Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing investing. I'm your host, Oscar Pulido. Today, we're wrapping up our mini-series on megatrends.
On our last four episodes, we've covered megatrends across a wide spectrum: how advancements in health care and genomics have helped us fight the COVID-19 pandemic, the transition to a lower carbon economy, how China has become a global superpower, and the growth of autonomous and electric vehicles. On today's episode, we'll talk about what we missed and what's next for megatrends with Jeff Spiegel, BlackRock's U.S. Head of Megatrends and International ETFs.
Jeff, thank you so much for joining us today on The Bid.
Jeff Spiegel: Thanks so much for having me back, Oscar. And, actually, I think this is Bid podcast appearance number three for me. So, out of curiosity, does that mean I now have the record for most regular guest on The Bid podcast?
Oscar Pulido: Well, you're right. This is definitely not the first time we've spoken, and I don't have the rankings in front of me. I'm going to say you're maybe our second most regular guest.
Jeff Spiegel: OK. Well, number two, still proud of that. I think Alec Baldwin is number two in most episodes of SNL hosted right behind Steve Martin, and I'm actually pretty good, I think, with being The Bid's Alec Baldwin.
Oscar Pulido: Well, we'll try to move you up those rankings, Jeff, but let's talk about megatrends. Throughout this miniseries, we've covered aspects of all five megatrends. And as a reminder, we've talked about demographics through the lens of genomics and COVID-19 vaccines, we've talked about climate change and the move to a net zero economy, emerging global wealth and rapid urbanization in China particularly, and we've also talked about technological breakthrough via electric and autonomous vehicles. So, give us a quick sum up. What are the areas within these five megatrends that are most in focus today?
Jeff Spiegel: Well, it's always really tough to choose, and I think at the moment particularly so, because really, during a crisis, we most forcefully see the impact of creative destruction. So, for example, if you look at the share prices of a lot of today's megacap technology firms, the ones that rose to prominence really off of the last 20 years of megatrend themes – things like social media, e-commerce, the smartphone – their leap forward really came on the heels of the Great Recession, right? The past crisis, after which capital was really reallocated at large by investors. And as we faced the COVID-19 crisis, we've actually seen a similar phenomenon as investors again look to the future. And as we heard from so many of the amazing guests in episodes one through four of the series – and I should note I'm humbled to be following them today – we heard about the many areas where those future-seeking investors are going. But I won't totally dodge the question, so I'll take it megatrend by megatrend and see if I can give you a real answer here. So, we'll start with tech breakthroughs. Cybersecurity is the main area of focus here. In fact, cyberattacks have actually increased 400% during COVID-19, which makes sense with everyone moving really to an online lifestyle, and cyber criminals have shifted more recently to targeting critical infrastructure, supply chains, and that's been in focus with the colonial pipeline attack, disrupting oil transmission, the JBS hack wreaking havoc on livestock markets. In demographics, and really given how many Americans have already experienced the benefits of genomics and immunology in the form of a jab, I'll leave this one at two words – and those words are “mRNA vaccines.” I think enough said on that one. For urbanization and climate change, I'll kind of lump those together. Whether it was the record breaking almost $800 billion into traditional and renewable infrastructure passed by the EU last year or the current debate in the U.S. that's already seen Republicans and Democrats agree that our own infrastructure in the U.S. needs $1 trillion of spending, government efforts to build out infrastructure – from bridges, to tunnels, to EV charging stations – and connected cities are really top of mind. And then, of course, in emerging global wealth, here we've seen some short-term challenges as emerging markets have been less able to scale up vaccinations versus developed ones. But we continue to see record levels of inflows, actually, into emerging markets as an asset class in countries like India and Brazil as investors look past today to the seemingly unstoppable rise of middle-class consumers in these markets over the mid to long term.
Oscar Pulido: So, Jeff, I want to go back to some of the areas that we didn't cover in these megatrends. Let's start with rapid urbanization. With the COVID-19 pandemic, we saw a big move out of cities. In fact, you and I live in cities and maybe there was a part of the pandemic where we wondered why people were leaving us. But has this dented this megatrend at all, or do we still see this urbanization theme being one that you consider to be long term?
