Webinar Replay: Themes for the New Normal Economy
With widespread vaccine distribution and growing population-level immunity, the last of the COVID-19 pandemic’s four phases is in sight: the New Normal Economy. In this phase, the lessons and lingering economic impacts of the pandemic will continue to play an influential role on governments, consumers, and corporations as more normal economic and societal activities resume. In this webcast, we’ll discuss the disruptive themes that are poised to accelerate in the post-pandemic world, including Fintech, Cannabis, Infrastructure Development, and CleanTech.
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Jay Jacobs: Thank you everyone for joining us today. We’re thrilled to be able to talk about the new normal economy and to ultimately provide a bit of an optimistic view of how things are going to shake out over the next few months and several years following the COVID-19 pandemic. I’m joined by two research analysts at Global X, Pedro Palandrani and Andrew Little, who both lead our thematic research here, are constantly putting out research on our 27 different themes, all of which can be accessed at globalxetfs.com/research.
Very brief background about Global X. We are an ETF issuer based out of Manhattan. We have over 80 ETFs today, more than 28 billion in assets under management. A large portion of that is in our thematic growth suite. Over half of our assets, and now actually with the launch last week we have 27 thematic ETFs, which is the most thematic ETFs for any provider in the United States. What is a thematic ETF, and what is thematic investing? It’s the process of identifying powerful macro-level trends and the companies that stand to benefit from the materialization of those trends. Effectively, as a research team, as a firm, Global X, we’re looking around the world at what are some of the most powerful disruptions that are happening in the world today and then which companies do we think are going to benefit from those disruptions.
It’s very much a long-term growth focus strategy. We tend to be pretty agnostic towards things like geographies or sector definitions. We’re purely looking for the companies that are providing the most exposure to these disruptive themes. These strategies tend to have low correlations to other parts of one’s portfolios, specifically growth strategies, because these tend to be more concentrated, and many of the themes that we will talk about today or we’re always talking about in our thematic research are relatable concepts. These themes are happening in the real world around us. We’re reading about them in the news. We’re seeing about – we’re seeing these themes occur in our daily lives, in our local communities, which we think really makes these themes come to life, not just live in a spreadsheet in a brokerage account but something that is really tangible for investors.
As I mentioned, we have 27 thematic ETFs. Those are derived from really three different categories: disruptive technologies, changing people and demographics, changing relationship with the physical environment. Today we’ll be talking about four of these themes as they relate to the new normal economy, and actually, each of those categories technology, people and demographics, and the physical environment will be represented showing the breadth of disruption that we’re seeing in the world today, especially as we exit the COVID-19 pandemic, fingers crossed.
A little bit of an overview for how today’s call will go. We just went through the introduction. We’ll talk a little bit about what has happened during the pandemic. Some of the acceleration in disruptive technologies and other thematic structural changes that happened over the last few months. We’ll spend the bulk of the time talking about the four themes that we think are very well positioned during the new normal economy, and then we will wrap it up there and open it up to any questions from the field. We love hearing questions. These topics are really – hopefully very engaging, so if you have questions, please don’t hold back, and we’ll be happy to answer them either on this call or at a future time.
Thematic adoption accelerated during the pandemic’s stay-at-home and reopening economy phases. What do we mean by that? We’ve been talking about the COVID-19 pandemic in an economic sense as being a part of four different phases. We had the pre-COVID economy when we knew coronavirus was a thing, but it still hadn’t really hit US shores yet and impacted our daily lives in an extremely meaningful way. Then, of course, we entered the unforgettable stay-at-home economy where we were locked inside and had to learn how to work and entertain ourselves and educate our kids all from the safety of our homes. We then progressed to the reopening economy where we started to peek our heads out a little bit trying to reignite the normal economy while also staying safe amid the pandemic. Then finally or hopefully we should be entering the new normal economy within the next few months.
Our widespread vaccine distribution and immunity across populations mean that we can leave this pandemic behind us in some ways but also carry through many of the lessons and changes that occurred during the pandemic going forward. To recap some of these changes in a little more detail before we get to the new normal economy, one of the most important things that we saw during the stay-at-home economy was the acceleration and the expansion of disruptive themes in many different ways. The acceleration meaning that many disruptive trends that we’ve had our eye on at Global X for years suddenly saw adoption patterns occur in a matter of days and weeks that we were only – that we would have expected to have taken several years to occur.
