Key Themes for 2023 and Beyond

We’re all thinking about the future differently given the current environment. However, our contention has always been that the trends on which we focus will…

Key Themes for 2023 and Beyond

We’re all thinking about the future differently given the current environment. However, our contention has always been that the trends on which we focus will play out over a multi-year if not multi-decade horizon. Of course, some will assume greater priority in the near-term than others. Where we have focused and what we have written on most in 2022 is a partial reflection of this dynamic. As in previous volumes, we present below a summary of how and where we see the world changing most rapidly. Please note, this review is non-exhaustive; think of it rather as a series of interlinked high-level perspectives. Our stance remains that as diverse future trends overlap and intersect, they become mutually reinforcing.

Top of mind for every reader, investor and policymaker this year has been the question of how do we save the planet? As Antonio Guterres, the Secretary General of the United Nations, notes, “we have a choice: collective action or collective suicide.” Although this is a somewhat emotive statement, it highlights the stark nature of the challenge. The World Economic Forum asserts in its latest outlook report that the three largest risks facing the planet comprise climate action failure, extreme weather and biodiversity loss.

The invasion of Ukraine by Russia (also discussed in our theme essay in the previous section) has shown how one nation might be prepared to use energy as a political or economic weapon. Put another way, climate and security priorities have merged. Jack Fusco, the Chief Executive of Cheniere Energy, highlights appropriately that “criticality of energy security has never been more evident to governments.” Extreme weather conditions across both Europe and other parts of the world over 2022 have further heightened the criticality of robust energy infrastructure. Every nation, in our view, is now seeking to accelerate its path to greater energy (and food) independence wherever possible. As we will see below, progress is being made, although there is much still to be done.

Alternative Energy

  • Relevant Season 4 Blogs: Tailwinds, Headwinds too (7 April); Sunshine in Munich (12 May); What, no global warming? (19 July); Robo-taxis and the two key EV debates (31 August); Looking outwards (22 September)
  • Relevant Theme Pieces: A ‘natural’ solution to the world’s energy needs (April 2011); What if the sun always shone? The coming energy storage revolution (September 2015); Winds of change (March 2018); Everybody loves the sunshine (January 2020); The missing element (June 2020)
  • Key Statistic: 90% of the global economy is now covered by national net-zero emissions targets

"We have only touched the beginning of the energy transition."

Henrik Andersen, Chief Executive of Vestas

The good news is that 90% of the global economy is now covered by national net-zero emissions targets, up from 68% at the end of 2020 (per the United Nations). The past year has been a recordbreaking one for renewables globally. Solar additions of 180GW meant that more solar was added in 2021 than the combined level of coal and gas additions this century. Meanwhile, offshore wind energy installations doubled compared to 2020 while storage solution capacity tripled (all data per Future Crunch).

As far as 2022 is concerned, Vladimir Putin has arguably done more to accelerate the clean energy transition than anyone in history. 19 European Governments have fast-tracked their decarbonisation plans since the invasion of Ukraine. Under the latest set of national commitments, EU countries are now aiming for 63% of renewables in electricity generation by 2030, up from 55% under previous commitments. The EU’s current plan is for wind power installations to grow by a factor of 2.5 between now and 2030.

On the other side of the Atlantic, the recently passed Inflation Reduction Act is also hugely significant. The deal provides just under $400bn of funding for energy and climate change, the biggest ever federal investment in clean energy. The Act embeds within it the intention that US emissions will be cut by 40% by 2030 (from a 2005 base). At the end of this decade, renewable solutions could account for 38% of America’s energy mix.

The intentionality on the part of nations is evident from the numbers. Global clean energy investment reached a record level of $750bn in 2021 and is on track to cross the $1tr threshold this year (per Bloomberg New Energy Finance, or BNEF). When taken together, wind and solar are already the fourth largest source of electricity globally, behind coal, gas and hydro. Impressively, wind turbines in the US now produce more power than the entire country used in 1950.