Jeff Spiegel: I love that this is where we're starting, because it actually gives us a chance to do a little bit of myth busting right off the bat. And so, here are some of the facts. In our nation's largest city by far, New York, also my hometown, younger millennials, Gen Z-ers, have actually been taking advantage of falling rents driven from the pandemic and moving in large numbers into the city. Actually, more people moved into New York City than have left since the start of the COVID-19 pandemic – which is not to say that there hasn't been some migration. As work from home has enabled people to leave some of the larger cities like San Francisco, the top areas people are moving to are actually just other cities – mid-sized cities like Austin, and Phoenix, and Nashville – so still urban. Still supporting that trend towards urbanization, which, of course, is actually driven primarily from emerging markets. Eight out of the 10 largest cities in the world are in developing countries, and a lot of these cities' population growth is really driven by a desire of citizens in these markets to pursue better economic opportunities, education, healthcare, meaning that drive to urbanize isn't being deterred even by the magnitude of the COVID-19 crisis. Throughout history, there have been major events, such as the flu of 1918, such as 9/11, which led a lot of people to forecast the demise of cities. But time and again, cities have overcome. There's that famous New York Post headline when New York City was at its nadir in 1975: “Ford to city – drop dead.” But each time, people have returned to pursue economic opportunities, maintain proximity to networks of capital innovation and culture in great cities like New York.
Oscar Pulido: There's no question that New York is exhibiting a lot of resilience. We're seeing some of the activity pick up now, so it's interesting to hear you talk about the people actually moving into New York being in greater numbers than those that have left since the pandemic. But as cities grow and develop, one thing that comes to mind is the need for infrastructure. Infrastructure has been a hot topic politically. So, what are the latest developments here?
Jeff Spiegel: So, infrastructure revitalization in the U.S. is like that old joke about the weather. Everyone talks about it, no one ever seems to do anything about it. The United States is the wealthiest nation in the world, but it ranks 13th in infrastructure and that poor status has persisted for some time. That said, even in this totally unprecedented political gridlock where it seems like there's nothing Democrats and Republicans actually agree on, both are calling for over $1 trillion of infrastructure spending right now. Specifically, if you look at President Biden's plan, he's focused on modernizing 20,000 miles of highways, roads and streets, fixing the 10 most economically significant bridges in the nation, repairing the worst 10,000 smaller bridges, providing critical linkages to communities, replacing thousands of buses and rail cars, hundreds of train stations, renewing airports, modernizing seaports, expanding transit and rail into new communities. That's a mouthful and that's just on the traditional infrastructure component. Most of these sorts of items are the kind that both Democrats and Republicans are actually supporting together right now.
Oscar Pulido: Well, and when we think about infrastructure, you might remember we spoke with Will Araujo of Cruise and the developments going on around electric and autonomous vehicles. We talked about how these vehicles could help with ride sharing and change the way that people commute. So, how will cities adapt and become smarter to support the needs of these technological advancements? I'm thinking, for example, about the charging stations that you need for these electric vehicles.
Jeff Spiegel: Yes. So, unfortunately, everything's not always totally rosy in Washington, and so this gets into some of the components of the Biden Build Back Better plan that are less aligned across Democrats and Republicans. So, for example, President Biden's proposal involves spending $174 billion, building 500,000 charging stations by 2030. And as with anything political, it's hard to say whether this provision will make it into a final bill, but – and you heard this from Will really clearly – the electric vehicle future appears to be coming either way. There are – pardon this pun – too many speed bumps for EVs today, with only 26% of rural citizens having an EV charging station within five miles of their home, and even densely populated areas having only about 65% of their people that close to a charging station. So, whether or not in the U.S. the federal government is going to be the driving force, these issues are being addressed in America and around the world. Over 65 million EVs are predicted to be sold by 2040. A lot of progress is actually going to come out of local government regulation, in California, we'll see the banning of sales of traditional combustion engines as soon as 2035. And it's a truism in the car industry that so goes California, so goes the world. The world's 100 most populous cities emit one fifth of global carbon emissions and EVs are being seen by many of them as a way to curb those emissions impacts. And again, many of those cities are in the emerging world, where countries like China have ambitions to achieve carbon neutrality by 2060, a goal which absolutely depends on advances in energy-related technologies, and certainly, that includes electric vehicles.
Oscar Pulido: Jeff, obviously the examples that you cite around electric and autonomous vehicles are a great example of technological breakthrough, which is one of the megatrends. But what other examples within tech can we think about that are progressing?
