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# The Age of Disruption

## Issues to be addressed in this paper

Business platforms have been disrupted for hundreds of years. Ever since the industrial revolution when innovations first gathered momentum, it has happened fairly regularly, but the advent of digital technology has had the effect of accelerating the pace quite dramatically (Exhibit 1).

There is no reason to expect the pace to slow anytime soon. Further technology advances, e.g. advanced robotics, artificial intelligence and blockchain, will see to that. I should point out, though, that technology is not the ultimate driver of disruption, but more about that later.

Disrupters tend to build business models that are very different from those of incumbents, and it takes much longer to disrupt than generally perceived. Disruption is a process and, because it takes time, incumbents frequently overlook disrupters until it is too late. Moreover, it is a misconception that entrants are disruptive by virtue of their success. Some disruptive businesses succeed whereas others don’t.

In the following, I will identify the root cause of disruption, I will look at the importance of technology, and I will zoom in on an industry or two and explain why I think they are prime candidates to be disrupted in the years to come. Finally, I will point you to a few likely winners and losers from an investment point-of-view.

We publish investment strategies and opportunities in our research papers. This research paper is available to professional investors as part of ARP+ subscription.

## The root cause of disruption

Harvard Business Review has provided a very descriptive definition of disruption which I wholeheartedly subscribe to. It is described as a process whereby:

… a smaller company with fewer resources is able to successfully challenge established incumbent businesses. Specifically, as incumbents focus on improving their products and services […], they exceed the needs of some segments and ignore the needs of others. Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more suitable functionality – frequently at a lower price. Incumbents, chasing higher profitability in more demanding segments, tend not to respond vigorously. Entrants then move upmarket, delivering the performance that incumbents’ mainstream customers require, while preserving the advantages that drove their early success. When mainstream customers start adopting the entrants’ offerings in volume, disruption has occurred.

From this definition, it should be obvious that technology is not the ultimate driver of disruption. In the vast majority of cases, it is indeed a very important tool in the disruption process, but it is not the root cause.

Thales Teixeira, professor at Harvard Business School, makes some very interesting observations in his book, Unlocking the Customer Value Chain. He uses Uber as an example and argues that, while technology definitely helped the company to grow, it wasn’t technology that got Uber off the ground in the first place. As professor Teixeira puts it:

It is not that Uber has a technological ability to summon a car. When I did research and I look back at the early days of Uber, when you wanted to call an Uber, you would text message or call them. At the other side of the line, there was an Uber employee who picked up the phone or looked at the text message and tried to call car operators to send a car your way.

Urbanisation is another example of disruption, and it is very much about changing behavioural patterns and is only to a limited degree about changing technology.

In other words, the ultimate driver of disruption is the changing needs and wants of the customer. Changing behavioural patterns become the root cause and the technology behind the disruptive innovation merely a tool.

## The role of technology in the disruption process

If technology is not the root cause, how important is it to disruptors? There is no simple answer to that question because, sometimes, it is very important and sometimes it isn’t.

Going back to the Uber example, the company initially became a success because of changing consumer habits. Taxi customers were increasingly frustrated by the poor service provided by conventional taxi firms and found that Uber had something else to offer. Uber, on the other hand, didn’t have access to a technology nobody else had. They simply responded to changing customer behaviour, and they did so better than anybody else.

Another example worth mentioning in this context is Amazon. It responded to a rising need to shop online which is the result of changing lifestyle patterns as (i) female participation in the workforce continues to rise, (ii) increased competition has forced many to work longer hours, and (iii) a growing number of people live on their own these days rather than cohabiting.

A combination of those factors has led to many households struggling to find the time to do the shopping. Meanwhile, technology allowed Amazon to develop a business model that would suit those lifestyle changes, but it was changing consumer habits that created the opportunity in the first place.

More generally, when I look at the various technology platforms that have been rolled out in recent years, I can’t think of that many which have made a massive impact on the disruption process, but the smartphone is clearly one.