The number of companies, the number of people that figured out how to use Zoom, Slack, other work from home communications, cloud computing solutions was accelerated dramatically quickly after we had to go home. The number of senior citizens that learned how to use e-commerce or telemedicine amid the pandemic because that was the safest way to be able to either order goods to be sent to their homes or to be able to connect with their doctors We saw an expansion of the addressable market for those technologies reaching a new group, those senior citizens and even consumers in emerging markets where adoption had historically lagged, but now we saw these technologies reaching more people than we ever thought was possible, so we saw a huge growth of many of these themes through that acceleration and through that expansion of the market potential.
A few themes that really thrived during that stay-at-home economy really related around digital experiences. Because we had to be at home, we couldn’t do things in person, couldn’t go to sporting events, couldn’t go to concerts, couldn’t go to restaurants, so we saw those patterns shift to online and digital forms of consumption. E-commerce grew almost 45% year over year in Q2 as everyone shifted from buying in stores to buying online. We saw video games and e-sports a key winner as people looked for that entertainment that couldn’t happen in person and shifted it to the safety of their couch in their living room.
Now, after the stay-at-home economy, we shifted to the reopening economy, which is technically where we still are today at least in Global X’s view. The difference between the reopening economy and the stay-at-home economy is of course we had some opportunity to go back outside. We could in limited fashions go to the office, send our kids to school, go into stores again, but the COVID-19 pandemic, of course, was far from over, and this created a major emphasis on the companies involved in either creating flexibility for this uncertain environment or facilitating better safety, the ability to be able to resume some in-person activities with reduced risk of COVID-19. We’re still here today. COVID-19 has not yet been eliminated. We’re still seeing continued fiscal stimulus to support a weakened economy because we’re not totally reopened.
There’s constantly new rules being put into place around social distancing or hygiene or mask wearing that we’re adapting to. We continue to see companies and people who are risk averse. Even if we do think might be able to go into the office, we’re still holding back because of some uncertainty. Just saw a stat a couple days ago in the Wall Street Journal, four million people who would be working in the work force haven’t gone back in yet because they’re still concerned about COVID-19. This is having real economic impacts in the United States still and, of course, around the world. We have travel bans and we have uncertainty in all areas of the economy that’s really reinforcing itself. That uncertainty around whether schools will be open for our kids creates uncertainty around whether we can return to the office.
This put an emphasis on safety – on companies involved in safety and flexibility. A few of the big winners during that reopening economy were cloud computing. Of course, cloud computing has been able to facilitate that work from home environment, but it’s really proved its staying power during the reopening economy where people have realized that if they’re going to have this hybrid environment of working from home and working in the office, or their kid studying at home or being in school or connecting with your doctors in person or remotely through telemedicine, it continues to reinforce that cloud computing is here to stay and is really facilitating that flexibility side of the reopening economy.
On the other hand, other companies that we saw succeed during the reopening economy have been involved in Genomics. These are the companies that have been really on the front lines of the COVID-19 pandemic, developing tests that can test if people are afflicted with COVID-19 as well as developing many of the treatments and even the vaccines that are helping to reduce infections and the impact of those infections around the world, so Genomics has really been key to facilitating that safety side of the equation so that we could wrangle this pandemic and get closer to the new normal economy.
That’s a very brief recap of the past year and the several themes that we saw really drive during those second and third stages of the pandemic, but that brings us to the fourth and final stage, the new normal economy, which we’ll spend the majority of today’s discussion talking about. As much as we would like the new normal economy to be the end of COVID-19 and that we can put this pandemic behind us and that we can completely forget about everything, the reality is it’s not that simple. While the pandemic might be coming to a close and maybe infections will be permanently down and largely a thing of the past, there’s still several lingering impacts of the COVID-19 pandemic that is going to be likely impacting the new normal economy for years to come. We’re not talking about the impact of just a couple of months here.
The stay-at-home economy was in the grand scheme of things only a few months, the reopening economy only a few quarters. The new normal economy we’re talking about could be decades long, and the impact of COVID-19 is going to last with us for a long time. A few of the areas where we see long-term impacts are those changed consumer habits. Consumer habits are incredibly hard to change. People get very stuck in their ways, but when you’re stuck at home for nearly a year, you do have a major opportunity to change those habits. We saw people increase their preferences for digital goods and services. We saw people become more comfortable with work from home or remote work, and we’ve seen people change their entire attitudes to public health and safety amid the COVID-19 pandemic. Even when this is over, we think all of those changes are likely to be sticky going forward.
Weakened economies, even though we’re seeing very strong economic growth rates right now, in the United States, there’s still expected to be a GDP output gap of about 1.7% meaning this year’s GDP will be below the potential for the economy had COVID-19 not existed. Even though we’re seeing this economic acceleration, we have disrupted supply chains and shortages, which are making it difficult to fully bring things back online, to resume things like home building, to resume auto manufacturing, you name it. A lot of industries are still very much feeling the impact of the closures from a year ago. Unemployment remains high, as I mentioned. People still sitting outside the workforce because they’re concerned about COVID-19. It’ll just take time to reabsorb those workers, and we have surging government debt that will have to be dealt with in some way at some time.
