Research

Willis Towers Watson and PRI Global Investment Megatrends report

Investment institutions trend index 2017

December 14, 2017

The PRI commissioned Willis Towers Watson to carry out in-depth research with 300 senior figures, including major global asset owners, investment managers and service providers. The resulting report identifies five key megatrends impacting the global economy, financial system and the UN's Sustainable Development Goals (SDGs), as well as 21 'sub trends'. It also provides a framework for incorporating mega/ sub-trend analysis within portfolio construction.

The five key megatrends identified were:

  • Technological advances: Technology is everywhere. An insight that was backed up by the survey participants - technological trends were rated as the most important on our composite score. Despite fears that the ‘low hanging’ advances are behind us technological progress continues to drive productivity improvements and at its best has the ability to enhance the world’s ability to achieve sustainable and inclusive economic growth and development. In terms of sub-trends, we concentrate on four areas of progress: digitisation and the Internet of Things; automation and artificial intelligence; Fintech; and biotechnology and personalised medicine.  We also highlight the potential disruptive capacity of cybersecurity and privacy risks.
  • Society and demographics: The material decline in fertility rates and increases in longevity over the past century are well known to investors. When combined with accelerating societal trends, such as wealth and income inequality and rising public sector debt burdens, demographic shifts have the potential to drive material transformation. We highlight the likely slowing of economic growth, human capital pressures, rise of populism and conflict, changing consumption patterns, savings conundrum and public sector debt burdens as material sub-trends.
  • Environmental challenges: Our environment impacts all aspects of our activity. We highlight three areas of key change over the coming decade. First, the rise of acute environmental events such as hurricanes and typhoons. Data from the National Oceanic and Atmospheric Administration shows that the prevalence of ‘billion-dollar’ insurance losses (on an inflation adjusted basis) increased by three and a half times from the 1980’s to the last decade. Secondly, the chronic impact of global warming – heat stress, water stress, extreme rainfall, and sea-level rise. Finally, a large scale transition to a low carbon economy has the potential to mitigate some of the largest impacts of rising global temperatures.
  • Globalisation and connectivity: Since 1950 global trade has grown at a faster rate than GDP growth, culminating with China’s accession to membership of the World Trade Organisation in 2001. We believe that this expansion has reached its peak and trade growth will slow. However, capital market integration and data flows are and will continue to become more important. Global market integration and the floating of currencies led to an explosion in capital flows between 1990 and 2007. With the opening up of China’s capital markets we expect this trend to continue. Finally, we also expect a third globalisation/connectivity revolution in data flows.
  • Emerging market growth and dynamism: The recent slowing of economic growth could be taken as a sign that the dynamism of emerging market economies is waning. However, concentrating on headline GDP growth numbers is a mistake, we are long past the point where emerging economy growth supports over half of global economic progress. Led by rapid urbanisation, emerging economies will continue to become more influential, with ever increasing consumer power and expanding corporate competitiveness. Rising geopolitical power will be exerted via new institutions and governance, especially exemplified by China’s One Belt, One Road policy.

Figure 1. Megatrend rank order

CHART: Global Investment Megatrends rank order 

In a sector where innovation is key and change a constant, the top four ranked sub-trends are associated with the technological advances megatrend: cybersecurity and privacy (first), automation and artificial intelligence (second), digitisation and internet of things (third), and new Fintech (fourth). Inadequate savings and global capital flow issues, including public sector deficits stand out as concerns. As do low carbon transition and physical climate-related risks.

Perhaps surprisingly, the risks posed by emerging economy dynamism are not the greatest concern for investment institutions. However, organisations expect challenges around to increase, especially over the long term.

The report sets out the full ranking of trends by survey respondents, below we show the top ten.

Figure 2. Top ten trends

CHART: Global Investment Megatrends Top ten trends 

Finally, the report outlines a new framework to help investors quantify the impact of sustainability risks, identified through our analysis of megatrends, on asset returns. This framework can be used as an input to boards setting long-term strategy, portfolio managers dynamically seeking out the best investment opportunities, and policymakers assessing financial stability or the world’s ability to meet the Sustainable Development Goals.