Game Changers: The shape of things to come: Imagining 2030 and beyond

Henning Stein:

What will the world look like by the end of the decade? No one can truly predict the future, but many of us try to develop an informed idea of what it could hold. And I'm delighted to welcome today, Professor Mauro Guillen, political economist, sociologist, management educator, and now director of Cambridge Judge Business School. Mauro's idea of where we might find ourselves in a few years’ time is unusually comprehensive, as shown in his bestselling book, “2030: How Today's Biggest Trend Will Collide and Reshape the Future of Everything.” Also joining us is Stephanie Butcher, Invesco's Chief Investment Officer in the UK. Like every investor, Stephanie has a very keen interest in where the world may be heading.

Henning Stein:

Welcome to Game Changers. Mauro, Stephanie, thanks for taking the time to be with us today. I would say, I guess, the first issue we want to address is one that's been part of so many discussions since early 2020. It's COVID-19. And my question is: is this pandemic likely to be substantially changing the future or is this just likely to make the future maybe arrive more quickly. Mauro, maybe you want to go first.

Mauro Guillen:

Yes. Thank you so much for inviting me, Henning. And certainly, COVID-19 is the kind of crisis that began as a public health emergency, but then, of course, mutated into an economic crisis. And it is, of course, affecting the prices, but it will change the future. Although, I don't think it's going to derail the direction, the general direction of change. In other words, I think this pandemic essentially accelerates pre-existing trends. I think the most obvious example is the use of technology. So e-commerce platforms were already growing before the pandemic. The use of technology in education was already growing before the pandemic. Even the use of technology at work and for the purpose of working remotely was growing from a very low base. But the pandemic, of course, has accelerated that to the point that over the last 18 months, things have changed in terms of the use of technology in ways that, normally, would have taken maybe five years or six years for them to change.

Mauro Guillen:

That's one example, but there are so many others. Let me just mention two more. Inequality.  That's another trend that was going on before the pandemic, but the pandemic has accelerated big time. And then another one, by the way, is population trends. So some of the pre-existing population trends have also been accelerated by COVID-19. So it's a great accelerator. In other words, we can still talk about the future, but we have to remember that the future is now arriving much, much faster as a result of COVID-19.

Henning Stein:

Stephanie, you studied history during your time at Cambridge. Do you feel our recent events rank alongside, let's say major disruptive episodes. We look at the Great Depression or world wars.

Stephanie Butcher:

No, I mean, I think I wouldn't put it in the same category. I don't think we're looking at a sort of revolution overnight, but I agree with Mauro. I think it has been a really swift acceleration of some key trends. And I think, from an economic point of view, it's really forced people to rethink things like supply chains. That was something that people hadn't really seen stressed. And then you've got the geopolitics on top of that, which was also putting some questions into how those work longer time. I think the inequality point that Mauro mentioned is really important. And I think politics and economics are going to be inextricably linked moving forward.

Stephanie Butcher:

So I think policy discussions on how you solve to some of these problems. And if you think about we've been post-GFC, really a monetary only environment. And if anything, we had to start austerity on top, but now, fiscal policy is very much part of the debate. And like they think that goes away. So I agree with the acceleration of digital trends. I think the reappraisal of working practices and frankly, for individuals as well. A profound reappraisal of their work-life balance. And that will probably have implications for us as investors as we move forward.

Henning Stein:

Great points. And maybe let's take a closer look at some of the key elements of this great acceleration starting with demographics. What trends are likely to be especially evident by 2030, Mauro?

Mauro Guillen:

Well, I think that the biggest one that we need to pay attention to is population aging. So we have been talking about population aging for at least 20 or 30 years, but in the next decade or so, we're going to feel a big impact. And the pandemic has accelerated that trend by the way for the very simple reason that young couples have postponed having babies during this crisis. For example, in the United States during the year 2020, about 300,000 fewer babies than expected were born. And so population aging means several things. Some of them really good, like for example, well, we're going to have people with more experience out there who potentially could continue to make contributions to the economy, but it's also going to have some negative consequences in the sense that it may be difficult for defined benefit pension systems to essentially make good on the promises that were made to many workers.