However, despite such progress, Henrik Andersen, Chief Executive of Vestas (the world’s largest manufacturer of wind turbines) is almost certainly right when he says that “we have only touched the beginning of the energy transition.” There is a major difference between passing legislation and getting infrastructure practically deployed, particularly in the context of raw material and workforce challenges. Consider, for example, that the EU’s permitting backlog is four times the size of the number of renewable projects currently under construction (per Wind Europe). It typically takes up to five years from an order for a wind turbine being placed to it being fully operational and connected to the grid. Some forecasters also note that annual clean energy investment worldwide would need to triple to $4tr by 2030 to meet the widely held commitment of net-zero carbon emissions by 2050 (per the International Energy Agency, or IEA).

Transportation

  • Relevant Season 4 Blogs: Keep on charging (16 February); The very long road ahead for electric vehicles (31 May); Robo-taxis and the two key EV debates (31 August); Message to the planet (15 September)
  • Relevant Theme Pieces: The long road to autopia (April 2015); The new transport revolution (February 2017); Disrupt the car, and rethink the city (April 2021)
  • Key Statistic: There are currently 1.3bn vehicles in the world 98% of which are still powered by fossil fuel

"All our customers are accelerating their transitions to electric vehicles"

Kevin Clark, Chief Executive of Aptiv

Given the level of energy investment highlighted above, the logic for collective action is high. Consider that G20 nations account for c80% of global greenhouse gas emissions with transport being the leading source responsible (per BNEF). One trans-Atlantic return air ticket, for example, carries the same atmospheric burden as two years of a meat-based diet, eight years without recycling or four lifetimes’ worth of plastic bags (per Our World in Data). While flying is a potentially avoidable luxury for many, electric vehicles do help to displace roughly 1.5m barrels of oil per day (2021 data, per BNEF).

More efficient transport solutions therefore matter. The last twelve months has, fortuitously, been a period in which the world’s carmakers seem finally to have accepted the inevitability of an all-electric future. General Motors said it would eliminate the sale of all fossil fuel powered cars and SUVs by 2035, Jaguar said it would stop selling them within the next five years and Hyundai has committed to no more by 2024. Ford has gone on the record as saying it would sell only electric vehicles (EVs) in Europe from 2030. Fiat said it would be an all-electric company by 2030 and Volvo said its entire car line-up would be fully electric by the same year. Neither Audi nor Daimler is developing combustion engines any longer.

Global EV sales have grown at a 56% CAGR in the last decade. In order to meet the stated targets of all countries to phase out sales of combustion engines, the IEA estimates that worldwide EV sales would need to increase to 25m by 2030, equivalent to a 15% market share. For context, this number of vehicles would be double 2020 levels and compares to just 130,000 EVs sold a decade ago. Some 50 EV models currently exist, but based on statements from automakers, this number could reach 60 by the end of this year and over 250 by 2030. “All our customers are accelerating their transitions to electric vehicles” notes Kevin Clark, the Chief Executive of Aptiv, a leading systems integrator. BNEF estimates that by 2040, EVs could be outselling petrol-powered vehicles.

As with any other future trend, the development of the EV industry will not be without its challenges. Consider that there are currently 1.3bn vehicles in the world and 98% of these are powered by fossil fuel (per McKinsey). This implies that the green transition is non-trivial and will take time. Growing material costs and shortages of critical inputs such as lithium, cobalt and nickel will likely constrain availability. There is also the issue of customer buy-in: only 36% of Americans says that they would consider buying an EV given concerns about charging logistics, driving range and cost (per Axios). This may, however, change given that the Inflation Reduction Act provides a $7,500 clean vehicle tax credit. Europeans are also more positive.

To return briefly to other collective action to save the world, consider that over 100bn tonnes of raw materials are consumed globally each year, but just 8.6% of this total is currently recycled (per 13D Research). This implies both a logic for, and opportunity in, growing circular economy solutions. Whereas Europe recycles just 32% of its plastic annually, the comparable figure for the US is less than 10% (per the European Environment Agency). More worryingly, 11m tones of plastic enter the ocean every year. Without radical change, the amount of plastic waste generated worldwide could double by 2040 (per Pew Research).

Food Innovation

  • Relevant Season 4 Blogs: Food’s fancinating future (13 January); Feed the world better (30 March); Metaverse meals and more (19 April); Food Forever (8 September)
  • Relevant Theme Pieces: You are what you eat: health, wellness and food innovation (October 2014); We’re all hungry for some agtech (February 2019); Beyond impossible (August 2019); Food’s future; how to feed the world more intelligently (October 2021)
  • Key Statistic: Oceans cover c80% of the planet’s surface but provide us with only 2% of our total food

"If you don't feed people, you feed conflict."

