Special Edition: Three megatrends on Nasdaq Helsinki

In this What’s Up with Stonks Special, we will talk about three major megatrends that will impact and benefit companies on Nasdaq Helsinki.

Megatrends are long-term developments that change the world. A clear example is urbanization, which has been going on for ages. In 1960, one billion people in the world lived in urban areas; today more than four billion.

In investment circles, megatrend is a buzzword. And what company or seller of investment products would not want to be on the right side of history? Large asset managers like to advertise: “Invest in this or that megatrend.” Finland's most popular broker, Nordnet promotes thematic ETFs as an easy way to invest in megatrends. Increase in wealth and making hip investing choices is one of the megatrends we will return to below.

(If I were to invest in ETFs, I would prefer low-cost index funds. S&P 500 is the best momentum trading strategy in the world, where investors are always winners regardless of megatrends.)

Then again, if an industry is fighting against megatrends, making money eventually becomes difficult, no matter how skilled the company’s management. For years, investing legend Warren Buffett owned local newspaper businesses that didn’t grow but generated abundant cash flow. Eventually, the megatrend of the rising internet crushed their advertising-based business, and Buffett ended up selling his newspaper assets a few years back.

I have chosen three megatrends that through many companies have some kind of link to Nasdaq Helsinki: climate change, digitalization, and increase in wealth.

Climate change

The challenge of climate change and living beyond our planet’s carrying capacity in general is an unfortunate man-made megatrend. But great challenges also offer great opportunities. For example, the massive US IRA package to address climate change (while supporting US domestic industry) worth hundreds of billions didn’t go unnoticed by listed companies. You don’t have to browse too long through the materials of listed companies to find that almost every company is trying in some way to curb global warming or help others to do so.

However, the degree of concreteness varies. Electrification of transportation is on the rise, as traffic is slowly moving away from the use of more polluting internal combustion engines. One clear beneficiary in this on Nasdaq Helsinki is the skyrocketing charger manufacturer Kempower from Lahti. Kempower still has lots of room for growth to expand like the ski trails in Lahti. Kempower’s business model is capital-light and its competitive advantages are currently excellent, so the company has the potential to create significant value in a rapidly growing market.

An even more obvious example is the energy company Fortum, which is now focused on the Nordic market and mainly fueled by nuclear and hydro power. But energy production is capital-intensive and the company is at the mercy of the highly volatile market price of electricity. All the same, the stock is still cheap on our books with its generous dividend yield.

I could also quickly mention the success story of the last decade or so of Neste, which is reducing emissions from mobility by providing a lower-carbon alternative to fossil fuels. Or Wärtsilä that is accelerating the transition towards marine decarbonization.

Digitalization

Digitalization is very obviously a megatrend. People’s everyday lives and work are moving more into the world of ones and zeros. At the moment, the focus is on cloud services, data and analytics, as well as transformation management. This transition requires developers, those pairs of hands that are provided by IT service companies. Inderes estimates that the IT service market will grow faster than the general economy in the long term. However, within the sector, priorities are constantly changing. Basic development is in danger of becoming bulk production, and IT service companies have to seriously look for strong talent so that they don’t end up as a sort of staff leasing company.

A favorable tailwind doesn’t mean that every company in the large IT consulting sector on Nasdaq Helsinki is solely on the winning side. Strategically glued to customers, Gofore has been an obvious success story and also Digia has achieved a convincing turnaround. On the other hand, Solteq, Innofactor, and Vincit have struggled with internal challenges for a long time. Focused on strong talent recruitment, Witted, has faced challenges in a difficult market as competition has shifted from talent to customers.

Increase in wealth

Although slow economic growth has been a challenge both in Finland and around the globe for some time now, wealth has continued to grow rapidly. Not all people are independent stock pickers like the Inderes Community, so help is needed to manage wealth. Investing is stupid if you don’t know how. This is a dilemma that asset managers are happy to solve. Wealth needs to be managed in a productive way. The asset management sector has clearly been profitable for equity investors both in Finland and globally.

Credit Suisse estimates that in the 21st century, net global household wealth has risen around 7% annually. Inderes expects the Finnish asset management market to continue to grow by around 5%, in spite of the chronically weak growth of the Finnish economy. The baby boomers will be leaving a huge inheritance. One consulting firm estimates that over the next 20 years, as much as $84 trillion in assets will be passed on from generation to generation. Young people are open to new investment ideas and alternative investments. This offers the asset management industry the opportunity to offer these new opportunities – in return for hefty fees.

Globally, stocks of asset management giants such as BlackRock and Blackstone have performed well: Blackstone +270% and BlackRock +260%, so roughly the same as the S&P 500 index in the past 10 years. 

The wide asset management sector on Nasdaq Helsinki has also performed decently, led by eQ, which focuses on real estate. Asset management companies also tend to pay large dividends because the business itself is capital-light (they mainly invest their clients' money).

Nordea, the largest company by market cap on Nasdaq Helsinki as well as the company with the largest shareholder base in Finland, also manages over EUR 300 billion in assets. In recent years, assets under management have grown by around 9% per year according to Inderes’ extensive report.

Of course, not every company is an automatic winner in all the market situations. For example, Taaleri has been struggling with profitability problems. Because of its attachment to the real estate sector, eQ’s stock has halved from its peaks, as the sector has suffered from rising interest rates.

 Yet no megatrend lasts forever and the winners within a trend do not remain the same. In the beginning, I referred to Buffett’s newspaper business, left on the wrong side of the digitalization megatrend. The rise of the internet has been a clear megatrend, but we don’t hear much about the early winners like Yahoo and Myspace today. The “financialization” of the economy can be seen as a megatrend. Banking stocks were superstars from the 90s to the early 2000s, until the banks, which had securitized everything and were operating with wafer-thin equity, got caught in the financial crisis. Since then, the banking sector has lagged behind the overall performance of stock markets, especially in Europe.

High potential and faster growth than in the general economy attract competition. For this reason, it is more important to understand how sustainable the competitive advantages (return on capital higher than the cost of capital) of a company are than to get hung up on megatrends. Even Warren Buffett is primarily after good business, not growth industries. In the end, growth is only a component of value. If you invest in megatrends, it’s worth considering whether the competitive advantages of your chosen companies will last if the competitive environment intensifies.

Thank you for reading, make good stock picks!