Finally, one of the lingering impacts will be political uncertainty. A lot of the super-national institutions like the World Health Organization are both under fire from the COVID-19 pandemic and yet proving to be more important than ever before in addressing future issues that we know are going to be global in nature. On top of that, we’ve seen rising tensions between the US and China, which don’t seem to be abating anytime soon and could create additional issues down the road especially if we have any other global issues that need to be addressed by the world powers.
Which four themes do we think are most likely to thrive in this environment with these lingering aspects of COVID-19 hanging over the economy’s head for several years? We’ll talk about these in a lot more depth, but very brief overview, first, we’ll actually be talking about paying down the debt. Governments have seen an explosion of debt, and they’re going to have to find new sources of revenue, which leads to areas like cannabis where we’re seeing an acceleration of adoption.
What we’re also seeing is as stores reopen and try to attract customers who have been locked inside for many months now, but their habits have changed, and these stores are going to have to appeal to them and meet their customers where they want to be met. Whether that’s on Main Street or whether that’s on their website, they’re going to have to be able to create solutions that are facilitating omni-channel shopping that are increasingly hybrid in nature both online and in person.
Next, we’ll talk about rebuilding for long-term growth, that output gap a result of COVID-19. At the same time that high unemployment, those low interest rates that can take advantage of borrowing, we’re going to talk about how that’s impacting the political environment and some of the social aspects around US infrastructure development. Then finally preparing for the next crisis. Those institutions which are under fire and yet more important than ever before are going to play a large role in shaping how we address the next issues that arise, some known, maybe some unknown, but we know that on the radar, climate change is very much going to be in the spotlight as we exit this pandemic. With that, I will pass it over to our research analyst Pedro Palandrani to talk about the first of these four themes: cannabis and how it is well-positioned in the new normal economy. Pedro?
Pedro Palandrani: Thanks, Jay. Good afternoon, everyone. Great speaking to you today. Starting with the cannabis theme and the implications that legalization plans may have for states, local governments, and potentially at the federal level as well but also for companies that are operating under fully regulated markets. I think all of that is going to be topics that we’re going to be talking about today. At a high level, we need to recognize that economic downturns can accelerate efforts to find new sources of economic stimulus and tax revenue.
Just for context, we can look back to the repeal of alcohol prohibition here in the United States. Basically from 1920 to 1933, producing, importing, transporting, and clearly, selling alcoholic beverages was banned in the United States, but the subsequent repeal of this prohibition in the late 1933 quickly brought back economic growth that helped in the years after the Great Depression, so something similar is happening here with cannabis. Clearly, after the pandemic, we believe that legalizing and taxing recreational cannabis is important, and it’s going to be an important avenue for states to generate economic growth.
If we look at a few states here, we can see that the tax revenue shortfall they’re expecting is severe. New Jersey, for example, more than $5 billion in revenue decline for this year’s budget. Hawaii also facing challenges because of the decline in traveling. Florida, somehow a similar situation, also facing a tax revenue shortfall. Clearly, New York City or New York state is facing close to a 18-billion-dollar tax revenue shortfall over the 2021 and 2022 period, so if we combine it all, the tax revenue shortfall before factoring in the stimulus packages that we’re seeing, it’s expected to be greater than 10%, which as we can see in the slide compares unfavorable to the ’08/’09 financial crisis.
As I mentioned before, the stimulus packages may address many of these issues for states and clearly for the federal government in the short term, but in the long-term, the new normal economy is going to be different thank the economy before the pandemic, so for states, that means that sources of revenue may not be the same. If you look at New York City’s MTA ridership levels, for example, we can see that subways, buses, also the long Island Railroad, the Metro North, all of them are still below 50% ridership level that we were seeing pre-pandemic. Actually, the MTA predicts that the new normal ridership level in 2023 and 2024 are going to be between 80 to 92% of pre-pandemic levels.
What that could mean for the MTA is that achieving the $17 billion in revenue they generated back in 2019 may not be possible, right, so add to that the fact that the highest earning 5% of tax filers in New York state account for more than 60% of total taxes raised and that remote working dynamics may have shifted the location of some of these payers, then tax revenue shortfalls may be long-term, so beyond short-term implications, we also need to think about those long-term implications.
