Thematic investing: New kids on the block

BANK OF AMERICA & MERRILL LYNCH REPORT

It’s not just about Millennials: the rise of the Centennials Gen Y (“Millennials”, 19-35Y) and Gen Z (“Centennials”, 0-18Y) are the world’s most important demographics, collectively accounting for 59% of the global population. There are 2bn Millennials worldwide and they have overtaken Boomers to become the largest living generation in US history. But we need to prepare for the rise of the 2.4bn Centennials born at the turn of the century and set to live to over 100Y. They are embracing diversity, sustainability, globalisation, disruptive technology, “peak stuff”, new business models, and entrepreneurialism like no generation before them - and they are economically optimistic to boot. Together Gen Y and Gen Z will account for c60 percent of the global workforce by 2020E.

Digital natives

Technology is the defining characteristic of Gen Y and Z’s daily lives, with 90 percent smartphone and social network penetration. Young cohorts check their phones 150x per day, 50bn IMs and 6bn emojis are sent every day, and human attention spans are falling below those of goldfish. Gen Y and Z are mainstreaming disruptive technologies and both corporates and investors need to step up to the challenge, including via smartphones and apps, social media, instantaneous communication, “snackable content”, omnichannel strategies, and making things shareable.

For the first time in history, people aged 65Y+ will outnumber children <5Y before 2020E. Total fertility rates have dropped to near or below replacement rates in all regions except Africa. The downside risk is that both generations may end up poorer than their parents and grandparents, with the demographics having profound longterm effects on the viability of economic growth, housing, pensions, health and long-term care, labour markets, education and public finances.

$21tn income today

We estimate the total income of Millennials and Centennials at $21 trillion in 2015 - 35 percent of global gross income. The US, China, India, Japan, and Germany are the largest markets. We forecast that this number could grow to $62 trillion by 2030E, $32 trillion for Millennials and $30 trillion for Gen Z. We highlight five entry points for investors wishing to play the theme: 1) Technology, Media & Entertainment; 2) Consumer; 3) Household Formation; 4) Education; and 5) Financials.

We present a list of 200+ global stocks covered by BofAML that have exposure to Millennials and Gen Z-related solutions. Our Buy-rated stocks with material exposure to the theme are detailed in an accompanying Primer Picks report, as is our full list of stocks.

For each company, we have estimated the level and materiality of companies’ exposure to Millennial and Centennial-related themes and have characterised their exposure as follows:

Low - Millennial and Centennial-related products, technologies, services, and solutions are not material to global revenues and/or growth but are one factor, among others, for the business model, strategy & R&D of the company.

Medium - Millennial and Centennial -related products, technologies, services, and solutions are an important factor for the business model, strategy and R&D of the company; material to sales and/or growth.

High - Millennial and Centennial -related products, technologies, services, and solutions are core to the business model, strategy and R&D of the company; material sales and/or growth driver; pure play (i.e. 100 percent of sales). Although it is difficult to accurately gauge the link between such exposure and share price performance (as many factors outside the scope of this analysis are likely to play a role in short-and long-term price development), we still consider Millennials and Centennials exposure as an important and positive point to track given that it is a global “Transforming World” theme with a long lifespan.

The aim of our list of stocks that have exposure to our Global Millennials and Centennials theme and its five underlying entry points is to provide investors with information to identify company and sub-sector specific risks and opportunities that are inherent in the theme.

In our Primer Picks report, we present a list of 200+ global stocks covered by BofAML that have exposure to Millennial and Centennial-related solutions. Our Buy-rated stocks with material exposure to the theme are detailed in that report, as is our full list of stocks.

Millennials & Centennials 101: the kids are alright

Gen Y (Millennials) and Gen Z (Centennials) have emerged as the world’s largest demographic with 4.4 billion people. Globally, there are an estimated 2 billion Millennials and 2.4 billion Centennials, or 27 percent and 32 percent of the total 7.4 billion population, respectively.