Apple launched its first smartphone in 2007 which is usually deemed the start of the smartphone era. If you take another look at Exhibit 1, I don’t think it is any coincidence that the number of innovative disruptions multiplied in the years thereafter.

In other words, technology may not be the root cause behind the recent wave of disruptive innovations, but it has most definitely played a very important role and will continue to do so.

## New technology innovations about to start disrupting

I have just pointed out that we have not yet been overwhelmed by new disruptive technology platforms, but that could be about to change. Several new technologies are on our doorstep, waiting to be deployed. In no particular order that would include the Internet of Things (IoT), driverless cars, artificial intelligence (AI) and blockchain.

Other advanced technology platforms have already been rolled out and will most likely continue to grow quite rapidly in the years to come – technology innovations such as advanced robotics and streaming.

Most of the numbers I am about to share with you are based on reputable firms’ projections. Having said that, as I prepared for this paper, I found that estimates projecting the impact of technology innovations are all over the place; hence the reader of this paper should take projected numbers with a grain of salt. In reality, nobody knows precisely what the impact will be.

Let’s begin with a technology platform that is already up and running all over the world - advanced robotics - which is probably the most disruptive of all the technology platforms I will mention in this paper.

One could actually argue that, if disruption is not the result of technology changes but of changing behavioural patterns, advanced robotics do not disrupt, as they are not a function of changing customer habits but merely the result of a more advanced technology platform.

That is (sort of) correct, but there is still a powerful human element to the advanced robotics story which has to do with changing demographics. In large parts of the world, the workforce will shrink in the years to come, forcing employers in many countries to embrace the new technology if they want to ensure that a shrinking workforce has no impact on the output.

In other words, whereas advanced robotics may not be a direct result of changing consumer habits, they are at least partially the result of employers responding to changing circumstances, i.e. the workforce retiring in large numbers.

McKinsey Global Institute expects up to 800 million jobs worldwide to be lost to advanced robotics between now and 2030 (Source: McKinsey Global Institute) most of which are manufacturing jobs.

Bearing that in mind, a country like Germany, with a big industrial base but also with a dramatically shrinking workforce, -0.83% annually between now and 2050 (Source: OECD), could actually turn a very negative demographic outlook into something positive. Robots could, if the process is managed well, simply replace humans in the work process without too many people becoming unemployed as a result.

Meanwhile, the US workforce will continue to grow modestly (+0.43% annually between now and 2050 according to the OECD), meaning that a large number of people could lose their jobs as the robots take over, potentially leading to major social problems.

Advanced robotics have already made huge progress, although the rate at which the technology has been adopted varies greatly from country to country (Exhibit 2).

The industry that has been affected the most by advanced robotics is the automotive industry where much is now assembled by robots (Exhibit 3). The numbers in Exhibit 3 are based on EU manufacturing industries only, but I wouldn’t expect them to be dramatically different elsewhere.

The fact that advanced robotics have been adopted so successfully in the automotive industry makes it difficult to argue that one should expect a dramatically different outcome in other manufacturing industries.

One final comment on the implications of advanced robotics:

It is a paradox that productivity growth has slowed throughout the digital age, i.e. over the last 20 years or so. Could it be that advanced robotics have actually had a negative effect on productivity?

I don’t think so. There is plenty of evidence that companies that have adopted the technology are, on average, doing much better than non-adopters (Exhibit 4). That would hardly be the case, if robots had a negative impact on productivity.

Having said that, despite the rapid advance of robotics, there are plenty of negative productivity agents at work these days. It is outside the scope of this paper to go into any level of detail, but productivity is hampered by an ageing workforce, by excessive amounts of debt, by an outdated infrastructure and by many other factors, and I would argue that, without advanced robotics, productivity growth would be even lower.

## Artificial intelligence (AI)

AI and advanced robotics are often considered to be more or less the same, but that is not the case. That said, there is a powerful link between the two which probably causes the confusion. Furthermore, analysts, when researching the two topics, rarely distinguish between AI and advanced robotics which only adds to the confusion.

