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Approach growth differently: think development, not just GDP

Dáire Dunne, CFA, Portfolio Manager
Simon Henry, Portfolio Manager
2022-09-30
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The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.

Key points

  • The traditional way of viewing economic success solely through the lens of GDP growth is rapidly becoming outdated. Taking the broader perspective of economic development when evaluating companies and industries enables investors to target a wider opportunity set and achieve more sustainable returns.
  • The forces underpinning sustainable economic development align with investors’ goals of economic progress, social evolution and sustainability.
  • By embracing the development mindset, investors can be part of the change today to help shape a better, cleaner, more productive and more inclusive future, and grow their own wealth to pass on to future generations. 

Targeting just GDP growth is increasingly a thing of the past. To achieve their growth goals sustainably, investors must take a broader view and incorporate development considerations when assessing investible opportunities.  

The way of defining economic success has evolved over time and the old way of relying on quantitative metrics is becoming outdated. Increasingly, people are looking beyond headline GDP numbers and demanding an economic model that is fairer, more inclusive and sustainable.

To capitalise on this shift, investors need to think in terms of economic development rather than growth. Development puts in place the foundations on which long-term, high-quality economic progress can be achieved. 

This shift in mindset is increasingly important in reshaping how the world thinks about investment opportunities and is enabling investors to differentiate long-term winners from losers.

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Growth
  • Is defined by increases in gross domestic product, a measure of the size of an economy.
  • Measures the quantity of economic change over time.
  • Limited by rigid definitions, which are increasingly obsolete as societies move away from growth for growth’s sake.
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Development
  • Is concerned with the quality and durability of economic expansion.
  • Relates to increasing the productive capacity of an economy while making responsible use of available resources, promoting economic inclusivity and engendering a better quality of life for citizens.
  • Puts in place the foundations for achieving long-term, high-quality economic progress.

GDP redefined: from binary to multi-dimensional

If we look beyond the traditional narrow realm of growth defined by GDP, redefining economic development and understanding investment opportunities require a differentiated and multidimensional approach — a new “GDP” approach for the twenty-first century — to examine global and disruptive issues and trends with a prescient mindset.

Global: both business models and market-moving events are increasingly transcending borders

Disruptive: secular trends seen today are challenging the conventional mindset 

Prescient: assessing opportunities with a broad thematic lens will facilitate dynamic positioning over multiple cycles

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In today’s interconnected world, technology allows companies to expand globally with greater ease, while traditional sector definitions are becoming too rigid for modern operating models. Meanwhile, cross-border issues like climate change and ageing populations are disrupting society, which is creating challenges but also opportunities for businesses. Secular trends like these frequently lead to under-appreciated investment themes. Prescient investors who gain a deep understanding of how these economic, geopolitical, technological and consumer trends will play out over the coming decades should be able to identify attractive long-term investment opportunities.

Where to find opportunities

Using the new lens, we can categorise investment opportunities into three key drivers of sustainable economic development — economic progress, social evolution and sustainability.


 

Economic progress
Opportunities in economic progress include development drivers that capitalise on the growing efficiency in the production of goods and services with the help of increased application of new technologies and scientific insights. Beneficiaries of such advances could be found in areas like automation, robotics and digital and physical infrastructure.

Key themes include:

Theme spotlight: medical innovation

  • Rising wealth, technological advances, falling costs and improving access to health care are increasing the demand for higher-quality and increasingly personalised services.
  • Gene sequencing, biosensors, neuroscience and data analytics enable us to better understand what is happening inside our bodies, allowing preventive care to take precedence over invasive and costly treatments. 
  • Customisation will replace standardisation and continuous monitoring of our biological data will become the norm. A core group of companies within the med tech, biopharma and health care services sectors will emerge as enablers of this transition.
3B vs 1,000 in USD; Genome sequencing becomes affordable

It took 13 years and nearly USD 3 billion for the first sequencing of the entire human genome. With today’s next-generation sequencing (commonly known as NGS) technologies, the entire human genome can be sequenced for USD1,000 in a single day.

Source: National Human Genome Research Institute, ‘The Cost of Sequencing a Human Genome’, December 2020 

Social evolution
Social evolution is accelerating thanks to improving living standards and supportive governmental policies. As health care, education and financial services become more accessible, we see a change in behavioural patterns and new investible opportunities. 

Key themes include:

FINTECH

HEALTHCARE INCLUSION

Theme spotlight: education and learning

  • The education and learning sector undergoing severe disruption. Whether driven by a desire to upskill, access higher-quality education or simply overcome a shortage of supply, demand for education and learning is increasing globally. 
  • At the same time, we see a structural shift to online/hybrid models — accelerated by global lockdown measures in response to COVID-19 outbreaks. 
  • Innovative business models are emerging, and the increased use of new and old technologies, ranging from video conferencing to virtual reality, are helping countries build more agile and resilient education systems, with providers of such services set to benefit greatly.
2B Children will enter elementary school

UN projections imply that, between 2015 and 2030, 2 billion children will enter primary school. According to our research, it is estimated that the next 10 years will see the largest growth in the education market since the post-World War 2 boom.

Sources: United Nations, Department of Economic and Social Affairs, Population Division (2015). Population 2030: Demographic challenges and opportunities for sustainable development planning (ST/ESA/SER.A/389).

Sustainability
Sustainability-led opportunities reflect global concerns about climate change, pollution and overconsumption. These issues have put the spotlight on how businesses are using available resources with due consideration for future generations and the environment. Investible ideas span renewable energy, waste management, recycling, water treatment and other clean technologies as well as testing and diagnostics.

Key themes include:

ENERGY TRANSITION

NEXT GENERATION VEHICLES

Theme spotlight: energy transition

  • Over 180 countries have ratified the Paris Agreement to limit global warming, and most of these have committed to net zero carbon emissions by 2050. 
  • The coming years should see significant investment in research, development and infrastructure to enable that transition away from heavily polluting fossil fuels.  
  • Energy providers involved in wind, solar and other renewable sources that are compensated based on investments in their infrastructure are likely to be key beneficiaries.
windmill
30 - 85+% Increase needed to meet net zero carbon emission targets over the next decade

It took 13 years and nearly USD 3 billion for the first sequencing of the entire human genome. With today’s next-generation sequencing (commonly known as NGS) technologies, the entire human genome can be sequenced for USD 1,000 in a single day.

Source: IRENA (2018), Global Energy Transformation: A roadmap to 2050, International Renewable Energy Agency, Abu Dhabi.

Bottom line

The old way of measuring economic growth through GDP is outdated. A new development-focused approach that looks past the headlines and goes beyond traditional definitions can yield a host of new ideas. Turning these ideas into investible insights that drive long-term returns requires expertise, creativity and an unrelenting focus on finding and exploiting underappreciated opportunities. Investors can help to drive this change today and to define the future of our society. By tapping into themes of economic development, they can not only seek to shape a fairer, more sustainable world but also potentially grow their own wealth to pass on to future generations.

Long-term trends often go underappreciated by investors. By researching structural themes shaping the future of our world, we believe we can identify attractive opportunities ahead of the market.

Dáire Dunne
Portfolio Manager
Authored by
dunne-daire
Dáire Dunne, CFA
Portfolio Manager
Singapore
Simon Charles Henry
Simon Henry
Portfolio Manager
Singapore

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