For us, it really came as no surprise that very recently New York is moving forward to legalize recreational cannabis. If we look at Colorado, a state that legalized cannabis back in 2012 and then they realized the first sales of recreational cannabis in 2014, the state has generated in cumulative tax revenues approximately $1.7 billion. Some other economic studies as you can see here have shown that cannabis has created around 18,000 direct jobs, and the numbers is much higher if we factor in indirect jobs like construction, like security, other industries as well.
If we think about the potential impact of cannabis legalization at the federal level, we could be talking of billions of dollars in tax revenues generated every year and probably millions of new jobs nationwide. Clearly, this could happen because cannabis is already a large and proven market that, unfortunately, still most of the market goes through illicit channel. Just for context, we’re talking about a market that is about $150 billion worldwide, and only about 20% of that market goes through a legal and regulated channel, so clearly, as we transition those dollars from the illicit market to the legal and regulated market, many of the companies in this area are expected to benefit significantly.1
Now, if we look at in New York that seems to be moving forward with legalization, approximately 40% of Americans will be living in a state with recreational cannabis – where recreational cannabis is legalized, right? That’s up from just 5% back in 2014 as you can see in this chart, but if we look at states such as Rhode Island, Pennsylvania, New Mexico, Connecticut, and a few others that are still considering a potential legalization over the next couple of years, we could be talking that in the next year or so, around 50% of Americans will be living in a state with legalized recreational and medical cannabis. That’s a very, very large number, and clearly, that’s going to add additional pressure at the federal level to potentially pursue a nationwide legalization effort. I think that’s going to be one of the key drivers as we think about this theme over the next couple of years.
Now, wrapping things up here, if we look at Canada, clearly a country that legalized cannabis back in Q4 of 2018, we continue to see that cannabis sales are increasing significantly. Just last year, cannabis sales increased 121% to about 2.6 billion Canadian dollars. This has been a result of a larger number of retail cannabis stores in Canada, which essentially show that cannabis sales are directly correlated to the number of stores and also because social acceptance continues to improve. In fact, in Canada, social acceptance for cannabis is even higher than smoking tobacco, so it clearly social acceptance continues to improve around the world.
Clearly, as we think about these Canadian licensed providers or LPs, they’re capturing the opportunity in Canada, may potentially enter the US market once we see federal legalization here. Clearly, there are several examples as some of you may know already like Canopy Growth announced two years ago that it reserves the right to buy the US company acreage for about $3 billion – over $3 billion, actually – once the US legalizes the production and sale of cannabis here at the federal level. Clearly, to provide exposure to this theme, we have the Global X Cannabis ETF, POTX, that provides access to all of these companies that operate under fully and regulated markets.
Shifting gears to the second theme today, fin tech, this is another area that we’re really expect to be very well-positioned as we think about that new normal economy phase that Jay was talking about. As we enter this new phase, we can see that fin tech companies are very well-positioned to benefit from both a pickup in in-person activities like dining out, like going to bars, like travel, other type of activities but also from a consumer behaviors acquired during the pandemic like shopping online and doing curbside pickup. Jay mentioned that the senior side of the population, that silent generation or the late cohort of baby boomers adopting a new e-commerce solutions and is shopping online for things like groceries.
All of those behaviors are definitely going to stick with us post-pandemic, and fin tech firms are the backbone technology that allow consumers to use mobile payments and digital wallets for in-store transactions but also are the backbone for e-commerce transactions, and you can think about examples like PayPal where their top marketplaces are Uber, Airbnb, GrubHub, Lyft, and others. Clearly, there are many fintech companies that are very well-positioned in this new normal economy phase to benefit from both a pickup in in-person activity but also a continuation of growth in the e-commerce worlds.
Now, if we look at merchants that use Square’s point of sales just as an example here, we can see that pre-pandemic, less than 15% of these merchants were cashless businesses. Post-pandemic it’s a completely different story. We can see that in most cases, that number doubled. Here in the United States, for example, the pre-pandemic level was about 8%, but post-pandemic 15% of merchants are cashless businesses. You can see here Canada, Australia, Japan, and the UK, all of them as well seeing cashless levels increasing significantly, so clearly, this is benefiting the total payment volumes that we’re seeing through fin tech payment platforms challenging the use of cash in many cases.
Online payments have also something to do with this trend. We can see on the right side that since 45% of Square sellers were accepting online payments by the end of February 2021, that number increased from 30% a year ago. Again, it goes back to the main point that both in-store transactions are seeing a high level of mobile payment and digital wallet use, but at the same time, in the e-commerce world, we continue to see a shift towards accepting online payments, and fin tech companies are very well-positioned in that regards.