Mauro Guillen:

If we move in the direction of essentially having more people in retirement for each person who is making contributions into the system, because they're working. But as far as the eye can see, this is going to change consumer markets because by the year 2030, the largest segment in the market in terms of age will be people above the age of 60. I think it's going to change financial markets as well, because an increasingly older population means that savings behavior shifts, that the demand for certain kinds of financial products also shifts. And therefore, it will have many important lasting consequences. The fact that we're going to have, beginning with Japan, about 40%, nearly 40% of the population about the age of 60 after Japan will be China that reaches that proportion. And then Europe. A little bit later United States. And after that, Latin America and the rest of the world.

Henning Stein:

And, Mauro, you just mentioned pensions, right? Stephanie, if you look at other parts of the financial system and investment implications, thinking about, for example, consumers, right? You also see opportunities here. And what are the implications for this from an investment perspective do you think?

Stephanie Butcher:

Yes. I agree with everything Mauro said in terms of the big picture. And I think, as investors, there are lots of implications. So as you said, moving towards different products. Wealth management is going to be important. And then I think as well as the policy shifts, we're already beginning to see it. So decision-making that governments have to make, for instance, so social healthcare requirements versus education and housing, and how to sort of balance those over time. I think the other big implication is a shift from goods towards services. The older populations tend to consume services more than goods. And so that will be an interesting implication to think through.

Stephanie Butcher:

I think there will be some elements though that will stay in place. And I think, the emphasis on ESG investing is going to be in common, whichever sort of balance you have. So I think that element of thinking through the holistic element of running businesses is going to be increasingly important. But I think, for me, the biggest, biggest trend is probably that sort of shift from goods towards services and the implications of that.

Henning Stein:

Right. And then that's another shift, Mauro, demographic-wise, which you mentioned your book is the growth of the middle class and developing economies. Could you talk a little bit about that?

Mauro Guillen:

Yes. So we are on the verge of a very different situation in the world from the one that has prevailed for the last hundred years or so, which is that Europe and the United States will no longer have the largest middle class markets in the world. And the middle class, of course, is key in the economy, also the political system, because most of the consumption in the advanced economies comes from the middle class. And, unfortunately, both in Europe and the United States, the middle class has been stagnant for at least 15 to 20 years. Whereas in emerging markets, especially those in Asia, it has been growing by leaps and bounds for two reasons. First is that every year that passes, there are more people in those markets that are above the minimum threshold for being considered middle class. And then secondly, is that those people who are already middle class in those markets have been seeing their incomes increased over the last 15 or 20 years.

Mauro Guillen:

So in other words, by the year 2030, just China and India together will be bigger as middle-class consumer markets than the US and Europe. If on top of that, you add the rest of Asia, you add the middle east, you add Sub-Saharan Africa, then we'll be in a situation in which upwards of 60% of the purchasing power of the middle class in the world will be located outside of Europe, United States, Japan, all of the traditional rich countries. So that's a big change. That's a big change for many reasons. And more importantly, I think is something to watch in the context also of climate change, because, well, the middle class has air conditioning at home. The middle class has a car as opposed to a bicycle. The middle class wants to go on vacation. So we're seeing this tremendous growth of middle class, of its consumption in the world, at the same time, that we also witnessing tremendous pressure on our natural resource base and on climate change.

Henning Stein:

And Stephanie, these trends, I guess, they're already influencing your investment decisions right now, right? It's not only 2030.

Stephanie Butcher:

Yes. I think China is, as a driver of global growth has been something we've been very conscious hope at Invesco for a long time and we've been deeply involved and investing in the region and have presence there. I think the interesting element is that the rebalancing, particularly with China, but over time, as you see that sort of development of middle class services and consumption outstripping manufacturing, and construction. Albeit different rules as well, and I think from a market context the results could be quite different for investors versus what the underlying fundamentals are saying... And I think we're seeing some examples of that with industries that are very attractive in terms of their growth profiles. But in terms of how much an underlying shareholder sees of that versus the social equality points that China are emphasizing, that's going to be interesting to look at.

Stephanie Butcher:

I think, clearly, we're going to see more new businesses coming through from these markets as well. And so we're going to see homegrown versus international brands. So for a lot of the international players, they've had very, not easy—that isn't the right word—but they've dominated some of these markets. I think as we're seeing more domestic brands come through that puts more competition in. Again, the supply chain difficulties as well. So I think clearly the pie gets bigger. The question is who owns, what percentage of it is going to be the piece where investors will really make or lose their money. But as an overall trend, it's going to be absolutely crucial. And I particularly, I think Mauro's point about the carbon intensity of middle class growth shouldn't be underestimated. That is going to be the biggest challenge, to some extent, what Europe does near term about its carbon intensity is far less relevant than China and in particularly, India as well. So I think that's something that we're all going to have to grapple with in terms of policy.