Jeff Spiegel: So, in our upfront, I noted that cybersecurity is really the most in-focus area within the technological breakthrough megatrend right now. So, I think it probably makes sense to start there. In 2011, there were two cyber criminals on the FBI's most wanted list, and today, there are actually over 100. In fact, those folks and others are hacking a new computer roughly every 39 seconds. In response to that, corporate spending on cybersecurity to counter the threat is rising quickly. Worldwide spending on information security and risk management tech and services is actually forecast to top $150 billion this year, up 12% from last year and a staggering 50% from four years ago. Of course, the need to advance here is constant as cybercrime advances just as fast as cyber defenses, which means renewed investment is constantly required. But the work actually also goes beyond the private sector. In May, President Biden signed an executive order to improve the nation's cybersecurity and that will create a standardized playbook and a set of definitions for federal responses to cyber incidents. And in his latest budget proposal, he's included significant spending to modernize the federal government's IT infrastructure specifically to be more resilient in this area. Of course, there's more to tech breakthrough than just cybersecurity, and other areas are accelerating now, so many of them, we can't possibly cover them all in detail today. But whether it's cloud and 5G enabling everything from AVs to surgical robots, artificial intelligence supercharging really an increasingly remote economy and one that will remain more remote than ever, even post-pandemic, or the number of industrial robots doubling by 2025 in response to supply chain disruptions, there's no end to the accelerations that we're seeing this year and going forward in the areas of technological breakthrough.
Oscar Pulido: I always like that FBI statistic, so just to be clear, there’s been an over 50-fold increase in the number of cybercriminals on the Most Wanted List over the last 10 years. You’re always chock full of statistics, I just did some math based on what you were saying. When you talk about technology, Jeff, how much of the technological breakthroughs are really genuinely new technologies versus they’re just evolutions of an existing technology?
Jeff Spiegel: Will made a point that I really liked about the beginnings of self-driving. He called out the advent of cruise control as the start of it. I might go even a little further back and point to the automatic transmission as the first instance of the car starting to take responsibility from the driver. We take these innovations for granted as they are longstanding, and we look at self-driving as something completely new. But I couldn’t agree with Will more that today’s self-driving technologies are just quantum leaps forward on a long journey. But in many ways, it’s advances in ancillary technologies, sometimes longstanding ones, that make breakthroughs possible in a virtuous cycle. I always think of The Jetsons, and as a kid, I couldn’t figure out why we didn’t have the ability to talk to each other via video like Mr. Spacely does when he’s yelling at George. I mean, we had phones and movies and TVs, why not video phones? The baseline technology was there, but all the ancillary components weren’t. Zoom, WebEx, they all rely on many other technologies – like broadband and the smartphone – as well as evolving consumer habits, to work rather than being strictly new ideas. So, let’s take the internet of things – of which self-driving cars are a part – and which is my favorite example of this loop. So, let’s go back to that rapid fire list of in-focus tech innovations I rattled off to your last question and see how they come together. Autonomous cars are hardware (the car, the sensors) enabled by software (effectively hyper-advanced MapQuest) that rely on artificial intelligence (which helps the car anticipate and react), and that in turn uses 5G to reach the cloud and keep learning. Then of course, all of this needs to be protected by cybersecurity. Okay, that was a mouthful but hopefully it illustrates this point that old technology is constantly advancing – even where we leap forward so far that an innovation feels brand new – and it’s all enabled by other gradually advancing technologies that make those big leaps possible.
Oscar Pulido: I am laughing when you say MapQuest and wondering if people still know what that is when we used to print directions out and have them next to us on the passenger seat in the car when we were driving somewhere. So, clearly, we’ve made a lot of advancements. Jeff, as part of the mini-series, we talked to BlackRock’s Salim Ramji and Chris Ailman, who’s the Chief Investment Officer for CaLSTRS, and the topic was the transition to a low carbon economy. So, talk to us a little bit about how technology is helping fight the climate crisis. What developments are we seeing here?
Jeff Spiegel: So, worth a quick reminder here and I’ve mentioned this in previous Bid episodes. While we position technological breakthrough as its own megatrend, tech really infuses all 5 of our megatrends and a lot of innovation in a variety of areas today. From the technology platforms that enable mRNA to connected cities, the areas where EM consumers are leading the way in tech adoption, like digital payments, and of course, to the technology that makes climate solutions more efficient and effective. Again here, COVID-19 has been a catalyst. Renewable energy demand actually grew 7% in 2020 while traditional energy demand fell by 5% during the pandemic. Much of this is enabled by rapidly advancing technology in energy capture, storage and transmission that will enable 50% of the world’s energy to come from solar and wind alone by 2050. As ever, necessity is the mother of invention. In April, the U.S. committed to halving emissions by 2030, a feat only possible via expanding our production and consumption of clean energy. We already talked about China’s net neutrality target and countries in Europe out to Japan have all made similar announcements. What that means is that the public and private sectors will have no choice but to keep investing and developing technologies to reach these critical targets.
