OCEAN CITY — The market has been driven by strong macro factors such as low interest rates and easy monetary policy in recent years, with most risk assets moving higher. Going forward, we expect equities to provide moderate returns and experience higher volatility. We therefore emphasize the importance of being selective within different asset classes and looking for specific long-term thematic opportunities. We advise investors to apply core and satellite exposures to diversify across investment themes.
Driven by a lower tolerance for risk in the aftermath of the global financial crisis, an aging population, and a “lower for longer” interest rate environment, investors have had an insatiable appetite for income in recent years. We think this appetite for income is unlikely to abate and is already manifesting itself in the markets.
Investors hunting for yield in a specific sector may want to look at opportunities in global Telecom. The sector is yielding 3.5% globally and 5.2% in the U.S., while valuation looks attractive compared to the S&P 500. Another key investor preference is the adoption of social impact investing, particularly among millennial investors. According to a U.S. Trust survey, millennials view their investment decisions as a way to express their social, political or environmental values. Over 70% of those surveyed preferred to invest in companies that have a positive social or environmental impact and indicated that it was possible to achieve a market rate of return in social investments.
The “tech economy” is leading new sources of growth through robotics The integration of robotics and automated “smart” solutions continues to have a strong impact on several industries. According to a recent BofA Merrill Lynch (BofAML) Global Research report, the robot technology market is expected to grow 9-11% by 2020, with global spending on robotics reaching $43 billion by then (see Exhibit 2). This growth hits many segments of the market, but two key sectors where this disruptive technology has immediate applications are Health Care and Defense. According to the same BofAML Global Research report, the global market for medical robotics and equipment is expected to grow to $18 billion by 2022. Key drivers include growing demand for health care IT and robotic surgeries, and the introduction of advanced treatment technologies. Additionally, the global market for telemedicine — the delivery of health-related services via information and communications technology — is expected to reach more than $34 billion by 2020, with growth stemming from global aging trends and increasing per capita health care expenditures in North America and Emerging Markets. The Defense sector globally has been increasing its adoption of robotics and unmanned vehicles in recent decades, and it is expected to continue to do so.
This is driven by the advantages they bring in terms of safety, accuracy, speed, flexibility and cost. Global spending on broader military robots and their systems is expected to reach $7.5 billion by 2018. Similar to overall defense spending, the U.S. is the leader in global defense robotics, while strong growth is expected to come from Japan, South Korea, China, and India. Gray matters — aging demographics are stimulating demand in key areas of the economy Established companies and startups alike are offering a variety of products and services to capitalize on the increased spending of an aging population.
This could spell opportunities for investors in a variety of sectors, particularly travel, leisure, hotels and restaurants, as baby boomers gear up for retirement. Additionally, as would be expected from an aging population, consumer expenditures will shift toward increased consumption of health care products and services. We expect these expenditures to also flow through to retail drugstores and pharmacies as these businesses try to transform themselves into one-stop health care shops focused on overall wellness.
Spending more years in their homes should translate into more years spending on their homes. Their share of home renovation spending, already accounting for 50% of total home improvement spending, stands to grow larger as this demographic increases.
(A Merrill Lynch Wealth Management Advisor who can be reached at 410-213-8520.)