Secretary General of the United Nations, Antonio Guterres

Saving the planet also means feeding the planet. Data from the United Nations (UN) paint a concerning picture. Between 720m and 810m people faced hunger in 2020, up 18% year-on-year. Given recent conflicts around the world, this figure is almost certainly higher now. A further 2.3bn globally lack adequate access to food. As its Secretary General, Antonio Guterres, notes, “if you don’t feed people, you feed conflict.”

The UN estimates that crop production would need to increase 60% by 2050 to feed an estimated 9.3bn people, while water reserves may only be able to meet 60% of global water demand by 2030. Note that the human diet is highly dependent on just four grains: rice, wheat, corn and soy. These comprise almost half of the calories of an average global diet. Further, almost two-thirds of the production of these crops is derived from seven countries: China, the US, India,
Brazil, Argentina, Russia and Ukraine (per McKinsey). All of these are experiencing at least one of the following: war-related disruptions, extreme weather conditions or export controls. The risk of a full-blown food crisis is therefore high.

Against this background, there is a high logic for thinking about alternative food solutions, particularly given that around a third of all food produced is wasted (per the World Health Organisation). Diversification makes sense. Consider that oceans cover c80% of the planet’s surface but provide us with only 2% of our total food. The amount of feed required to generate a kilo of salmon protein, for example, is significantly lower than for any other commonly farmed land animal. Given the health benefits of salmon, “we have a lot to thank it for” says Ivan Vindheim, the Chief Executive of MOWI, a major producer. The fish could become “the food icon of the 21st Century.”

Go one step further: Impossible Foods, a producer of alternative protein products, says that its environmental footprint is far less than similar animal-based products. Its plant-based chicken nuggets, for example, have 25% less salt that regular chicken equivalents and use 55% less water, 24% less land and 24% fewer greenhouse gas emissions to produce. Globally, the plant-based foods market reached $29.4bn in 2020 but could rise to $162bn by 2030 (per Bloomberg). It’s also encouraging to hear the two-thirds of consumers worldwide say that they are willing to pay more for sustainable brands, while 43% state they would be happy to replace meat-based proteins with plant-based alternatives (per Nielsen).

Health

  • Relevant Season 4 Blogs: Bending the diabetes curve (15 March); The $100 genome (14 July); Looking outwards (22 September)
  • Relevant Theme Pieces: Fat profit potential: bulging bellies and growing obesity (April 2012); Reinventing healthcare and the coming age of personalised medicine (November 2012); Implantable technologies: The man-machine merger (September 2016); Time for a DNA upgrade? (June 2017); Gut feeling (June 2018); Who wants to live forever? (October 2019); Telemedicine: the virtual doctor calls (February 2021)
  • Key Statistic: In the UK 28% of adults were classified as obese in 2019, double the level reported in 1993. Obesity is now a bigger cause of death than smoking

"There are significant unmet needs for treating peole with diabetes."

Lars Jorgensen, CEO of Novo Nordisk

How much and what we eat also has a significant impact on our health. It might be great that six in ten global consumers say they are currently looking to purchase food and drink products that help raise their immune systems (per Innova), but the bigger problem is that more than 650m people live with obesity, but few than 10% seek help (per Novo Nordisk, a major insulin producer).

Worldwide obesity rates have tripled since 1975 (per the OECD). Take the UK where 28% of adults were classified as obese in 2019, double the level reported in 1993. The NHS (the source of the data) says that obesity is now a bigger cause of death than smoking. Data from the US is similarly depressing. Around half of Americans are expected to be obese by 2030, with 18% of all US healthcare spend allocated to treating this and other comorbidities such as heart disease, stroke and osteoarthritis (per Harvard University).

At the same time, some 537m people globally have diabetes, yet only 40% of these are treated and 50% are not even diagnosed. By 2045, 784m adults are expected to live with diabetes, an increase from onein-ten to one-in-eight. Against this background, no surprise that the CEO of Novo Nordisk, Lars Jorgensen – the data source – says “there are significant unmet needs for treating people with diabetes.”