In short, robots interact with the physical world through sensors and actuators. They are programmable, and they are either autonomous or semi-autonomous (Source:  blog.robotiqcom). AI is a branch of computer science. It involves developing computer programmes to complete tasks which would otherwise require human intelligence – tasks like problem-solving, understanding languages and logical reasoning. The link between the two technologies arises when robots use AI in the manufacturing process (Exhibit 5).

Long-term readers of my work will know that I am seriously concerned about productivity growth continuing to decline all over the world, and AI is one of the best remedies to fix that problem. Why? Because we need robots to replace an ageing workforce, and robots which can think will do so most successfully. According to Goldman Sachs, the AI hardware market will more than quadruple between now and 2025 – a CAGR of 30% (Exhibit 6).

## IoT

IoT is about all your devices being connected – for example having your fridge tell your supermarket that you are about to run out of milk – and the potential economic value is significant, although estimates have been reduced more recently as near-term expectations have been tempered.

In 2015, McKinsey estimated the global revenue opportunity to be as much as $11 trillion by 2025 (Exhibit 7) but more recently – in August 2018 – Bain & Company published a more modest IoT revenue target of$520bn (US only) by 2021. McKinsey may be proven right eventually, but barriers to entry have proven more significant than first expected, hence the take-up pace is slower than projected.

Whether McKinsey or Bain & Company is correct, IoT is about to cross over into mainstream business use. Five years ago, only 13% of all businesses used the IoT technology with the corresponding number today around 25%, and it continues to grow rapidly (Source: McKinsey & Co.).

To begin with, it was almost exclusively large enterprises that adopted the IoT technology, but SMEs are increasingly getting on the bandwagon. The proliferation of devices and the fact that sensor technology – embedded in IoT devices – is cheaper than ever, have seen to that.

Today, the entire IoT concept is way beyond your fridge talking to your supermarket. Smart parking is one obvious feature (see for example here); smart street lighting is another one (see here). Alternatively, think of the impact IoT may have on business. Take for example software companies being able to create new, value-added systems to the benefit of their customers.

## Streaming

Another disruptive innovation that is already out there, is streaming. Few disrupted industries have actually benefitted from being disrupted, but the music industry is one of those few. Young people do not buy CDs anymore - they stream. Consequently, physical sales (mostly CDs) have dropped dramatically since streaming was first introduced (Exhibit 8), leading to music retailers going out of business all over the world.

Having said that, streaming has had precisely the opposite effect on the music industry itself, where revenue growth has accelerated following the introduction of streaming, with annual music industry growth likely to peak over the next 5-6 years at about 8%.

As rising living standards in EM countries lead to growing demand for music from EM consumers, and as more and more countries get pretty good at stopping music piracy (streaming without paying for it), I would expect music revenues to continue to grow briskly.

## Driverless cars

According to the Boston Consulting Group, by 2035, about one-quarter of all cars on the road will be at least partially autonomous (Exhibit 9).

The findings of Boston Consulting Group are broadly supported by Victoria Transport Policy Institute (VTPI) – a Canadian organisation – who expects the conversion to driverless cars to take several decades. Only by the 2060s does VTPI expect virtually all vehicles to be fully autonomous (Exhibit 10).

Driverless cars are a disruptive innovation that is widely known; yet many don’t understand the full implications, and the reason is that the true transformation is not the car itself but the underlying digital technology.

Reaction times will be dramatically reduced and human error entirely eliminated. That will lead to a dramatic cut in the number of accidents, hence fewer hospitalisations and a significant drop in the number of fatalities.

The net result of that is a fall in healthcare costs which is a major positive for society, but insurance companies will be negatively affected which is counterintuitive, so let me explain.

As a result of the drop in the number of accidents, insurance premia will fall and probably significantly so. As auto insurance is a major part of most insurance companies’ profits, earnings in the industry are likely to come under significant pressure.

## Blockchain

Blockchain is an emerging technology mostly mentioned in the context of cryptocurrencies. At first, it was indeed developed as a supporting technology for Bitcoin but has since taken a life of its own. In essence, it is a tool to maintain transparent ledgers that verify transactions with minimal third-party involvement.

