filter news, and create a Fifth Estate that is more established than chaotic.

10. The Rise of Moral Capitalism: Though some academics now question whether and how much wealth inequality is rising, the public perception is clear that it is - and by a lot. Politicians are for the first time bashing billionaires as a class, and by name.

Billionaires doubled in number during the 2010s to more than 2,100 worldwide - and to more than 100 in India. They have become symbols of the growing belief that capitalism is broken and benefits mainly the top one percent.

A backlash is already underway, and likely to gain momentum in the 2020s, Populists across the developed world are calling for redistribution - universal income, free college, healthcare and childcare, new wealth taxes. Parts of this agenda seem likely to pass in many countries. A recent survey showed that from the United States to Germany, India and Russia, rapidly growing major economies think corporations can pursue profits and promote social change at the same time.

Flipping companies, often beyond the scrutiny of public markets, private equity firms became a symbol of capitalism by and for the ultra-wealthy in the 2010s. They may be replaced as the trendy investment vehicle of the 2020s by firms that promise to invest in socially and environmentally responsible ways; assets managed by these firms in developed markets doubled between 2012 and 2018 to $30 billion. With support from millennial investors, they are becoming symbols of a new moral capitalism.

(Ruchir Sharma is a global investor and an author)

Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.

.