Diabetes and obesity, of course, are not the only healthcare challenges the world faces. Harvard University observes that Alzheimer’s is currently the most expensive illness to treat in the US. Declines in genome sequencing costs (from $3bn in 2003 to less than $500 currently) provide a cause for optimism. Although scientists know the molecular cause of nearly 4,000 different diseases, they currently have treatments for just 250 (per 13D Research). We were also impressed to note that 2022 marked the first time a case of xenotransplantation successfully occurred with a patient receiving a genetically modified pig’s heart.

The Power of Technology

  • Relevant Season 4 Blogs: Virtual coffee with Head of IT (19 January); Where did those five hours go? (26 January); Live from Big Data and AI World (3 March); The boiled frog (16 March); Data download in Docklands (28 April); Quantifying quantum (21 June); The ethics of AI (7 July); A day in Silicon Fen (27 August); Mission to the dataverse (27 September); How cool is your data centre? (4 October)
  • Relevant Theme Pieces: The data deluge (March 2011); Drowning in data (October 2012); Watch out! The growing privacy invasion and cybercrime threat (April 2014); Connecting the unconnected (July 2014); The rise of the smart machine (April 2016); The next generation (September 2017); A leap forward (October 2017); Ten years on; the data deluge 2.0 (October 2020)
  • Key Statistic: People spend 4.8 hours a day on their mobile phones 31%, say they feel anxiety or withdrawal without them

"AI is the only way to process large amounts of data."

Arvind Krishna, CEO of IBM

Beyond trying to save the planet, we would all like the world to be a better place. We have consistently argued for over a decade that technology is an enabler; a means to an end for solving the world’s biggest problems. Consider that a combination of processing power, cheap data storage and improved machine learning solutions is driving every industry. By way of example, optimal wind turbine speeds are partially determined by computer programmes and large datasets; salmon harvesting can be improved through tagging fish and analysing their weight and health versus historical precedent; drug discovery everywhere is accelerating. The list could go on.

Against this background, readers should not be surprised to learn that 22.5% of global GDP is made up by the digital economy. With global data doubling roughly every two to three years, the technology market is currently outgrowing global GDP by four to five percentage points annually (figures from Accenture, KKR and IBM respectively).

At a consumer level, people spend 4.8 hours a day on their mobile phones (per App Annie), up 30% from 2019 levels. Interestingly, the Illinois Institute of Technology found in a poll that 56% of people say they are somewhat dependent on their smartphones while 31% say they feel anxiety or withdrawal without them. Do not forget, however, that smartphone penetration globally is just 50% while some 390m people are still not even covered by 2G cellular networks (per the International Telecoms Union). Look ahead though and given the rate of development – albeit still at a faster pace in developed rather than developing countries – and the number of connected devices could, according to IDC, grow from 40bn (equivalent to roughly 5 per person) to 350bn (over 40 per person) by 2030.

The implications from this forecast are twofold. At a simple level, more devices mean more semiconductor chips. To elaborate on the point made in our introductory essay, one of the best indications of data as the world’s most mercurial commodity comes in the form of TSMC’s announcement to spend $36bn building new semiconductor fabrication plants this year. For context, it spent $30bn last year and ‘just’ $17bn in 2020. Peter Wennink, ASML’s Chief Executive talks about “unprecedented customer demand [for semis]” enduring “well into next year.” Next, as we have said repeatedly, data have no value unless secured, stored and analysed.

Begin with cybersecurity. The global cost of cybercrime reached $945bn in 2020, double 2014 levels (per McAfee). It is almost certainly higher now and too big to ignore. IBM notes that the average cost of a data breach to an organisation is $4.2m while Mastercard talks of how 71% of its merchants cite identity fraud as a ‘top concern.’ Losses in this area alone totalled $56bn last year. No surprise then that 85% of respondents to Equinix’s 2022 Global Tech Trends survey say improving cybersecurity is a key priority. It will, according to Arvind Krishna, IBM’s CEO be “the issue of the decade.”

Turn now to storage and the data are impressive. Hyperscale cloud spend is growing at ~$50bn per quarter, with the two largest cloud service providers – AWS and Azure – both generating revenue growth at an annualised run-rate approaching $100bn (per Bloomberg). The Equinix survey cited above showed that 70% of respondents believe migrating to the cloud is a top priority, while 80% are currently focused on (further) digitalising their IT infrastructure.