Oscar Pulido: So, let's switch gears and let's talk about demographics and social change. On the first episode of the mini-series, we focused on genomics research with Stephane Bancel, the CEO of Moderna, and we also talked to Dr. Samarth Kulkarni, the CEO of CRISPR Therapeutics. And Jeff, you've alluded to this, the advancements in medicine, how they've allowed us to develop vaccines for things like COVID-19 in record time. So, what other developments in healthcare are we seeing?
Jeff Spiegel: Before answering that, can we just reflect on a moment on Samarth's comment that children born today are likely to have a life expectancy of 120 years driven by advances in cell and organ regeneration that actually make 150 years not out of the question? That's kind of blowing my mind. Because if you look at even the past decade or so, global life expectancy has been rising super rapidly, but it's still only reached about 73 years so far. Actually, from 2015 to 2025, the number of people worldwide over 60 is going to have doubled from 1 billion people to 2 billion people. And we kind of have two phenomena going on here. So, first, that people are living longer, and second, that fewer people are being born, meaning a greater percentage of the world's population is therefore older. That aging population and associated increases in healthcare expenditures globally, that's what's driving an amazing amount of spending and therefore innovation and breakthroughs in medicine that are going to make the potential for that prediction of that 120-year life expectancy to come true. Let's look at some of the examples. There are new approaches in immunotherapy to leverage or manipulate a patient's own immune system to fight rheumatoid arthritis, gastric cancer, and a variety of other cancers. Gene editing is allowing us to, for the first time, this year, begin releasing genetically modified mosquitoes that can cull the broader mosquito population and prevent the transmission of some of the world's worst killers, like malaria and dengue fever, in addition to more emerging threats like Zika. And before we even get to that fully organic organ replication that you guys were talking about, scientists believe they can actually first get to a point where they can 3D print functioning organisms that are custom made for each patient, and that's estimated to save millions of lives each year. But actually, all of that just covers what we think of as traditional medical breakthroughs where technology plays a role. But in the more traditional sense of technology beyond medicines and vaccines, there's a really important virtual angle at play here. So, since the onset of the COVID-19 pandemic, the Mayo Clinic has actually conducted more telehealth visits per day than all visits in health combined in 2019. COVID has changed the game here, with countless millions of people, frankly, forced to get comfortable with telemedicine over the last year. And this is really critical in supporting that aging population, because it means that technology is enabling the application of medicine at scale. It's estimated that a single medical practice can save its patients about $3 million in total and reduce travel by about four hours per year per patient by offering telemedicine, right? And again, with this larger population, particularly older population, not only is that more convenient, but it's more efficient and it's more cost effective for the individual seeking care as well as for society that's paying for a lot of that care.
Oscar Pulido: It is really interesting when you think about the advancements in healthcare. And when you talk about a life expectancy of 120 or even 150, it seems hard to believe. But I guess there was a time when you lived on planet Earth that living to the age of 73 also seemed kind of impossible, so don't bet against human innovation. Jeff, you might remember we also talked to BlackRock's Molly Rosenman. We talked to her about the trend of emerging global wealth. Molly is now on her second career stint in China. In China, there has been a One Child Policy for many years. That has resulted in a population that has aged and where we have a lot of people really over the age of 60. That percentage of people is only going to continue to grow. Just recently, they’ve announced a Three Child Policy. So, there’s been an evolution in how Chinese government officials think about demographic challenges. So, how does this trend of emerging global wealth play out in economies like China and India versus how it plays out in economies like the U.S. and Japan?
