The­matic in­vest­ing: New kids on the block

BANK OF AMER­ICA & MER­RILL LYNCH RE­PORT

Kuwait Times - - BUSINESS -

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.

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