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Here is how you can spot megatrends

Key learnings on Megatrends & leadership by Utpal Sheth

In this newsletter let’s absorb learnings from Utpal Seth about Megatrends and Leadership

Mr. Sheth’s lecture at the CFA Society is one the rare pieces of content available to the public. Here, he shared his expertise with “Megatrends and Leadership” – key drivers of value and wealth creation in the financial markets.

So, grab a cup of coffee and immerse yourself in the essence of the discussion. 🍵

What are Megatrends?

Some sectors have consistently outperformed broader indices over the long term due to structural changes. These structural changes are classified as megatrends. 
These megatrends, unlike other sectors, don’t consistently revert to the mean over the long term. In short, these are not cyclical in nature. 

One such Megatrend that we have seen is the finalization of savings, which has resulted in a surge in demat accounts, Mutual fund AUM, etc.

Let’s delve into the characteristics of Megatrends. How do you know if what you are seeing is a Megatrend or just cyclicality? 

A few of the characteristics of Megatrend are: 

  1. Irreversible shifts that are long-term in nature 
  2. Lasts for decades, having far-reaching impact
  3. Identifying them requires a broad view of their impact along with a focused approach to understanding their intricate details over time. 
  4. They redefine norms, creating new opportunities and challenges and reshaping the competitive landscape
  5. Megatrends are not impacted by borders, generations, and political systems. They are not because of the government but despite the government.

Recognizing megatrends and aligning your investments accordingly can result in disproportionate results.

Ingredients for the long-term success of a Megatrend?

Scalability – Strong supply-side conditions 

Durability – Changing demand scenario 

Granularity – Innovation-based business model 

Resilience – Not impacted by boom-bust cycle 

Without them, a megatrend is just a potential. 

Defining Leadership 

Observation also says that a few dominant companies take away a large part of the market share in the megatrend. Additionally, they also continue to take up substantial incremental market share intensifying their dominance. 
Effective leadership transcends strategy to focus on execution, with only a select few able to deliver. These leaders ensure profitability, scalability, and long-term sustainability, indicating a lasting competitive edge and consistent growth. 

Also, the Key to their success is wise capital allocation. Mistakes in capital allocation and structure compromise not just ROCE and growth but also the durability of the business

Economic Cycles Amplify Leadership

With every cycle, leadership is not only reaffirmed but redefined and becomes stronger than before. The leaders get the opportunity to extend and expand their leadership through each cycle.

  1. Macro Perspectives regarding Economic Cycles: Each cycle leads to creative destruction and non-linear shifts. These non-linear shifts take place in businesses, business variables, and business models. 
    The economic cycles are caused by 4D cycles i.e. Debt, Disruption, Displacement, and Dis-intermediation. 
  2. Micro Perspectives regarding Economic Cycles: In each cycle, the power between incumbents and new challengers shifts. You have to be able to perceive that shift of power. 
    In each cycle, men are separated from the boys. You have to be clear about whom you are backing. 
    Each cycle sets higher standards; what sufficed before becomes the baseline for the next. Management must continuously innovate and evolve. 
    The value paradigm also evolves in each cycle. It is always fine-tuned. Value migration accelerates with each cycle. Each cycle allows expanding TAM by giving inflection points. But only the adapters can take advantage of that. 

How does one approach the valuation of companies identified to be in Megatrends?

  1. It is important to consider intangibles in your valuations.
  2. Applying the classical mean reversion approach will result in disappointment.
  3. The intersection of megatrends and leadership is a rare multi-sigma event. Therefore, valuation metrics cannot appropriately reflect this outlier event.
  4. The terminal value impact of megatrends and leadership is disproportionate. Therefore, small changes in them result in outsized changes to terminal value. This cannot be captured in the conventional valuation frameworks

Thank you for exploring megatrends and leadership with us. We hope our insights enhance your strategic decisions and investments.

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