Investment Themes in US market

Source

Eight Investment Themes for Global Growth: 2016 & Beyond

 

Digitalization of the global economy brings opportunities as well as negative implications [1]

– Profit themes are on areas of the market that have demand tailwinds: pricing power and rising ROI

1. Millennials (born at 1981 – 2000)

スクリーンショット 2016-08-17 22.17.56.pngThe Millennial generation (Generation Y) is the largest in U.S. history

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this demographic transition will pressure consumer spending dollars by roughly 1% a year until 2019, at which point spending should then accelerate.

demographic theme for Millennial:

  1. Homebuyers (U.S. has a shortage of entry-level housing. ) but late marriage and Rental Culture
  2. E-commerce-Biased consumption and Social Media as advertising, not brand-conscious
  3. Experiences than material goods
  4. Higher Health-Conscious
  5. Lower financial obligations but also lower income
  6. Thus larger part of disposable income spent on fixed housing and education

(Social consumption as whole will surely be depressed under the new behavior pattern of  Millennial along with less shopping of baby boomer.)

スクリーンショット 2016-08-17 22.39.31.pngA recovery of aging after 2020

2. Digital Disruption

companies:

  1. pivoting by moving to asset-light, subscriptionbased services
  2. leveraging shared infrastructure that can adapt quickly to rapidly changing trends
  3. capital expenditures (capex) is often rationalized and converted into operating expenditures (opex) (reason for the underperform in many capital-goods sectors and muted inflation)

3.The Internet of Things

スクリーンショット 2016-08-17 23.01.06.png

 

 

personal IoT (Wearables)/ The Automated Home/  Lighter, Connected and Intelligent Car/ Mass Manufacturing to Mass Customization (3D printing and advanced robotics)

4. Data Wars

User trends continue to drive exponential growth of data and traffic

  1. Social media now accounts for 90% of traffic
  2. users checking their social media site an average of 14 times a day
  3. internet impatience: every 100-millisecond delay can cost an e-commerce site 1% of revenue
  4. Consumer appetite for bandwidth remains insatiable

スクリーンショット 2016-08-17 23.20.29.png

Given the prospects of traffic growth from content-rich applications and device proliferation

– opportunities in companies that provide the infrastructure to manage, move, store, and analyze this data in cloud-based architectures

5. Biotechnology

Challenges: A high R&D hurdle + Prices of biotech drugs have risen and managed-care firms have steadily restricted prior authorization  [2], but

  1. many biotech firms are well-capitalized
  2. The FDA seems more open to approvals than it has been in the past [3]

Two primary challenges of gene-therapy companies

  1. clinical trials typically include no more than 10 patients, which makes the trials very risky.
  2. If one adverse event occurs, such as an unfortunate death, the trial could be doomed.

6. Health Care

スクリーンショット 2016-08-17 23.36.38.png

The Affordable Care Act (ACA) is to increase health-insurance coverage and have contributed to multi-year outperformance in the Health Care sector, but this tailwinds may diminish:

  1. an increase of 4% in national health-care expenditures on programs
  2. the rate of change in the newly insured is slowing
  3. offset to cheaper plans is higher out-of-pocket expenses
  4. demographic shifts are causing an increase in the Medicare population at the expense of the commercially insured demographic cohort

スクリーンショット 2016-08-17 23.43.29.pngThe digitalization of health care remains a longer-term byproduct of reform. 3 primary areas: business intelligence-driven opportunities, population health management and big data/predictive analytics.

(innovative, disruptive technologies aimed at high return on investment (ROI) solutions.)

7. Fiscal Spending

スクリーンショット 2016-08-17 23.46.47

The economic cycle has reached a natural transition as the baton is passed from monetary easing to fiscal spending.
State and local government expenditures are growing again, a trend that began in 2014, and federal spending followed

スクリーンショット 2016-08-17 23.46.54

Opportunities:

  1. Infrastructure upgrading, particularly among construction and materials companies
  2. Defense sector particularly programs tied to cybersecurity, intelligence and surveillance
  3. renewable energy, health care sector

8. U.S. Energy

スクリーンショット 2016-08-18 1.07.31.pngTechnology-driven explosion in U.S. oil and gas production: the U.S. energy renaissance isn’t dead.

  • The U.S. is a major swing oil producer. Low prices will cause supply to fall and demand to rise. The world will probably need the U.S. to start ramping up production to meet demand by 2017.
  • companies with balance sheets that can weather the 2016 speed bump and be poised to take future market share.
  • natural gas infrastructure is a compelling area to invest in volume growth, as U.S. natural gas prices remain well below international prices.

 

[1]

  1. Barriers to entry are rising for a few dominant companies such as Amazon and Google, but are crumbling for many companies.
  2. The sharing economy should improve asset efficiency, but capital spending as a percentage of GDP may have forever peaked.
  3. Software and connectivity are ubiquitous, but traditional measures of productivity are stagnating.

[2]

  1. biotech drugs are far more complicated to manufacture than small molecule drugs and require greater capital expenditures and knowledge. Biotech drugs are manufactured in a living system, such as plant or animal cells, and tend to be large, complex molecules. Any company attempting to enter the biosimilar market would have to invest in bioreactors, mass spectrometers and other similarly highpriced laboratory equipment, which would require seasoned Ph.D.’s and other well-trained individuals to properly operate them.
  2. the U.S. Food & Drug Administration has historically cast a dim view on such drugs and has seemed reluctant to yield to market entrants. While it has always set a high bar that some may view as overly cautious, the FDA would likely respond by saying that such caution has been prudent.
  3. doctors have resisted the idea of switching their patients from proven biotech drugs that, while expensive, do save lives.

the collective inflation for biotech drugs was roughly 30% in 2014, the highest annual increase on record) but recently

[3]

possibly because of progress in Europe, where biosimilars have been a safe and cheaper alternative to branded biotech drugs for several years.

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