It’s Not Just AI. 5 Trends That Will Change How You Invest.

We put together this package to spur investors to ponder how changes under way today may cause dominoes to topple years from now, creating new winners and losers across the investing landscape. We asked five investing pros to share their top stock picks; we asked Barron’s Roundtable member David Giroux of T. Rowe Price for his top transformative trends; and we laid out how to find a good thematic fund. And here we explore five key trends that will upend economies and companies.

Medical Miracles

Advances in biomedical science will alleviate a lot of human suffering related to rare genetic diseases and obesity.

For instance, gene therapy, which involves transplanting normal genes into problem cells, may help address genetic disorders that cause approximately 7,000 diseases. Some of these diseases are rare, deadly, and have no cure. Take Duchenne muscular dystrophy. The muscle-wasting condition, which is fatal and has no cure, affects fewer than 50,000 people, mostly young boys. Biotech company Sarepta Therapeutics (ticker: SRPT) has been working on a gene therapy treatment for the disease, which could help patients produce a key protein that they otherwise can’t. The therapy has yet to receive Food and Drug Administration approval, but a panel of experts narrowly voted in May to recommend approval.

“Gene therapy may address diseases that we don’t have any solutions for today,” says Andy Acker, a portfolio manager at Janus Henderson who oversees the asset manager’s Global Life Sciences and Biotechnology strategies. Duchenne muscular dystrophy could be just the start.

Another major medical breakthrough that investors should watch closely: the advent of weight-loss drugs. Worldwide obesity has nearly tripled since 1975, according to the World Health Organization, which estimates that more than 1.9 billion adults were overweight in 2016. In the U.S., about 40% of Americans are obese. Obesity is linked to diabetes, stroke, and heart disease, which are among the leading causes of preventable, premature death, according to the Centers for Disease Control and Prevention.

Reducing obesity rates could help many people have healthier, longer lives, but it isn’t easy. Enter new drugs such as Eli Lilly ’s Mounjaro and Novo Nordisk ’s Ozempic. Both were designed to help treat diabetes, but they also help people lose weight. That has caught the attention of investors as well as competitors, who are working on their own weight-loss drugs. “It could profoundly impact society,” says Acker. “With more weight loss, we could also lower the risk of heart attacks.”

While the future for medical breakthroughs is promising, the present moment is difficult for biotech stocks. Their share prices have come down substantially after soaring during the pandemic, which “pulled forward a lot of companies that weren’t quite ready to go public,” says Eric Potoker, healthcare equity strategist in UBS ’ Chief Investment Office. The SPDR S&P Biotech exchange-traded fund (XBI) is down about 50% from its February 2021 peak of $174 a share.

But “there is still a lot of innovation going on and scientists doing important work,” Potoker says. Plus, the stocks are a lot cheaper now.

Of course, many promising drugs never make it out of the lab. And of those that do, few turn out to be blockbusters. Investors should look for a fund to ensure a diversified approach to the volatile sector. The largest index ETF is iShares Biotechnology (IBB).

India’s Rise

India is set to play a much bigger economic and geopolitical role in coming years. With 1.4 billion people and counting, the country will soon dethrone China as the world’s most populous nation, if it hasn’t already by the time you read this. India’s population is also young: More than 40% of Indians are under age 25, a sharp contrast to China and many developed nations that are likely to find an aging population an economic drag in the future.

Demographics isn’t the only reason that investors should keep India top of mind. Recent structural reforms have helped unlock the country’s potential, says Ajay Krishnan, lead manager of the Wasatch Emerging Markets Select fund (WAESX) and Wasatch Emerging India

fund (WAINX), which are up about 8% and 4.5% year to date, respectively. For example, a tax overhaul simplified India’s archaic and complex system, Krishnan says. Transportation infrastructure is also much improved. “If you were transporting goods from one state to another, it was quite inefficient,” he says.