Henning Stein:

And, I guess, investment opportunities as well. Right? If you look at these carbon technologies, for example, right?

Stephanie Butcher:

Yes—huge opportunities. And again, looking at the experience or for instance, European companies who've developed a lot of capabilities and technology. There's a huge market to be.   We're seeing it. Major European companies involved in emerging markets and helping create solutions. But we need to see more about and that is going to be where a lot of capital needs to be allocated.

Henning Stein:

Right. And another theme in Mauro's book that I personally very fascinating is the ever-increasing role of women as practitioners, as academics, innovators, entrepreneurs, and leaders, right? And, Mauro, how is this trajectory likely to unfold?

Mauro Guillen:

Well, one of the most consequential changes over the last 20 or 30 years has been the increasing access to education by women, in an increasing number of countries around the world. This has opened up new horizons for women. This is really fantastic. It has also, as you know, accelerated the decline in fertility because women with a career, they postpone having their first baby. And if they postpone it, then they're more likely going to have fewer babies over their lifetimes. But it is a very, very good change, I think, because essentially, it has enabled, not just the economy to take advantage of half of the talent pool, but I think it has also enabled society to be a little bit more equitable and a little bit more true to its values, especially in Europe and the United States.

Mauro Guillen:

A lot of the progress still remains to be done in many parts of the world. And, of course, the recent crisis in Afghanistan is a stark reminder of the fact that not all women in the world enjoy, as we speak today, the same level of access to education and the same rights.

Mauro Guillen:

But there's another aspect here that I think is really important to take into consideration when it comes to financial markets, which is that as a result of these big changes, women are accumulating wealth at a faster rate than men. And I believe that we haven't crossed over in the threshold but we're very close to a situation in which more than half of the net worth in the world is owned by women. And, of course, this is driven in part by the fact that now we have greater numbers of women pursuing their career, making money, saving money, and in general, by the way, investing it on average, better than men. But more importantly also because women live longer. And so we're seeing, overall in the world, this accumulation of wealth in the hands of people above the age of 50, 60, 70. And remember: at those ages, there are more women than men.

Henning Stein:

Right.

Mauro Guillen:

So this is going to also change the landscape to the extent that you believe that men and women on average make different decisions about how to manage their money.

Henning Stein:

I mean, it's almost sounds like a no brainer, where this is natural process, right? Where if you look at, Stephanie, at the investor side, the companies we are invested in, do you see that as a natural process or is this a little bit more than that we need diversity inclusion as an active management practice to make that happen, or do you see that it's already there?

Stephanie Butcher:

So, I mean, I think I just want to pick up on a point of Mauro made of this pointing in terms of how women invest. Because I think there is a differential where I think they've historically attempted to be more conservative in terms of risk. They’re more means-to-end focused. Tend to            be more in cash and bonds rather than equities. And there's a good report that BCG did on all of this. And I think that's something as an industry we really need to think about, because to Mauro's point, this is where the strongest growth is coming and yet, how effectively the industry is reflecting that in terms of the product that it offers, I think is up for debate.

Stephanie Butcher:

I think going back to the corporate element to it, I think, clearly, from a gender perspective, and, obviously, I’m massive supporter of all of that. But I think on a wider basis inclusion, gender is hugely important, not just in terms of the moral imperative, but really it's just the weight of research makes it clear that diversity of thought in the widest context make businesses work better.

Stephanie Butcher:

And there's a risk that you focused in on any one group. But whether it's gender, or ethnicity, or social background, or sexual identity, or neurodiversity, they all add together to that strength and breadth. And for us within Invesco, we know we have work streams focusing on all of those because we recognize that it's really that grouping together of those different inputs, which will make the most difference. I think where we can make some impact as an industry in terms of kind of helping accelerate trends. I mean, obviously, there's the things like board level representation. And, again, I think one has to be slightly careful that it isn't just box-ticking. And I think, again, within boards are they non-exec or exec level. I'm not generally a fan of quotas per se, but I think there is definitely room to put pressure on businesses, frankly, to reflect more effectively the diversity of their own client base.

Henning Stein:

Because you see it from a performance perspective and that's why you put that pressure on firms that you see more?