Another example is CVS. Very large retailers as well are adopting new forms of payment. Just last November, CVS rolled out a PayPal and Venmo QR code technology in its point of sale to improve the consumer experience. Actually, as we can see here, some of the recent surveys show that 34% of consumers who prefer paying with QR codes would not pay using any other method, so it’s not only our traditional mom and pop shops that are implementing this type of technologies. Even large retailers like CVS are shifting their payment solutions allowing consumers to definitely make use of fin tech applications to continue to increase that consumer experience.
Clearly, all of that is essentially because fin tech forms of payments are convenient. They also offer a greater degree of security than cash for example. They also allow merchants and consumers to store data for merchants. That essentially means they’re storing data about their customers to learn a little bit more about their customers, and for the consumers that means they can learn about their spending behaviors and how to set budgets in terms of spending, investing, and things of that nature, but also fin tech platforms tend to be less costly, so all of these factors are quite positive, and if we look at result of that, if we combine Venmo and Cash App users, that number reached about 90 million people last year.
Now, an important consideration here is that fin tech platforms are not only growing their user base but are also improving the monetization of their platforms by introducing new services such as crypto transactions, clearly now one of the most important areas for companies like Square. PayPal also introducing some crypto transactions in their platform, but they also are introducing systems like buy now, pay later, lending opportunities, and a variety of other services. There’s significant room to continue to monetize their user bases since the average revenue per user for many of these fin tech companies is still below the levels we’re seeing in large commercial banks in the United States.
I believe the average commercial bank in the United States monetizes each of their customers at a rate of over $300. Leading commercial banks actually monetize their customers at about $800 average revenue per user. Some fin tech companies are still below $100, so again, by introducing new services, new solutions, they’re going to continue to increase that user monetization, so fin tech companies are going to continue to grow twofold: one in terms of acquiring new users but at the same time they’re going to continue to increase their user monetization. I think that’s very, very important to know.
To wrap things up before I pass it over to Andrew, we covered some of the growth opportunities in payments, but fin tech is much broader than that. For us, that really includes insurance, it includes investing, fundraising, you can think about crowdfunding, for example, peer-to-peer lending, and even blockchain technology, and that’s the approach of our fin tech ETF – the Global X FinTech ETF ticker FINX. The reality is that as we can see here, last year the majority of these segments grew from pre-pandemic levels, so as we look at the future, we believe that companies in areas like buy now, pay later, for example, which are expected to become a much larger portion of total e-commerce transactions and clearly a greater use of digital wallets, all of these areas are expected to gain share from traditional forms of payments like credit cards as you can see in this chart. With that, I’ll pass it over to Andrew to continue the conversation around a couple other critical and very important things within the new normal economy. Andrew?
Andrew Little: Thank you, Pedro. As many of you may have noticed, US infrastructure development front and center in today’s national conversation in the United States. It was a bipartisan talking point in the run-up to the 2020 presidential election. It was part of both candidates’ platforms, actually, and now it’s the subject of spirited debate around the newly announced American Jobs plan, announced about two and a half weeks ago by the Biden administration. It’s clear there are many opinions on the matter. That in mind, a few weeks ago, we put a survey together and surveyed around 550 individuals in the United States to get a gauge on this, balanced sample size, balanced survey.
We got some pretty interesting insight, so from this slide you can gather that one, looking at the chart on the right, a significant share of people really feel like US infrastructure is in need of an overhaul, and I mean chart of the left for that one. Then two, from the chart on the right, it’s not just minor upgrades that it’s going to need. Infrastructure according to those we surveyed, it’s in pretty bad shape with over 50% giving it a C rating or worse, so it’s always interesting to look at this type of data with political affiliation in mind to show how Washington might regard the issue, hoping, of course, that that is reflective of the general sentiment in Washington.
Looking at this, you can really see that US infrastructure development is a bipartisan issue. There are differences that might affect the current feelings in Washington. They are miniscule when we think about meaningful majorities and what this might mean for getting infrastructure built, but we’re going to talk about the actual infrastructure plan after we address the long-term thesis, so first, let’s actually look at that and think about those results and use that as first an initial gauge of what infrastructure looks – how the American public might look at infrastructure and then actually looking at this slide to get an idea of its current state and really what’s – what requires fixing and rebuilding.
Pretty recently, about two months ago, the American Society of Civil Engineers gave the US a C- on its infrastructure. Across most major areas, roads, bridges, rails, other forms of public transit, waterways, ports, what have you, the country performs inadequately. That includes utilities as well, electric, water, digital. 43% of roads are in bad condition, poor shape. They’re deteriorating. 8% of bridges – yes, the bridges that are elevating our cars high in the air are structurally unsound, and the project log for fixing all of them is nearing $800 billion. Other transportation, too, that’s essential for really getting around in the modern world in a sustainable way, public transit, 45% of Americans don’t have access to public transit, so that’s definitely concerning.