Jeff Spiegel: Actually, as an aside, and I don't know if you know this, Oscar, I'm really personally grateful to Molly as she's the person who brought me into BlackRock years ago and she's been a mentor to me ever since. And I thought it was awesome to get a take from Molly, a professional who's lived and worked in the Asia-PAC region on two sides of a roughly 20-year span. So, for some time now, China has been the world's most populous country, but we're now at an inflection point where India will actually overtake it as both reach about 1.5 billion people in the next five years. So, China's older population is growing rapidly, but its younger population is in decline by the numbers. Let's compare that: India's population growth is largely fueled by a younger demographic, meaning that there are more young workers able to replace older workers as they exit the workforce. That's a pretty fundamental difference in the societal burden of an aging population between the two countries. Let's take Japan and Europe: Here, we actually also have low birth rates, meaning the situation demographically is more akin to China's. But the difference is the social safety net. These places are already largely urbanized, which means you haven't seen the older population sort of left behind geographically and more on its own as younger folks move to cities. And these places also have more established healthcare and pension schemes for the elderly, so that social safety net is really important. At the end of the day, what that's telling us is that China is actually facing a fairly unique challenge here in being an emerging market country with such low birth rates and also having a large elderly population without that social safety net in place. That said, China is also the most exciting emerging market country when it comes to innovation. The top seven EM economies will be bigger than the top seven DM economies by 2036, and China is, by far, the first among them. I should say, by EM, I mean emerging markets and by DM, I mean developed markets. So, by 2030, as much as 60% of energy is going to come from renewables. Over the next 10 years, Shanghai is going to add about seven million new citizens. China's already number one in the installation of 5G infrastructure and develop a homegrown semiconductor. It's the leader in mobile payments and has the world's largest online population. So, investors have to balance some of the demographic headwinds we just talked about, not to mention some of the social and governance challenges in China that we heard from Molly about, with those amazing tailwinds that China has going for it as it moves forward so rapidly in areas like climate and technology.
Oscar Pulido: Jeff, I really liked what you said, megatrend investing is about investing in human innovation. So, really, from an investment perspective, how should we think about where the best opportunities are?
Jeff Spiegel: Yeah, we're building on each other's ideas just like great technology is building out this ecosystem in a virtuous cycle. So, virtuous cycles everywhere. And I think there's also a virtuous cycle to the way that we talk about investing in megatrends, three items that are self-reinforcing and really critical: one, to weight for tomorrow, two, to focus across value chains, and three, to think beyond borders. And I think the reasons, as I go through them, will be fairly clear from what we've talked about throughout the episode. So, of course, when I say weight for tomorrow, I don't mean W-A-I-T. I actually mean quite the opposite. So, the FAANG-M cohort of stocks, those technology firms, make up about 22% of the S&P 500, but they only represent about 3% of global patent applications. Now, most investors, just by holding the S&P 500 in their portfolio, are therefore very exposed to these firms. So, in our solutions for investors looking to expand their allocation to innovation, we focus on the mid and small cap firms that are low weights and existing benchmarks and that have the potential to ride the next 10 years of megatrends to become those megacap leaders of tomorrow. So, one, weight for tomorrow. Two, as far as value chains, I talked about this in that virtuous cycle around autonomous vehicles. Investors looking to access this trend have to think beyond car makers. Today's innovation is really multifaceted even for discrete themes, and so investors need to consider the range of firms that enable and benefit from a trend rather than just the most obviously involved companies. And lastly, these value chains and opportunities have to be thought of globally. I think Molly mentioned one of my favorite stats: China and India alone have over 1 billion people who have yet to access the internet. That's a billion people who have never made a mobile payment, never tweeted, never liked, never streamed anything. And as you think about the amazing returns of U.S. equities over the last 10 years, so much of that has actually been driven by exactly those activities proliferating across the United States. Now, they're coming to the rest of the world and they're doing it rapidly at a time when, actually, U.S. investors by and large are underweight global equities. So, I'd encourage our listeners to challenge traditional home country bias and remember that the rest of the world is an essential ingredient in any great megatrend portfolio. So, weight for tomorrow, connect the value chain, and think beyond borders.
Oscar Pulido: Well, I think I've said this in the past when you've joined us on The Bid, so I guess I'll just say it again, which is you have a treasure trove of interesting statistics to share at cocktail parties, and actually, maybe, maybe we're heading towards an environment where we can have those cocktail parties in person and not over Zoom. So, Jeff, thank you for joining us today on The Bid. It was a pleasure having you.
Jeff Spiegel: So, if you need any zinger stats before you get to your next cocktail party, Oscar, give me a call. Always at your disposal to provide a few. I'm also looking forward to coming back soon so I can keep pushing up my guest count. Because, yes, I am honored to be The Bid’s Alec Baldwin, but I’m hoping to one day be its Steve Martin.
Oscar Pulido: Well, I said it at the beginning, Jeff, we're going to look to move you up that list. Thanks again.
That wraps up our mini-series on megatrends. Our next mini-series dives into sustainability. We’ll talk about innovations in climate technology, how Covid-19 has increased the focus on social factors like corporate culture and employee satisfaction, and the importance of diversity and inclusion in the workplace. We’ll see you next time.
