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Opto Sessions

Jay Jacobs on the structural megatrends set to play out in 2023

Jay Jacobs leads the research and development of the Megatrends suite of active and index-based thematic ETFs at BlackRock. He discusses how government investment is spurring electric vehicles (EVs), infrastructure and microchips; the birth of a new asset class in healthcare; and why cybersecurity is emerging as a defensive sector within the technology theme.

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Jay Jacobs is the US Head of Thematics and Active Equity ETFs at BlackRock. He is responsible for leading the research and development of the Megatrends suite of active and index-based thematic ETFs.

He joined Opto to discuss the long-term structural megatrends he believes will dominate in 2023. These include a potential return to growth equities dispersion; underestimated healthcare breakthroughs; the implementation of fiscal policy supporting clean energy; electric vehicles (EVs); infrastructure growth; and technology sectors such as cybersecurity, which he sees as evolving from niche to necessity.

Previously, Jay was senior vice-president and founder of the research and strategy team at Global X ETFs, a leading company in the thematic ETF space.


Megatrends

BlackRock’s Megatrends are, according to its website, “powerful, transformative forces that could change the global economy, business and society”. They are structural shifts with long-term implications for the world.

Five megatrends in particular influence Jacobs and his team’s investment thinking: climate change and resource scarcity; demographics and social change; technological breakthrough; rapid urbanisation; and shifting economic power.

Key to Jacob’s approach is that “none of these megatrends exists in isolation; when trends collide and overlap, new investment themes appear”.

Room for growth

While investors have, over the last year, focused on a return to value stocks, Jacobs doesn’t feel this transition should be absolute. While value stocks may have outperformed growth stocks, but “that doesn't mean that investors should entirely abandon growth”.

Instead, he believes, the current environment demands a greater degree of selectivity over which growth stocks to invest in.

“It’s less a question of, ‘should you have growth or not have growth?’ It’s more a question of ‘within the growth space, where are the best opportunities?’”

For that reason, Jacobs is calling for a return to growth equities dispersion.

With interest rates moving in a direction that is unfavourable to growth stocks, market conditions can’t be relied upon to drag all of them up together. This creates “an opportunity for investors to really single out the growth opportunities that make sense in this environment.”

“It’s less a question of, ‘should you have growth or not have growth?’ It’s more a question of ‘within the growth space, where are the best opportunities?”

Birth of a new era

Genetic breakthroughs such as CRISPR gene editing are, Jacobs believes, transforming healthcare, too.

“We basically have the birth of a new asset class of treatments in medicine,” he says. “A silver lining of the pandemic is that mRNA-based vaccines now have a lot more investment in them, have a lot more regulatory interest for approval, and of course a lot more research and real-world experience behind them.”

These treatments cover diseases and conditions from flu to cancer and even Alzheimer’s, which Jacobs believes could have a radical new treatment approved as soon as this year.

BlackRock has three ETFs that tap into this trend: the iShares Genomics Immunology and Healthcare ETF [IDNA]; the iShares Neuroscience and Healthcare ETF [IBRN]; and the iShares Biotechnology ETF [IBB]. IDNA is down 7% in the year to date, IBRN is down 4.3%, and IBB is down 3.8%.

These declines highlight the opportunity in the space. “The market absolutely has lost a little bit of interest,” says Jacobs, “and that creates opportunities for investors”.

Government driving investment

On government spending, Jacobs points to three key bills that have been passed in the US. Firstly, there is the Infrastructure Investments and Jobs Act (IIJA), passed in November 2021, which provides $1trn in spending on transport and utilities infrastructure over the next decade.

Second, the Inflation Reduction Act (IRA) of August 2022, which includes incentives for investment in low-carbon energy infrastructure and technology.

And the third is the CHIPS and Science Act, also passed last August, which has encouraged hundreds of billions of dollars of private investment into US semiconductor production, as well as committing $52.7bn of public funds for semiconductor R&D and workforce development.

The funds directed to their respective sectors by these policies provide “significant tailwinds to the companies… that will benefit from those dollars being spent either directly or indirectly”.

Over the past few years, EVs in particular have, says Jacobs, “moved from a niche innovator or early adopter product to achieving much more mass-market appeal”. Government programs combine to fuel this: while the IRA’s incentives bring prices down, the IIJA commits to multiplying by 10 the number of charging points, reducing range anxiety. Thanks to these impacts—combined with improved battery technology and smoothened supply chains—Jacobs believes “we’re at an inflection point for electric vehicles.”

Cyber staples

Another pandemic legacy is the rise of home working, which has given hackers seeking access to corporate data an exponentially larger range of attack points to target.

“You're not just protecting inside the walls of an office,” says Jacobs, “you're protecting inside everyone's individual homes. They might be using a laptop, an iPad or a cell phone. There's a lot of different entry points.”

In 2021, the FBI’s Internet Crime Complaint Center logged 81% more incidents compared to pre-pandemic levels. BlackRock estimates that the annual cost of cyber-attacks will reach $10.5trn by 2025.

“Where we don't think they're going to cut back is cybersecurity. It has become an essential to corporations to be able to protect their data”.

Because of this, Jacobs believes that cybersecurity will display resilience even during periods of economic tightening.

“Companies are cutting back in certain areas,” he says, “whether that's reducing headcount, or reducing real estate, or cutting back on free chips and candy in the kitchen.

“Where we don't think they're going to cut back is cybersecurity. It has become an essential to corporations to be able to protect their data.”

The iShares Cybersecurity and Tech ETF [IHAK] has gained 6.4% in 2023.

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Listen to the full interview and explore our past episodes on Opto Sessions. You can also check out all our episodes via our YouTube Channel.

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