A national identity program has connected millions of people to financial services. Broadband access has improved and gotten cheaper. And a new national digital payment system has made it easier and cheaper for Indians to conduct business. “Why is that important? Because a 2% to 3% card charge was a hurdle in a [developing] country like India,” Krishnan says.

As nations and companies across the globe rethink their supply chains and dependency on China, that’s creating a tailwind for India’s manufacturing sector. Companies such as Apple (AAPL) and Foxconn Technology are looking to move production to the country. India’s real gross-domestic-product growth is projected to average 6.3% annually from 2021 to 2030, allowing it to surpass Japan and Germany as the world’s third largest economy, according to S&P Global. In the first quarter, India’s economy grew 6.1% compared with the year-earlier period.

Where to invest? For starters, all of that growth will require capital. Investors may want to consider stocks in the financial sector, such as HDFC Bank ( HDB ). For broader exposure, investors can buy ETFs such as iShares MSCI India

(INDA), which has an expense ratio of 0.64%.

Of course, India also faces challenges. The country has trouble feeding all of its people. There are religious and political tensions. Climate change could make heat waves unbearable and devastate agriculture. The population is booming, but Indian women have a much lower workforce participation rate than their counterparts elsewhere. Savvy investors will also recall the hype around the four so-called BRIC countries, which include India. The other three countries—Brazil, Russia, and China—have fallen out of favor. And India has clashed with China over their shared border.

“There’s an incredibly bullish, long-term India story,” says David Giroux, portfolio manager and chief investment officer at T. Rowe Price. “But there’s a big ‘if’ there.”

Caveats aside, investors would be wise to consider investing in India’s rise. Multiple factors are “coming to fruition” at the right time, Krishnan says.

Scarce Water

To say climate change is a big deal is an understatement. T. Rowe Price’s Giroux says that it’s the defining challenge for mankind during his lifetime. Among the multitude of environmental issues we face, water scarcity is among the most critical.

“You can’t do anything without water,” says Will Sarni, founder and general partner at Water Foundry Ventures. “You can’t grow almonds; you can’t make beer; you can’t make semiconductor chips.” Addressing water scarcity is becoming an urgent need not just in emerging markets, but also in developed economies, he says.

Americans living in the Western U.S. see it firsthand. Utah’s Great Salt Lake, for example, is rapidly shrinking. It may even disappear entirely in about five years. Climate change and the state’s population boom are culprits. Losing the lake won’t just be a sad event. Its loss also will increase the risk of dust storms, which are particularly hazardous for people with asthma. It will reduce snowfall in Utah’s mountains, negatively affecting the lucrative skiing industry. And, ultimately, it will mean less water for people, businesses, and farms.

Another, more dire example: The Colorado River, which supports 40 million people across seven states, is stressed, and water levels in reservoirs have plummeted. Bountiful snowfall this winter has helped relieve drought conditions in parts of the U.S. West, but the crisis isn’t abating. Farms, businesses, and millions of Americans in states such as Arizona and Nevada are competing for a dwindling resource. It may hinder the growth of fast-expanding cities such as Las Vegas and Phoenix.

Companies and people that don’t adapt are at risk. Investors should think about food and beverage companies, which are reliant on adequate water supplies. Agriculture is the elephant in the room, Sarni says. But other industries are at risk, too. For example, semiconductor manufacturers use billions of gallons of water.

Investors may want to steer clear of companies that are dependent on unreliable water supplies and invest in those that are attacking the root of the problem. There are a handful of funds that focus on water. Among them: Invesco Water Resources ETF (PHO). Its top holdings include Roper Technologies (ROP) and Ecolab (ECL).

Of course, this isn’t just an issue in the U.S. A hotter planet with a growing global population means that water shortages will be a challenge worldwide. Morgan Stanley researchers forecast that $1.4 trillion will be invested over the next several years in infrastructure to better treat, transport, and conserve water. “Water scarcity is already driving innovation, and that is driving investment,” Sarni says.

Energy Transition

The transition to renewable energy is already under way, but buckle up because the road to a green future will be bumpy.