Millennials (75.4 million) overtook the Boomers in 2015 to become the largest living generation in US history - and their numbers are not projected to peak until 2036E. US Centennials (74 million) have already overtaken Gen X in terms of numbers, and will shortly overtake both Millennials and Boomers The world’s 2.4 billion Centennials - born between 1998 and 2016 and aged <1Y to 18Y live in the world’s largest and most dynamic markets. In terms of the size of populations, the largest number of Gen Z-ers live in India, followed by China, Nigeria, the US, and Brazil. The largest Gen Z populations are also found in some of the most economically dynamic markets in terms of the maturity of the overall consumer market such as the US, China, Indonesia, and India (source: UN WPF, WEF).

$21 trillion in Millennial and Gen Z income and $10 trillion in annual Millennial consumer spending. We estimate the total income of Millennials and Gen Z at $21 trillion in 2015 - or 35 percent of global gross income -based on Euromonitor data of average gross income. Millennials account for the bulk of this at $18.4 trillion, with the largest markets being the US ($3.6 trillion), China ($2.4 trillion), India ($0.8 trillion), Japan ($0.7 trillion) and Germany ($0.6 trillion). Gen Z accounts for $2.5 trillion in global income, with the largest markets being the US ($293 billion), China ($250 billion), and India ($121 billion). Going forwards, we forecast that the two cohorts’ income could grow to $62 trillion by 2030E, $32 trillion for Gen Y and $30 trillion for Gen Z (source: Euromonitor). The estimated direct annual consumer spending of Millennials in the US alone is $1.3 trillion (source: BCG); this extrapolates to around $10 trillion globally and will not peak for another 5-7Y, in our view. Gen Y and Z to account for 59 percent of the global workforce by 2020E. In 2015, Millennials surpassed Gen X as the largest generation in the US workforce, and the oldest members of Gen Z will soon be entering the world of work. By 2020E, Gen Y and Z will together make up 59 percent of a global workforce that will have undergone a fundamental shift, with Boomers falling to 6 percent of the total vs. 35 percent Millennials, 35 percent Gen X, and 24 percent Gen Z (source: Manpower 2016). The rise of Gen Y and Z will be key to successfully tackling the twin challenges of the ‘age wave’ and technology-enabled creative disruption, in our view.

Technology is not disruptive for Gen Y and Z, it’s the new normal. Technology is integral to the lives of younger generations, with almost all Millennials online in DMs, and 92 percent of US teens going online daily, sending an average of 30 texts/IMs a day (source: Pew Research Center). Millennial smartphone penetration has reached 90 percent in DMs, and the average age for a US child to get a smartphone is now 10.3Y. Social networks are an integral part of their lives with 90 percent of Millennials using 1+ and 71 percent of 13-17Y olds using 2+, WhatsApp and Facebook Messenger both hitting 1 billion users, and 50 billion IMs and 6 billion emojis being sent every day (source: Pew Research, Deloitte, Ofcom, eMarketer). Tech truly lies at the heart of Gen Y and Z’s daily habits including news, media, entertainment, hobbies, and dating.

A world without boundaries and borders with “citizen of the world” defining them more than nationality, religion or ethnicity (source: WEF). Millennials and Gen Z have come of age in a world characterised by growing tolerance and see equality as nonnegotiable, in our view. Gen Z is the most racially diverse generation in US history (only 49-52 percent are non-Hispanic white), the US <5Y cohort has become “majority minority” for the first time in history, and by 2065E visible minorities will account for 54 percent of the US population (source: US Census Bureau, Pew Research Center). Gen Y, and particularly Gen Z, also have the most open and progressive views on women’s and LGBTQ rights.

According to our internal Bank of America card data, the biggest gain in spending in the US between 2010 and 2015 was among the Millennials, up 23 percent. Even after controlling for the 8.5 percent increase in CPI over this period, real spending was up 14.5 percent. In contrast, there was essentially no growth in nominal spending among Boomers and Traditionalists/Silents over this period, which is not surprising given the data shows that spending peaks around age 45. The gain in spending among Millennials partly reflects the following:

*The cohort is maturing into a major consumer force with a greater share employed and experiencing life events, such as marriage and childrearing.

*As individuals age they also tend to allocate a larger share of their budget to durable goods, which includes auto parts, furniture, building materials and electronics. Millennials are therefore still spending a greater share on consumable products, but will presumably increase the share of spending on durables over the medium term.