Then you also have utilities that are stretched so thin that it’s beyond what they were built to really serve. A large percent of the American population served by a small percent of infrastructure, so for things like water and electricity. A very small percent of the infrastructure built out for that is serving a very large percent of the American population, so there’s a little bit of things not being equitable in that regard, but beyond this not serving the American public right now, the implications here have significant long-term economic impacts and other impacts.
This could be lost productivity from people being immobile, from traffic, from those deteriorating roads. This could be negative health impacts from things like lead pipes, a story that we’ve been hearing increasingly over the years, or even from fires from falling transmission lines that are aging, the Camp Fire in 2018 being one of those examples. The impacts are evident. Looking at some estimates, the country could lose up to $10 trillion in GDP, $23 trillion in total output. That’s mostly business sales. Then also 3 million jobs by 2039. Those are definitely points that need addressing.
How’d it get to this point? Pretty simply, infrastructure investment has stalled significantly over the past two decades and even a little bit beyond that. You can see at the bottom left, that’s a chart showing public construction spend relative to GDP. Its share of GDP has not only decreased, but it’s also just inadequate even at those previous levels at the beginning of the chart. We did see a little bit of investment from the 2009 American Recovery and Reinvestment Act. I think it was around $95 billion, but that’s really just not enough when we think about the overall funding gap in some of the numbers also that we’re hearing in current – from current infrastructure plans.
Looking forward, the American Society of Civil Engineers, that organization that graded US infrastructure as a C-, they estimated that within the next 10 years, there’s a funding gap of $2.6 trillion. Based off of everything that we’ve discussed, this definitely could be considered necessity, but in our view, this really brings significant investing opportunity. Investing, though, in infrastructure today, it’s going to look a lot different than it used to. Often, we’ll hear what does infrastructure entail? What does that mean? Aren’t some of these numbers being thrown around in terms of funding for different areas of infrastructure. Is that even infrastructure?
We think in most cases it is because infrastructure today is different than it would’ve been when the interstate highways were built during the Eisenhower administration. It needs to be built with today’s structural trends in mind. It has to accommodate demographic trends like population growth, urbanization as well. It’s going to need to be more resilient as well so against obsolescence, which is one of the issues that brought us to where we are in terms of infrastructure, but then also to new risks like climate risks where you have roads in Florida in the keys getting submerged underwater, abandoned, and residents of the different keys being told to relocate to different areas based off of costs. Also, it’s going to need to consider new technologies and consumer preferences.
This is going to be our all-encompassing long-term thesis slide for discussing what infrastructure’s going to look like. First, discussing transportation, building more roads, that’s no longer realistic. Infrastructure’s going to need to facilitate better mobility, and transit. Public transit is a part of that. It’s going to need to be massively overhauled. Across state rails, light rails, those really need to be expanded. Underutilized systems like water taxis, other different means of transportation as well need to be built out, and most importantly, these systems should really leverage technology for better integration, and we’ll get into that in a second, but there’s that whole concept of connected cities, smart cities.
Mobility as a service really describes what transportation should look like in future infrastructure, but first, touching on resilience, it’s really going to need to be built out to withstand those climate disasters. The frequency of billion-dollar weather events is increasing, and infrastructure really needs to accommodate that. That could entail raised roadbeds, proper drainage systems, and strengthened levies and seawalls as well, though, of course, that’s going to have to be done thoughtfully because public policy makers are actually making decisions whether or not some of those resilience upgrades are necessary based off of how drastic things are getting in different areas in the United States from those actual events.
Then getting into the technology aspect, infrastructure and connectivity, more entwined than ever. Based on how we connect and how we travel, how we even use our own consumer technology, it’s really an ingrained part of what infrastructure is going to entail, the smart – the concept of smart cities, smart grids, or even smart water systems and utilities, but all of this requires faster networks with more capacity in order to handle the demands here, so infrastructure needs to develop a lot of stuff with all of those demands. This is where 5G really comes in. 5G networks they’re faster. They have greater bandwidth. The cell towers are much smaller but they have a lot more power in terms of what they’re able to do within a small range. You’re going to need hundreds of thousands of them built up. Many of them are actually right now but this is a continuous effort in terms of upgrading, installing, retrofitting the cellular networks in the United States. This is really important to infrastructure as infrastructure is going to be built with all of this really integrated as a part of it.
