The 4 Principles Credit Suisse Uses When Deciding Whether To Invest In The Next Big Thing

The home of the future? The camping section is seen in Gizmodo’s ‘Home of the Future,’ a pop-up apartment that displays the latest in innovation, design and technology in New York City. Andrew Burton/Getty Images

Megatrends, the long-term themes which may shape economic reality in the future, can last for decades and can go through several phases of euphoria and panic, according to researchers at Credit Suisse.

“When a technology is invented, it does not enter the market for a few years,” says Credit Suisse in its Megatrends update report.

Although the pace has become faster due to globalisation, it can still take years before the technology becomes commercial or receives regulatory approval.

Megatrends are economic, environmental and political transformations which are of long-lasting significance to society.

From the investor’s perspective, the rapid movement of a technology at an initial stage does not always translate into higher returns.

“Finding investment opportunities at a reasonable price can be difficult to impossible,” Credit Suisse says.

“This is because a new technology does not initially provide a sufficient revenue stream to have an impact on global portfolios.

“As a trend becomes more mature, growth decelerates, whereas in absolute terms it can make more of a difference to corporate earnings.”

Credit Suisse follow four principles when deciding whether trends are investment opportunities:

  • Focus on all aspects of innovation. Innovation usually comes in increments rather than breakthroughs. When a radical technology is introduced, the effect is often disruptive to existing products and industries. In some cases the benefits accrue to consumers rather than the industry as a whole, while the innovator also captures some of the benefit. The relative size and profits of the industry, however, can remain unchanged. The e-cigarettes market offers a good example of a technology that can change the future of the tobacco industry but is unlikely to change its relative size in any significant way as regulation catches up.
  • Don’t believe the hype. Investing during the early stage of a theme carries significant risk because of limited investment opportunities and hype. Moreover, new industries can be fragmented and suffer from excess capacity. The best time to invest is often after a bubble, when valuations are depressed and industries go through a phase of consolidation. The technology industry in the aftermath of the dotcom bubble offers a classic example of this.
  • Invest across asset classes. The best thematic opportunities are frequently outside equities. Investments in an early life cycle are probably easier accessed through venture capital and private equity. Sometimes entirely new markets can be created (such as insurance-linked securities), although this does not eliminate the risks already discussed.
  • Consider portfolio aspects. Investments must in any case be judged on portfolio characteristics. Megatrend Investments can exhibit lower correlations due to their unique drivers. However, this must be weighed against their risk and return characteristics versus other assets.

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