Fossil fuels aren’t going to disappear anytime soon, even if the need to switch to renewables is urgent. “We have so much energy reliance on fossil fuels that we are not at the point where we can just flip the switch to more renewable energy sources,” says LPL Financial Chief Investment Officer Marc Zabicki. “It’ll be a number of years before we get there.”

That said, the transition is coming, thanks to mounting concerns about climate change, measures like last year’s Inflation Reduction Act, and moves by many countries to be less reliant on fossil fuels—especially the imported kind. We’ll see more efforts to build renewable energy sources and upgrade the accompanying infrastructure. There will be a “massive opportunity” around capital expenditure, says Jessica Matthews, global head of sustainable investing at J.P. Morgan Private Bank. Since August 2022, $150 billion in capital investment has been announced for clean energy projects and manufacturing facilities, according to trade group American Clean Power. That’s more than the total investment in U.S. clean power projects commissioned from 2017 to 2021.

Increasing adoption of electric vehicles will also necessitate additional investments in infrastructure. EVs are already gaining market share and moving from niche to mainstream. In oil-rich Norway, the majority of cars sold are now EVs. But adoption in many countries, including the U.S., still faces infrastructure hurdles. “For every dollar we are investing in renewable energy and batteries, we need $4 of infrastructure,” says Haim Israel, head of global thematic research at Bank of America . “That’s the grid, the charging stations, and so forth.” Eventually EV technology will take over, but it’s a huge investment.

Nuclear power will get a second look, even by once-skeptical environmentalists. Building new plants is highly controversial, but advocates for nuclear power note that it can safely generate huge amounts of reliable electricity and without generating emissions.

Wind and solar projects have recently been attracting significant capital. Investors can also look for companies that will benefit from this long transition away from fossil fuels, says Bazaar of Hollow Brook Wealth Management. “There are utilities that are trading at 12 times earnings, and that are transitioning from coal to renewable,” he says. “I think that’s an interesting investment opportunity.”

Companies to consider include Ameren (AEE) and NextEra Energy (NEE). Investors could also opt for the iShares U.S. Utilities ETF (IDU).

AI’s Consequences

Artificial intelligence is evolving at a dizzying pace, raising ethical questions about its use as well as concerns that it may steal our jobs. Fast-food chain Wendy’s, for instance, is experimenting with using an AI chatbot to take customers’ orders. “I can’t think of any industry—healthcare, energy, manufacturing—that won’t use AI,” says Bank of America’s Israel. “In the coming years, you’re going to see it everywhere. It’s going to change our lives.”

AI may replace humans in some roles. But it may just as likely change the nature of how we work. It could make us much more productive, says Denny Galindo, head of Morgan Stanley Wealth Management Thematic Investing. “It might have taken someone like me a month to write a good report. Maybe with AI, I can do four a month,” Galindo says.

In that case, the world may need fewer writers, but more editors. As anyone who has used generative AI programs knows, the software can produce texts populated with clichéd language and errors.

The technology’s rapid evolution has led some people to overrate the intelligence part of AI, says Sarah Hoffman, vice president of AI and Machine Learning Research at Fidelity Investments. Chatbot-type AI programs are not sentient, but they can still be useful. “Today, you can’t quite trust the results of the tool,” she says. “But if you are brainstorming, it doesn’t matter whether it’s specifically true; it gets you thinking.”

AI may also one day help you pick stocks. JPMorgan Chase (JPM), the nation’s largest bank, is developing an AI service that will give customers investment advice. The move underscores how it won’t be just chip makers such as Nvidia (NVDA) that benefit from AI’s development. Its impact could reach across industries. ARK Invest’s Cathie Wood recently said Tesla (TSLA) is her top AI play.

None of this is to say that we should set aside worries about AI threatening the very fabric of civilization or evolving into a version of HAL in 2001: A Space Odyssey. But it’s just as plausible that in a few years’ time, the technology will evolve into nothing more dastardly than getting our fast-food order wrong. The future is coming, and you may want fries with it.

Email: editors@barrons.com