At this point, as I discussed earlier, we’ve mentioned the American Jobs Plan, which the Biden Administration announced two and a half weeks ago. This really seeks to invest across different areas of US infrastructure. Physical infrastructure wise, this includes over $600 billion to transportation areas, like roads, bridges, ports, airports, public transit, electric vehicles get a significant amount of investment in the plan, which of course, would need to be drafted into law, but among many other different things. It also includes $250 billion directed to buildings, schools, hospitals, and $50 billion directed just to resilience so that whole component I was speaking on regarding raised water beds, road beds, drainage systems, etc.
It also seeks to invest in energy, water, and digital infrastructure. This includes $300 billion to Clean Tech and clean energy. Some of that those overlap with physical infrastructure based off of the way that these buildings really do have energy efficient technology, electrification, as a part of that. The next session we’ll talk Clean Tech so we can get into a little bit of that then. It also includes $111 billion to water utilities, much of those, the water infrastructure, distribution infrastructure in the US is inadequate and so that could definitely go a long way there. Finally, it includes $100 billion to digital infrastructure as a part of the, really, I’d say core infrastructure of the plan.
There’s about a trillion combined for different other components, including long-term care, manufacturing, and small business, research and development, and workforce development. We do feel that those are important to the plan but they do fall a little outside of the core infrastructure part of it. I do think some definitions of infrastructure really being designed to create that economic capacity or increase the economic capacity of the United States based off of everything that’s occurring or that would be occurring. In all the plans, it’s around $2.3 trillion that looks to invest 1% of GDP over the next eight years in infrastructure.
Complementary to the plan, really a part of paying it off is the Made in America Tax Plan. If everything goes according to plan with the Tax Plan, you can see that the American Jobs Plan paid off within around 15 years. At a high level, it seeks to increase the corporations paying taxes but really focusing on multinational corporations that are able to reduce the amount of taxes they pay based off of their status and the way that they classify assets and then also what those assets are held. The plan really is in favor of – it would increase corporate tax rates but the companies that are really going to do okay from this are those that are in America that generate American revenues. That’s really a core part of this about getting everything back to the United States. This doesn’t really include anything that affects the taxes that individuals pay for. That’s thought to be a part of a later plan which we’ve yet to really hear exact details on. There is definitely pushback, even with a blue or light blue government, there being those moderates in the middle of the two parties who are in favor of different ideas when it comes to compromise.
There are going to be challenges, of course. Unlike the American Rescue Plan, which we saw at the beginning of this year as an outgrowth of last year’s policies, this infrastructure bill will need to be drafted into law. Speaker Pelosi has indicated that July 4th is her target date for the House to get the bill through, which would really probably bring it to the Senate in the late summer, factoring in recess, possible passage in the Senate could be after Labor Day, maybe a little bit later. There are obstacles in the Senate that don’t exist in the House, mainly moderates who do favor bipartisan agreement, which of course, is important in terms of curating what the American public needs and thinks around the infrastructure plan. They have indicated that they would rather not go the reconciliation route and rather compromise, but more recently, we’ve actually seen that inaction on the compromising aspect of things. It’s tilted the equation in terms of what different possibilities are in terms of getting this through.
Part of the survey that I was talking about earlier, we looked at how the American public feels about the plan. The results were pretty reflective of those dynamics in Washington with Democrats pretty resoundingly in support of the plan and then Republicans and independents being a little bit more neutral or negative on the plan. I’d say Republicans are definitely more negative on the plan just based off of the survey results we have. Again, we think it’s likely that based on the core infrastructure pieces of the plan, we’re going to probably see more additions to that than subtractions.
Really quickly going to move on to our next theme, Clean Tech and renewable energy. Renewables, that includes clean energy sources, like wind, solar, hydroelectric, geothermal bioenergy as well. These companies are mainly those in the utility sector. Clean Tech is a little more broad and looks beyond production at technologies that are supportive of renewables as well as enablers of renewables, so smart grid, storage, electrification, energy efficiency. It also includes technologies that are environmental mitigants or impact mitigants, so things that could reduce pollution or emissions reduction, so carbon capture use and storage and carbon dioxide removable technology being a part of that. We like to look at this combined value chain really in the four groups you can see here, renewable energy sources and tech, energy efficiency and storage, electrification, which does have some overlap with energy efficiency, and then also emissions reduction and removal.
The need to mitigate the environmental impacts of human activity right now, it underpins this theme, and those impacts are growing. The world is warming. 2020 tied 2016 for being the hottest year on record. As we can see here, it is true that 75% of warming comes from concentrated atmospheric CO2. We can see here on the chart at the top that that density has actually increased significantly in recent times, and that from the chart on the bottom, that the temperature anomaly is just continuing to tick upwards. Humans are responsible for almost 50% of the carbon dioxide emitted since the Industrial Revolution. This is not really a coincidence based off of the different activity that we’ve seen since then. According to NASA, that’s really the cause there.
