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Investing Megatrend: How Rapid Urbanization is Shaping the Future

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An Investing Megatrend: How Rapid Urbanization is Shaping the Future

How Rapid Urbanisation is Shaping the Future

The world is constantly changing, and many of these shifts have the potential to alter the investment landscape.

While some of these changes can be temporary and fleeting, others can be powerful, transformative “megatrends” that shape how society is organized at a fundamental level.

One such megatrend that has been in place for decades is the rapid rate of population growth in urban areas — and while it’s been highly influential thus far, we’ve likely only seen the beginning of its formative impact on the global economy.

An Intro to Rapid Urbanisation

Today’s infographic comes to us from iShares by BlackRock, and it highlights the case for rapid urbanisation as being one of the most important overarching trends to watch in markets over the long term.

It’s a trend that originated in developed economies in the 21st century, as people transitioned from agricultural work to factory and service jobs.

RegionUrban share of population (1900)Urban share of population (2016)
United States40%82%
Japan12%91%
Western Europe41%80%

In these developed economies today, cities are major sources of innovation and wealth creation, and the World Bank estimates that over 80% of global GDP is now generated in cities.

A Global Shift

Over the coming decades, the large-scale role of cities will become even more amplified as rapid urbanisation spills over to the rest of the world.

Billions of people — especially in Asia and Africa — will be seeking opportunities in cities over the coming decades. Between 2018 and 2050, the global urban population will increase from 55% to 68%, adding another 2.5 billion people to cities around the world.

RankCountryUrban population growth (2018-2050)
#1India416 million people
#2China255 million people
#3Nigeria189 million people

Nearly 90% of this growth will be in Africa and Asia, with India alone adding 416 million new people to its cities — more than any other country in the world over this timeframe.

The Dawn of the Megacity

People are not only flocking to cities, they are flocking to megacities — urban conglomerations with more than 10 million people.

In just 40 years, the total amount of megacities will quadruple, gaining nearly 600 million residents in the process:

Year# of MegacitiesPopulation% of Urban Population
199010153 million7%
201023370 million12%
203041730 million14%

With billions of new people living in urban areas – and many of them living in megacities — we will have to rethink how our cities are designed and engineered.

And as this happens, the city as we know it will be revolutionised.

The Urban Opportunity

Rapid urbanisation will create both opportunities and challenges for society, and a plethora of investment possibilities in the process.

As global cities become more integrated with technology, new business models will emerge as cities become smarter, denser, and more connected.

These potential opportunities include:

  • Smarter cities
    Cities will embrace technology to improve services and infrastructure, adding tech-driven features like smart lighting or real-time traffic updates.
  • New infrastructure
    Cities and companies will invest heavily to build next generation infrastructure, such as data centers, green energy, and citywide WiFi.
  • A focus on personal security
    With higher crime rates in cities than rural areas, governments will employ elevated levels of surveillance on citizens in cities. Increasing connectivity means that every activity is logged and monitored.
  • New services
    As cities become more connected, non-traditional players — such as cybersecurity experts or cleantech engineers — will be needed as a part of city planning processes.
  • No car ownership
    A lack of space and the rise of autonomous cars will mean fewer people will own a car, preferring to use ‘summon-able’ services instead.
  • New healthcare systems
    As population density grows to unprecedented levels, existing healthcare systems will need to be radically overhauled to deal with this influx.

Rapid urbanisation will have a wide-ranging impact on global economics, demographics, and society as a whole.

As rapid urbanisation and other megatrends collide and feed off each other, there’s no doubt that even more thematic investment opportunities will be created.

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Markets

3 Reasons Why AI Enthusiasm Differs from the Dot-Com Bubble

Valuations are much lower than they were during the dot-com bubble, but what else sets the current AI enthusiasm apart?

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Two bubbles sized according to the forward p/e ratio of the Nasdaq 100 Index during the dot-com bubble (60.1X) and the current AI Enthusiasm (26.4x).

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The following content is sponsored by New York Life Investments

3 Reasons Why AI Enthusiasm Differs from the Dot-Com Bubble

Artificial intelligence, like the internet during the dot-com bubble, is getting a lot of attention these days. In the second quarter of 2023, 177 S&P 500 companies mentioned “AI” during their earnings call, nearly triple the five-year average.

Not only that, companies that mentioned “AI” saw their stock price rise 13.3% from December 2022 to September 2023, compared to 1.5% for those that didn’t.

In this graphic from New York Life Investments, we look at current market conditions to find out if AI could be the next dot-com bubble.

Comparing the Dot-Com Bubble to Today

In the late 1990s, frenzied optimism for internet-related stocks led to a rapid rise in valuations and an eventual market crash in the early 2000s. By the time the market hit rock bottom, the tech-heavy Nasdaq 100 Index had dropped 82% from its peak.

The growing enthusiasm for AI has some concerned that it could be the next dot-com bubble. But here are three reasons that the current environment is different.

1. Valuations Are Lower

Stock valuations are much lower than they were at the peak of the dot-com bubble. For example, the forward price-to-earnings ratio of the Nasdaq 100 is significantly lower than it was in 2000.

DateForward P/E Ratio
March 200060.1x
November 202326.4x

Source: CNBC, Barron’s

Lower valuations are an indication that investors are putting more emphasis on earnings and stocks are less at risk of being overvalued.

2. Investors Are More Hesitant

During the dot-com bubble, flows to equity funds increased by 76% from 1999 to 2000.

YearCombined ETF and Mutual Fund Flows to Equity Funds
1997$231B
1998$163B
1999$200B
2000$352B
2001$63B
2002$14B

In contrast, equity fund flows have been negative in 2022 and 2023.

YearCombined ETF and Mutual Fund Flows to Equity Funds
2021$295B
2022-$54B
2023*-$137B

Source: Investment Company Institute
*2023 data is from January to September.

Based on fund flows, investors appear hesitant of stocks, rather than overly exuberant.

3. Companies Are More Established

Leading up to the internet bubble, the number of technology IPOs increased substantially.

YearNumber of Technology IPOsMedian Age
19971748
19981137
19993704
20002615
2001249
2002209

Many of these companies were relatively new and, at the peak of the bubble in 2000, only 14% of them were profitable.

In recent years, there have been far fewer tech IPOs as companies wait for more positive market conditions. And those that have gone public, the median age is much higher.

YearNumber of Technology IPOsMedian Age
20204812
202112612
2022615

Ultimately, many of the companies benefitting from AI are established companies that are already publicly traded. New, unproven companies are much less common in public markets.

Navigating Modern Tech Amid Dot-Com Bubble Worries

Valuations, equity flows, and the shortage of tech IPOs all suggest that AI isn’t shaping up to be the next dot-com bubble.

However, risk is still present in the market. For instance, only 33% of tech companies that went public in 2022 were profitable. Investors can help manage their risk by keeping a diversified portfolio rather than choosing individual stocks.

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Explore more insights from New York Life Investments.

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