Robust research on emerging trends can reveal much about future market opportunities, said Joe Faraday, director, international equities at Baillie Gifford, during his session.
“I want for us all to be thinking about the growth waves – that’s the growth topic that really interests and excites us… Ultimately, it’s all about trying to ride growth waves when it comes to long-term investing.”
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We can draw a simple example of using research to predict these growth waves from data about what consumers are spending money on, he said. He noted incomes had risen sharply around the world over the past two centuries.
As a result, people spend a lower percentage of their income on staples relative to the amount they spend on non-essential goods. Should this trend continue, returns from companies providing staple goods will be outpaced by those focusing on higher-end goods.
Faraday also pointed to a more complicated example of how research can predict future growth industries. He highlighted the use of data to draw inferences about the broad traits shared between members of the same generation.
“Take the example of Generation Z, who were born after 1995 and entering their adult years now. . . They spend more time online and prefer face-to-face interactions than the older Millennials. Allegedly, they work far harder than all of us, are more practical and actually like saving money.”
“This will affect spending patterns the world over. Some will endure, some will continue to thrive, but there will be new trends that will also come through.”
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These types of insights don’t present a clear picture of what asset classes will see the greatest gains. But Faraday said they do provide an important perspective on what opportunities have the potential to boom.
He added that when analysing individual investments’ growth opportunities — whether a commodity class, a business or an industry — it is important to look through three lenses: disruption, trust and technology.
“When I say disruption, I mean companies or industries undergoing structurally significant changes. By trust, I mean trust in a commodity’s lasting allure or our confidence in a company’s corporate culture. By technology, I mean we look for major advances and breakthroughs in terms of discoveries and inventions.”
This three-step approach has led Faraday’s team to capture difficult-to-see opportunities across different sectors.
In 2008, it led his team to back a then little-known Chinese technology company, Tencent. It now boasts an annual profit of about $20bn.
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More recently, Faraday’s team used the methodology to determine that Sartorius was a worthwhile buy. The German pharmaceutical company focuses on bioprocessing equipment.
“It’s survived, it’s thrived and it’s been important for pre-clinical development of some broader manufacturing processes,” said Faraday.
“So it’s proven itself and stepped up and been critical for advancements in health care. It’s positioned to be a strong player with a 20 to 30 per cent market share and to be a leader in equipment for the manufacture of biological drugs.”
Technology is making it possible to use data in novel ways, added Faraday. He noted his research team uses AI to help crunch data and draw conclusions.
“Machine learning advancements in recent years have allowed us to do far more and in more novel ways. Our in-house developers now use 300-dimension vectors for our machines to analyse.”
Whether or not investors have the same sort of machinery available, Faraday said he believed they would reap the benefits of putting research at the centre of their investment process.
“We must be long term, and we must be optimistic in terms of what we’re looking to research.”
Read more coverage from the 2022 Global Investment Conference.