The ledgers are not held in a central location (at banks) but are spread across a network of computers. And it is transparent in the sense that every transaction is made public for all to see.

Gartner estimates the value-added of the blockchain technology to reach more than $3 trillion worldwide by 2030 (Source: Gartner), and the technology will likely be ramped up pretty fast as the benefits are obvious. One industry that stands to be dramatically affected by the blockchain technology is the commercial banking industry which could save as much as$13bn annually if blockchain is fully implemented (Exhibit 11).

Within commercial banking, cross-border payments, most of which are done to facilitate international trade, will become much easier to transact. About $600bn of cross-border payments are transacted annually at an average cost of more than 2%. Blockchain could cut that cost to virtually zero, but that is a saving to the customer. To the bank, blockchain becomes an opportunity cost. From the bank’s point-of-view, as you can see, by far the biggest saving is likely to come from a drop in frauds. Commercial banks have been notoriously slow to adopt the blockchain technology, and the opportunity cost I just referred to may explain why that is. That said, banks could be a great deal worse off by not adopting blockchain. If they don’t embrace the new technology, banks could entirely disappear in the not so distant future. Blockchain may quite simply make commercial banks obsolete. Stern regulatory standards may prevent that from happening any time soon but, strictly speaking, once blockchain is up and running, we may not need commercial banks any longer. And, the more reluctant banks are to adopt the new technology, the more likely regulators are to eventually allow many of these transactions to take place away from commercial banks. Large investments are now being made in the blockchain arena, so it is probably only a question of time before the technology is rolled out across the board. According to McKinsey & Co, venture capital funds invested more than$1bn in blockchain in 2017, and the number was even higher in 2018.

## Other industries to be disrupted

I could mention plenty of other industries that are likely to be disrupted in the years to come, but I think I will stop here. That said, one industry that deserves at least a mention in the context of disruption is the fossil fuel industry.

Oil, gas and coal will all be severely impacted, but that will be covered in much more detail in megatrend paper #7 - Electrification of Everything. Oil probably won’t be affected as much as the other two, as it is used extensively in other industries (particularly when producing plastics), but gas and coal prices will most likely go to zero in our lifetime.

## Investing in disruption = investing in technology

Disruption is not constrained by national borders. As we have seen in recent years, US and Chinese companies are at the forefront of technology innovations – a fact that has been recognised by investors who have enjoyed a veritable feast in those two countries since the Global Financial Crisis, as long as they have invested in tech (Exhibit 12).

Having said that, I do not subscribe to the widely held view that a new tech bubble – a repeat of the tech bubble some 20 years ago – is building. That is quite simply not true, and there are two reasons why that is.

Firstly, US tech P/E levels are substantially below the levels seen when the dot.com bubble burst in 2000, or when the Nifty Fifty bubble burst in 1973 (Exhibit 13).

Secondly, worldwide, 75% of the price increase in tech stocks since the Global Financial Crisis can be explained by a rise in earnings and only 25% by higher earnings multiples. The corresponding numbers for equities in general (ex. TMT) are 48% and 52% respectively (Exhibit 14). In other words, if a bubble is building, it is more in non-tech than in tech.

Given my modest GDP growth expectations going forward and how that is likely to affect equity returns in general, and given the oncoming wave of disruptive technology innovations as discussed above, I can only conclude that the simplest way to invest in disruption is to invest in tech.

Next question: Which part of the world should one zoom in on? We have already seen that US and Chinese tech companies have done exceptionally well more recently, so should one look at Europe or Japan instead?

My recommendation is very simple: Stick to the winners. There are obviously attractive European and Japanese tech companies as well but, for every European or Japanese winner, there are many winners in the US (Exhibit 15).

## Investment opportunities - long and short

One can invest in disruptors through either venture capital funds or private equity funds, or one can do it the way we prefer to do it – through dedicated equity long/short managers who have a proven record of identifying winners vs. losers whilst keeping the equity beta to a minimum. This universe is not that big and the managers we have identified are seriously capacity constrained, but the opportunity set is nevertheless very interesting.

