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Investing For the Long Term

By Gregory Zuckerman

Investing For the Long Term

How to Play Trends That Will Move Markets for Years to Come

Investors often try to profit by betting on short- and medium-term shifts in stocks and bonds. But the real money comes from anticipating long-term trends, the kinds of changes that take place over many years.

Thats why some experts encourage investors to focus on shifts that may develop over the next decade or so.

The largest profits come from investing across multiple business cycles and on themes that last many years, argues John Brynjolfsson, who runs hedge fund Armored Wolf.

Below is an attempt to identify a few trends in the global economy and financial markets that could affect investments over the next decade or so, along with a few ways to take advantage of them. These shifts are hard to predict, but if they pan out, big profits can result.

Demographic Shifts

Investors will have to grapple with aging populations in many developed economies, something that could weigh on economic growth by boosting health-care and other costs, reducing the number of workers and draining the pool of entrepreneurs.

The trends are especially troubling in Asia and Europe. In Japan, the sale of adult diapers began to exceed those for babies a few years ago, and more than 25% of the population is at retirement age. The birthrate also has fallen in the U.S. Immigration to this country has offset some of the problems, but the nations working-age population is growing at less than 1% in recent years, down from 2% between 1960 and 1985, according to Wells Capital Management.

The biggest long-term trend investors should consider is aging developed-world demographics, says James Paulsen, chief investment strategist at Wells Capital Management. Expect perpetually weaker average growth in the developed world, including the U.S.

Population trends arent a reason to exit developed-market investments. Slower growth doesnt mean no growth. Still, the populations of emerging-market nations are growing at a fast clip, a good reason to maintain exposure to those economies, which will become a larger part of global demand despite setbacks over the past year. The Vanguard Emerging Markets Stock Index Fund (VEIEX) is a low-cost way to wager on those markets.

Jared Dillian, an ex-trader who publishes a financial newsletter, says investors should focus on so-called frontier markets, which are among the smallest and least-advanced of the emerging markets.

The only place you will get growth in the next 10 years is in frontier markets, with growing populations and massive productivity increases, along with huge improvements in the rule of law and property rights, says Mr. Dillian.

He recommends the iShares MSCI Frontier 100 ETF (FM).

Conquering Cancer

Innovations in fracking and horizontal drilling have transformed the world of energy and elevated the U.S. as an energy power. The next American breakthrough appears to be in the world of cancer research, which already is causing a frenzy of interest among investors and excitement in the medical world.

Advances in immunotherapy, which uses the bodys own immune system to fight cancer, have helped those suffering from melanoma and will likely be applied to other cancers, experts say. Immunotherapy has disappointed in the past, but recent advances seem to offer breakthroughs that patients and investors have been waiting for.

Making money as a biotech investor is a challenge. Many of the companies leading the way with these treatments, such as Bristol-Myers Squibb (BMY) and Roche Holding (RHHBY), are so large that even successful immunotherapy products would provide only a modest boost to their stocks. A group of smaller companies developing their own immunotherapy approaches, such as Juno Therapeutics (JUNO), Kite Pharma (KITE) and Bluebird Bio (BLUE) are already at expensive levels.

The best approach: Buy Bristol-Myers and Roche, and wait for shares of the upstarts to fall a bit before wagering on them.

Energy Prices

Oil prices have tumbled below $50 a barrel as rising crude supplies overwhelm meek global demand, upending financial markets and giving consumers a lift. Analysts dont think the shift will last very long, though. Eventually, they say, global demand will outstrip the new supplies. The U.S. Energy Information Administration recently predicted that benchmark Brent global oil prices would hit $235 a barrel by 2040 as global consumption grows, amid a growing middle class around the world.

Experts were caught flat-footed by the remarkable supply of oil pouring out of U.S. fields, though. They could be just as wrong about demand over the next few decades.

For one thing, consumers and companies are becoming more efficient in their use of energy. The average American new car and truck will get nearly 55 miles a gallon by 2025, up from 24 miles in 2012. Chinese oil demand is starting to slow. Alternative-fuel vehicles, such as all-electric cars and hybrids, are gaining popularity. If the Chinese government can push citizens to embrace electric cars, an expected source of new oil demand could evaporate.

Google expects to roll out a self-driving car in the next five years. Any widespread embrace of self-driving cars could also cripple oil demand. Meanwhile, demand for urban living also will reduce auto use.

Ed Morse of Citigroup, one of the few analysts to anticipate the U.S. energy revolution, predicts global oil demand could drop to around 74 million barrels a day from about 93 million today, as global transportation shifts from a reliance on oil to plentiful natural gas.

The upshot: Be wary of investing in energy shares in the years ahead.

Low Interest Rates

Investors assume interest rates, held down by an aggressive Federal Reserve, eventually will rise, making it harder to make money. But Darren Pollock, portfolio manager of Cheviot Value Management, says rates could stay low for years to come, to bolster markets and deal with debt thats built up throughout the economy. Tepid inflation also could sideline the Fed, some say.

The U.S. held interest rates low from the 1930s into the late 1950s, he says. Japan has suppressed rates since the early 1990s. Markedly higher rates in the U.S. may not be something we see for a very long time.