What do we understand by megatrends?
A trend is a long-term, often fluctuating change in a characteristic in the same direction. In stock market trading trends play a major role. Here they stand for long-term price movements up or down. Accordingly, one finds upward or downward trends in the courses.
So what is the megatrend definition? A megatrend is a fundamental and sustainable trend that is associated with profound structural change and that tooks over long periods of time – often decades.
CASE IN POINT: globalization and international division of labor. The word part “mega” comes from ancient Greek and means something like “very large”. Megatrends like globalization have an impact in many areas of business, politics and society, not just on the stock market. They are global and “overarching” in the truest sense of the word. The stock exchange prices are only an expression of change and reflect the expectations of the future associated with long-term changes. There are investment strategies that specifically aim to profit from megatrends.
How do you find megatrends?
Trends in market prices are relatively easy to determine. As part of the so-called technical analysis , sophisticated mathematical-statistical procedures have been developed to measure trends and identify trend reversals at an early stage. Pure chart technicians do not even ask about the causes of the trend; trend identification is sufficient for them. But this is a very risky strategy that hides important information. That doesn’t work when identifying megatrends. They not only require intensive observation and analysis of current and past developments in a wide variety of areas, but also corresponding future projections.
GLOBAL megatrends – three examples
A wide range of results can also be obtained when searching for the keyword “megatrends” on the Internet. The megatrend definition on the internet is inconsistent. The following is an overview of global megatrends without claiming to be exhaustive and combined with a systematization. A clear demarcation is not possible. Social megatrends, for example, also have economic effects and influence politics. However, there can also be interactions between technological and economic megatrends. Everything is related to everything – that is precisely the hallmark of megatrends.
Global megatrends in four important areas
In the following, three megatrends from this megatrend universe are examined in more detail.
- Megatrends: sustainability
- Megatrends: Big Data
- Megatrends: Health and Demographic Change
WHY INVEST IN MEGATRENDS – PROS AND CONS
Megatrends affect the entire economy and society – they have a global impact on all markets. But that does not mean that change is taking place in the same way everywhere. There are booming industries, markets and sectors that benefit particularly from megatrends, while others are left behind. Changes also take place at different speeds. Some areas are pioneers in change, others laggards.
Investing in global megatrends means investing your money specifically in areas that are likely to be among the likely mega-trend winners. The expectation is that such areas will grow faster than average and be successful. This should then be reflected accordingly in price developments and income distributions. Expected megatrend losers, on the other hand, are avoided. In principle, it is an active investment strategy that aims to achieve excess returns. The concept sounds logical and promising. Nevertheless, there are pros and cons. Whether a megatrend strategy really leads to success is controversial among experts.
- Companies in booming industries and future markets are growing particularly quickly. Megatrend stocks therefore offer above-average price potential.
- Megatrend business models promise above-average profits. This is also reflected in distributions and prices.
- Investments in “outdated” business models that miss the “train of the day” are automatically avoided. The risk of underperformance decreases.
- With megatrends, there is considerable forecast uncertainty. Whether a megatrend really keeps its promises can only be seen over time.
- Expectations of above-average developments are often already priced into the courses, and over-performance is then no longer possible.
- When you focus on specific industries and markets, the benefits of risk diversification are lost. Rather, specific industry and market risks are taken.
What should be considered in megatrends investments?
There are different ways to invest in megatrends in the stock market. It’s primarily about stocks, funds, and ETFs. One option is to specifically buy megatrend stocks – these are stocks in companies that are active in booming industries and future markets or that pursue business models that rely on megatrends.
If you limit yourself to the stocks of certain companies when investing in megatrends, you also buy the respective specific company risk. A megatrend can be very promising, but that does not automatically mean that a business model linked to it works. A diversified portfolio should also be ensured with megatrends stocks. A wide diversification is possible, for example, through megatrends ETFs. In such an ETF, megatrends are mapped via the index construction. Either an existing index is “adjusted” for values that do not match the respective megatrend. Or new indices are constructed that are tailored to the respective megatrend. Anyone looking for an ETF related to megatrends will easily find it. There is now a wide range.
The advantage here: ETFs enable megatrends portfolios that easily map different booming industries and future markets.
ETF: Megatrends indices – here are some examples of areas with ETF offers:
- Digitization and information technology
- Cyber security
- Renewable energy
- Clean water and supplies
- Global infrastructure
- Health & Wellness
IMPORTANT TO KNOW: Every ETF provider determines which index construct he bases his fund on. Indices can also differ significantly within a megatrend. Two ETFs on the health & wellness megatrends can refer to very different health indices and then perform differently. You should therefore always check what is actually behind a megatrend index. In contrast to conventional ETFs, an ETF on megatrends pursues an active goal – through targeted selection within the framework of the megatrend it should perform better than the market average. This requires a correspondingly more complex management, which is also reflected in the costs of the ETF. They are higher than with “normal” ETFs . The calculation with the megatrends can work, but it doesn’t have to. In any case, staying power is advisable for megatrend investments. Megatrends have a long-term effect, and this may also apply to investment success.