As far as streaming is concerned, we prefer to buy a portfolio of music royalty rights from established artists and/or songwriters. Investing in music royalties is for long-term investors, though, as it is not a liquid investment strategy.

You may wonder why artists choose to sell their royalty rights if the revenue stream is so attractive? There is a very simple reason for that. From the artist’s point-of-view, selling the royalty rights is akin to tax arbitrage. At least in the US, royalties are taxed as income but, if the artist/songwriter sells his (her) royalty rights, the gain is treated as a capital gain, and a much lower tax rate is applied.

On the short side of streaming, two industries stand to be negatively impacted in the years to come - the broadcasting industry (BBC, Sky, etc.), and the providers of TV broadcasting services (whether satellite or cable). More and more people use streaming services when watching TV, but traditional broadcasters have, at least so far, managed to hold on to most of their subscribers for one very good reason – the pull of live sports.

Traditional providers of major sports events (such as Sky) are at serious risk of being disrupted, though, as Amazon continues to toy with the idea of getting involved with live streaming of big sports events. Two years ago, they first declared an interest, and late last year they recruited Marie Donoghue from Walt Disney’s ESPN. She is considered a heavyweight in the industry, and Jeff Bezos wouldn’t have hired her without having big plans, and that could have major negative implications for a company like Sky.

As far as driverless cars are concerned, from an investment point-of-view, let me tell you what not to do. Many investors are infatuated with Tesla and believe it will have a major role to play in this segment. Although it has fallen somewhat from grace in 2019, the company is still, as of late September 2019, valued at more than \$40bn despite delivering miniscule profits.

The first step in the conversion to autonomous cars is a switch to electric cars, and traditional manufacturers like VW are now gearing up. Over the next few years, they will simply price Tesla out, turning it into a fringe player at best.

Furthermore, the company is seriously under-capitalised for an opportunity that shall require massive amounts of capital, and Elon Musk is (in my humble opinion) a liability. Don’t go anywhere near it!

As far as blockchain is concerned, the obvious investment opportunity is a short in banks that don’t embrace the technology. I would even consider broadening that short to all commercial banks. We have all seen the devastating impact online shopping has had on brick and mortar retailers, and I think the damage blockchain could do to banks could be worse. I am not even sure commercial banks will exist by 2040.

A not so well-known investment strategy that stands to benefit from disruption is Carbon Credits. A carbon credit is a tradable certificate representing the right to emit one tonne of carbon dioxide into the atmosphere. Carbon credits are part of international attempts to mitigate the growth in concentrations of greenhouse gases.

Electrification of virtually all heating and transportation will drive the need for electricity higher in the years to come. Those power-generating utilities that have already (at last partially) switched to wind and/or solar, will be able to sell their carbon credits, whilst those that continue to base their power generation on fossil fuels will have to buy more as those they were allocated won’t suffice. This has established a growing market for carbon credits that investors can trade in.

As a consequence of the fight against global warming, one should also consider a short position in fossil fuels – mostly coal and natural gas. Those two fossil fuels will most likely be completely phased out in the years to come, following the ongoing electrification of heating and transportation.

The motivation to do so is significant. It will slow down global warming whilst addressing the growing freshwater scarcity problem at the same time (fossil fuel producers are major users of freshwater). Oil is not as straightforward as the other fossil fuels, as 20-25% of all oil goes into the chemical industry, mostly to produce plastic products.

## Another option – ‘disruptive’ ETFs

Virtually every industry across the world is affected by technology innovations – either positively or negatively. As Goldman Sachs put it:

… a “tech-tonic” shift is occurring – technology is no longer a single industry, technology is permeating all industries (Source: Goldman Sachs Asset Management).

There is only one problem. Many of the obvious investment candidates are (still) relatively small companies, making any high-quality investment approach seriously capacity constrained. And, as many investment managers are guilty of focusing on growing assets rather than maximising returns, our list of recommended active investment managers is actually quite limited.