When it comes to analysis in general and artificial intelligence (AI) in particular, some 33% of businesses now say that they are using forms of AI in their daily activities. AI is “the only way” to process large amounts of data according to Arvind Krishna, while Google’s CEO, Sundar Pichai, says that AI will be “helpful to people and businesses everywhere.” By 2030, AI could add over a percentage point to global GDP growth, per McKinsey. Look further ahead, and quantum computing could accelerate everything we have discussed above at an even faster pace.

Addendum: Hype Watch

  • Relevant Season 4 Blogs: Where’s the hype? (13 April); Metaverse meals and more (19 April); Mission to the dataverse (27 September)
  • Relevant Theme Pieces: Time to get real? (June 2016); Welcome to the metaverse (September 2021)
  • Key Statistic: The metaverse could be worth $5tr by 2030

“You can think about the metaverse as an embodied internet, where instead of just viewing content – you are in it.”

Mark Zuckerberg, CEO of Meta Platforms (formerly Facebook)

Every trend we have discussed above is real and tangible. Had space permitted, we would have sought to discuss other relevant topics. Consider, just briefly and by way of example, water scarcity. A quarter of the world’s population now live in areas characterised as having water stress (per the United Nations). In order to improve water infrastructure, the World Water Development Report estimates that over $6tr of cumulative investment would be required by the end of this decade, a figure which rises to more than $22tr by 2030. The logic for investment is high, since every Dollar allocated can generate at least a $4 return, primarily due to reduced healthcare costs and increased productivity.

Beyond a crucial area such as water, some readers may have been surprised by the relative lack of commentary in this piece about either online retail or digital payments. Both these important thematic areas became super-charged during the pandemic era. We are confident that looking forward, people will shop and transact financially more online, particularly given the length of runway ahead. Adoption in both areas is less than a quarter of the potentially addressable market.

The more interesting question, perhaps, is howand where? Our view is in a broadly similar way to currently and that we will not do these things in a metaverse environment any time soon. The best way to think about the metaverse is as a nebulous buzzword for now. Sure, there is a large opportunity given that $54bn currently is spent each year on virtual goods, almost double what is spent on music (per JP Morgan estimates). Almost every large consumer-facing business, from Adidas to Disney and from Chipotle to Walmart has now established a metaverse presence.

However, forecasts that the metaverse could be worth $5tr by 2030 (issued this year by McKinsey) simply look too optimistic, in our view. As things currently stand, the smartphone remains the centre of the digital universe, where consumers lead their digital lives. Metaverse proponents seek to change this with (more) compelling hardware, software and service solutions. A seamless evolution is by no means a foregone conclusion. At this stage, it seems hard to agree with Mark Zuckerberg (CEO of Meta, formerly Facebook) when he says “you can think about the metaverse as an embodied internet, where instead of just viewing content – you are in it.”

As we have noted in every annual edition of our thematic book, it is crucial to make a distinction between hype and reality.

Change is coming to all industries. To rephrase one of Charles Darwin’s most famous dictums, those businesses able to manage change most responsively will be the ones best placed to survive the future.

Alex Gunz, Fund Manager

Disclaimers 

The document is provided for information purposes only and does not constitute investment advice or any recommendation to buy, or sell or otherwise transact in any investments. The document is not intended to be construed as investment research. The contents of this document are based upon sources of information which Heptagon Capital LLP believes to be reliable. However, except to the extent required by applicable law or regulations, no guarantee, warranty or representation (express or implied) is given as to the accuracy or completeness of this document or its contents and, Heptagon Capital LLP, its affiliate companies and its members, officers, employees, agents and advisors do not accept any liability or responsibility in respect of the information or any views expressed herein. Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation. Where this document provides forward-looking statements which are based on relevant reports, current opinions, expectations and projections, actual results could differ materially from those anticipated in such statements. All opinions and estimates included in the document are subject to change without notice and Heptagon Capital LLP is under no obligation to update or revise information contained in the document. Furthermore, Heptagon Capital LLP disclaims any liability for any loss, damage, costs or expenses (including direct, indirect, special and consequential) howsoever arising which any person may suffer or incur as a result of viewing or utilising any information included in this document. 

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