Stephanie Butcher:

Yes. But I think it really goes beyond just the data. I think the cultural point is... and this is where engaging with businesses and management teams is…put simply: what does it actually feel like to be a woman, or black, or neurodiverse within these organizations?  Because those are going to be the healthy ones.

Henning Stein:

Right.

Stephanie Butcher:

Where it is a positive experience rather than box-ticking. So data gets you so far. But I think that engagement in that, really sensing a culture over businesses is going to be very important for success moving forward.

Henning Stein:

Right. And maybe it's switching topic, one thing we really haven't discussed in detail is technology in meeting the challenges of the near future. And I guess this will be a story of both opportunities and threats. So given the rise of things like AI and automation, should we look at this with excitement or more with trepidation or maybe both? Mauro, what do you think?

Mauro Guillen:

Well, I cannot think of any example of a new technology that hasn't been highly beneficial to one group of people, but at the same time, represented a big challenge or even a threat to another group of people. So if you think about the various waves of technological innovation that have happened in the world, there's always been people who have, unfortunately, lost their jobs. And other people who have seen their opportunities in the labor market expand as a result of that use of those new technologies. And I think this is certainly going to be the case with AI, with robotics, with digital platforms and so on and so forth. And I think what's important here is to keep in mind two very important principles? So the first is that increasingly competition in the world is being driven by the ability of companies to incorporate new technology, or to leverage new technology. That, I think is a first principle that we need to keep in mind when thinking about the impact of technologies in the economy.

Mauro Guillen:

Companies that for whatever reason, find it easier to incorporate new technology or they are themselves pioneers in new areas of technology, they tend to do much better. And then the second, very important principle in this case, is of a political kind. I think we have made a mistake both in Europe and the United States over the last 20 or 30 years. It was to assume that those displaced by technology, those who don't benefit from the technology or are even harmed by it, because they lose their jobs, we were assuming that they would be able to find another occupation, another job. We were essentially taking it for granted that the labor market would adjust.

Mauro Guillen:

And, unfortunately, that didn't happen. I think the rise of populism, the rise of extreme political options, some of the political nonsense that we hear about in the media, fake news and so on and so forth, has been increasing so much, mainly because so many people have felt sidelined or forgotten in this process of technological change. So I hope that from a political point of view, we don't make, in the near future, the same mistake that we've made in the last 10 years or 15 years, which is to essentially to just forget about those people and think that the market was, one way or another, going to take care of them. I think we need to be a little bit more proactive and anticipate some of the negative side effects of this wave of technological change that we're going through.

Henning Stein:

Because there are opportunities, right, for the human factor, right? And things like care for elderly and things like teaching. Right? So that is a big opportunity. Stephanie, what challenges or opportunities does this present from an investment perspective do you see?

Stephanie Butcher:

I think this re-scaling point is crucial. And I, again, mentioned politics a few times. I agree it's going to be very important for people to accept, also society to accept, this rapid change. And you can't put it back in the box. Technology's here to stay and the digitalization that we're seeing and the speed that it's operating at is incredible and, in general, to the good. But we do need to sort of take society with us on that. So I think, there are definitely investment opportunities for businesses that can help with that re-scaling. Companies that are agile enough to sort of to move their work force around.

Stephanie Butcher:

And, again, that goes back to culture. But also, generally, corporate businesses, there has been a tendency to say new entrants and anyone who's been left for any period of time can’t adjust, and actually, we're seeing good examples of businesses who've taken the opportunities that new technology is giving them and adapting really well and really becoming sort of new winners within the space.

Stephanie Butcher:

So I think it's, again, it's going to be very granular. I think it's going to be about really looking at the individual companies and then for society in general. I totally agree with the point that it goes back to this inequality element, this left-behind populism. And so I don't think society will accept the gaps getting even wider than they are today. And I think is that's being why there's been some of these tensions. The good news, I think, is that some of the fiscal spending that's going into society seems to recognize that. And I think emphasis on job creation and new technologies, education and so on, I think will be really important.

Henning Stein:

Mauro, Stephanie, thank you again for joining us. And as I said at the outset, no one can truly predict the future, but I think we can, at least, say with confidence that the pace that you laid out here of change has become extraordinary. And I think we can also say that we all have a part to play in really trying to ensure that this change, whatever form it takes, will ultimately be for the better. So thanks for watching Game Changers and see you again soon.