One way around this problem is to invest in ‘disruptive’ ETFs, and Goldman Sachs’ small family of such ETFs comes handy in that context. GS have created five different ETFs – all with a disruption angle:

• Data-driven world

Companies that are positioned to potentially benefit from the unprecedented proliferation of data, capitalizing on data storage, security and analysis, as well as artificial intelligence and machine learning.

• Finance reimagined

Companies that are positioned to potentially benefit from the evolving financial landscape, from the digitization of traditional financial services to the development of blockchain technology.

• Human evolution

Companies that are positioned to potentially benefit from advances in medical treatment and technology, from robotic surgery and precision medicine to gene therapy and care for an older population.

• Manufacturing evolution

Companies that are positioned to potentially benefit from technology-driven transformation of the manufacturing industry, including the emergence of new processes, products and energy sources.

• New age consumer

Companies that are positioned to potentially benefit from structural shifts in the way we consume goods and services, due to changes in demographics, technology and consumer preferences.

This is, in my opinion, a very cost-effective way of obtaining quick and broad exposure to a winning industry.

## Our portfolio construction recommendation

Putting together a disruption portfolio is very much a function of your liquidity requirements. For example, if you can ‘afford’ to tie up at least part of your capital for 7-8 years, I would consider investing in tech through private equity funds, and I would definitely invest in music royalties, as it delivers highly predictable and very attractive returns.

A quick word on tech in the context of private equity:

Unbeknown to many, more and more tech companies see private equity as a viable exit route, and private equity funds that invest in tech is a rapidly growing business (see for example here). Also, private equity funds have actually enjoyed solid returns when investing in tech in recent years, which can only accelerate the growth of this industry further (Exhibit 16).

Tying up your capital for such a length of time is not a luxury bestowed on everybody, though, and that is where I would bring the GS ETF strategy into the frame. Admittedly, we have not yet conducted much research on the five ETFs mentioned above, but we will do so in the not so distant future.

Assuming Goldman Sachs’ ETFs pass our due diligence, and assuming liquidity is required for at least part of the portfolio, I would establish a portfolio of disruptive technology companies by investing in one or more of Goldman Sachs’ ETFs. Around that core, I would then build a portfolio of the actively managed investment strategies mentioned above.

Our starting point is almost always near zero equity beta, which may be difficult to achieve with ETFs, but that could be resolved by establishing a short position in a suitable index future, thereby neutralising the equity beta.

## Megatrend #5 and its associated sub-trends

As we always do, when we identify a megatrend, we zoom in on a number of so-called sub-trends which are a direct result of the megatrend in question. In the case of disruption, we have (so far) identified a total of four such sub-trends (Exhibit A1).

Disruption will have a massive impact in the years to come – positive as well as negative. Given the rising computing power and the range of disruptive innovations on our doorstep, there is no reason whatsoever to expect this megatrend to fizzle out anytime soon.

The most obvious, and probably also the most investable, sub-trend derived from this megatrend is the digital revolution, but it is far from the only one. Fossil fuels will be phased out in the years to come with dramatic consequences to follow for coal, gas and oil prices.

Globalisation will also, whether the populists in the political elite like it or not, gain further momentum, and urbanisation will continue to drive millions of people away from rural areas into towns and cities around the world.

## The Digital Revolution

The Digital Revolution was born when the internet was first established in the mid-1990s, and it gained further momentum with the launch of the smartphone in 2007.

We are now on the cusp of the next stage of the digital revolution with the introduction of advanced robotics, AI, IoT, driverless cars, blockchain, streaming, etc. The number of advanced robotics for industrial use is growing very fast already (Exhibit A2). So far, the industry that has been penetrated the most by robots is the automobile industry, but others will follow in the years to come.

The Digital Revolution has affected many industries, even if they have no explicit need for robots. One such example would be airports. In a growing number of airports around the world, you can now check in, hand over your luggage, go through security (assuming you haven’t got anything dodgy on you) and all the way to the aircraft without having to deal with a single human being.

## The Death of Fossil Fuels

As a consequence of global warming, sea levels are on the rise. In the last 100 years, sea levels have risen by more than 20 cm (Exhibit A3). At first, that doesn’t sound like an awful lot, but it is. At the going rate, sea levels could rise by another 20 cm in the next 50 years, wiping out entire countries. Some of the world’s bigger cities, notably New York and Rotterdam, are also at risk.

Global warming is leading governments all over the world to switch from fossil fuels to alternative sources of energy. Virtually all transportation is expected to convert to electric vehicles over the next decade, and most heating is also expected to be electrified. By electrifying virtually all transportation and heating, fossil fuels can be replaced with renewable energy forms like wind and solar which is obviously negative for fossil fuel prices.

Some diehards argue that rising temperatures are part of the normal cycle, and there is nothing we humans can do about it. Quite frankly, it is a silly argument. If true, a conversion from fossil fuels to renewables, and later to fusion energy, will have little effect, but there is absolutely nothing to lose from the conversion. If untrue, we may still be able to halt the warming, which would benefit an awful lot of people.

## Globalisation

Globalisation is a relatively vaguely defined term, being used to describe all those dynamics that bring different parts of the world closer to each other. In economic terms, globalisation refers to the rising integration of markets – both financial and non-financial – leading to rising interconnectedness between nations. Away from economics, globalisation simply means that the world is getting smaller; that we are all on the same social media, that we all watch the same films, and that we all listen to the same music.

The implications as far as financial markets are concerned are numerous. The mobility of capital has risen dramatically as a result of globalisation; so has the mobility of labour. One of the most obvious beneficiaries of globalisation is international trade. 30 years ago, international trade accounted for 25% of national income across the OECD. The corresponding number today is 40% (Source: World Bank). Across emerging economies, the ratio has risen from 15% to 60%.

International trade will become ever more important. As a bigger and bigger slice of the workforce retires, many countries will become increasingly dependent on international trade to supply the goods and services the elderly require but no longer produce.

Growing international trade is a key driver of GDP growth around the world; hence the importance of globalisation. The current wave of rising populism could put a stop to that, and that would have a big, negative impact on economic growth, but stranger things have happened. Here in the UK, never have more people been employed, and almost never has the unemployment rate been lower. In spite of that, ordinary people demand that the government protect them from competition from abroad, and the current cohort of political leaders are only too happy to comply.

In terms of investment opportunities (other than trade finance) that stand to benefit from globalisation, allow me to mention a few. Strong consumer brands, which will increasingly be in demand from Asian consumers, will most definitely benefit. So will music royalties. Not only are younger people around the world increasingly subscribing to the same music taste. More effective anti-piracy laws in the developing world make emerging markets in general, and Asia in particular, the biggest growth opportunity worldwide for this industry.

## Urbanisation

50 years ago, only one-third of all people on Earth lived in urban areas. That number is now in excess of 55% and is expected to reach 66% by 2050 (Source: The Open University). Nowhere is urbanisation happening at a faster pace than in Asia (Exhibit A4).

Urbanisation is a direct result of people seeking a better life. All over the world, a city life offers more job opportunities than a rural life does. Even in the most mature countries in the world, young people continue to move to the bigger cities in search of a job, once they have completed their education.

The most rural continent in the world is Africa, but Africans now migrate in large numbers to urban areas, and the main driver is an attempt to escape the poverty trap.

Asia has been hit by the biggest wave of urbanisation so far. Younger, educated Asians migrate to the cities in search of a job, and the poor underclasses migrate to the cities to escape poverty (which doesn’t always work to plan).

The implications are numerous. City-life affects the environment and it affects health. Living in Delhi, one of the most polluted cities in the world, is akin to smoking no less than 44 cigarettes every day (Source: CNN).

From an investment point-of-view, healthcare is therefore likely to benefit immensely from this sub-trend. So is the water industry and the agricultural industry. City-life almost always leads to higher per capita water consumption and to higher per capita meat consumption which drives water consumption to even higher levels.