At current rates, we’re seeing that warming could reach around 4.1 degrees Celsius above industrial levels by 2100, which according to some estimates, would reduce global economic output by 10%. This isn’t accounting for some of the more changeable impacts we’re already experiencing from warming, like the billion-dollar weather events I mentioned earlier as part of infrastructure, rising oceans, legal temperatures. While this is definitely bad news, it means that we can do something about it.
Typically, the agreed upon amount of warming that’s appropriate is 1.5 degrees above pre-industrial levels. Clean Tech renewable energy can really help to limit this, which is a part of the overall plan in limiting these impacts. The Paris Climate Agreement, that stipulates a path for limiting temperature to those recommended levels and most of this, again, is from transitioning to renewable and Clean Tech. The price tag, it would be high. It’s estimated around $110 trillion dollars, done, again, in the spirit of the Paris Agreement, but we really think as a part of this renewable and Clean Tech industry, they’re going to capture a lot of meaningful amount of this investment, if enough is done to make it there.
We are seeing that this is materializing throughout the world. First focusing on the power sector, almost 27% of global electricity production was generated by renewables in 2019. That’s up almost 10% from the beginning of the decade or from 2010. More now than in the past, we’re seeing the rise of on and off shore wind and solar sources. Hydroelectric sources were the main portion of that in the past. Right at the inflexion on the chart on this slide, you can see that right before 2009, maybe a couple years before 2009, when that inflexion point for renewable adoption started to – or directed it – the share – the power sector, power mix upward. The levelized cost of electricity is really the way to look at this by explaining the declining cost in solar and wind. That refers to the amount of revenue that’s required to build and operate any sort of power source over a specified cost period. Over the past decade, that cost for solar, it’s decreased around 80% and for on and off-shore wind, that’s decreased a little over 50%; it’s actually 55%.
In most of the world, these costs are below what you’d see for coal and gas. It’s really representing significant incentive to further the transition to clean energy. We could really see this drop another 60 to 70% over the coming decade. As investment does continue to push economies to scale further creating this cycle of incentive for adopting these types of technologies
Looking through a wider lens and beyond the power sector, we can see that renewables make up a much, much smaller percent of the total energy consumption mix. Rather than what power plants produce electricity-wise, this reflects how other sectors are really using – consuming energy. Cars, they still largely run on gas, trucks on diesel, houses and buildings, they’re running on natural gas and heating oil as well for heating pumps and different other parts of building infrastructure. The transition here, it’s more than just replacing the electricity produced in power plants by fossil fuels with renewable sources. It’s more about electrifying every aspect of this around the world in different sectors, in different industries. You can see those on the bottom in the chart in the box. It is understandable to see why renewables make up just 11% of total energy consumption.
Electricity production, that’s only around 30% of emissions, too, so we’re going to have to look beyond the power sector. This is modernizing power systems to invest in smart grids and energy efficiency. Technology and components, that includes storage, it’s driving further electrification so the renewable power sector can actually reach those areas which aren’t currently electrified, so that’s investment in transmission lines and other sorts of technology
It’s also about bringing renewable fuel to sources where the power sector can’t reach. This is called indirect electrification. Green hydrogen is the most mentioned manner of doing this. Hydrogen’s the most abundant element on the Periodic Table. It has a lot of energy potential on its own, but it’s usually bound to other elements like oxygen when it’s found in nature. Electrolyzers can separate this hydrogen from the oxygen through a process called electrolysis, which really brings – if it’s renewable electricity that’s powering the electrolyzer, that renewable fuel has an input for other processes and sectors where that electricity couldn’t reach otherwise.
The cost of electrolyzers and then fuel cells, which is essentially what you would put that hydrogen fuel into to create energy – this is the – really the limitation here. They’re very expensive at this point in time, but considering the amount of investment that governments are committing to invest in this technology, including the United States in the American Jobs Plan and also supportive infrastructure for fossil fuel, hydrogen right now, which is used in different sources. We really think there’s potential for adoption of hydrogen in other indirect electrification technologies but likely in the medium term.
For those who feel that these technologies are far in the future and a little bit too expensive, it’s important to look at the traction that they’re gaining from consumers, corporations, governments. You see on the chart on the left that residential solar installations, they’ve been climbing steadily each year. More than two-thirds of US consumers, looking at the chart on the right, are in support of policies that are around funding renewable research, renewable electricity requirements, tax rebates. Then many different companies around the world, including Google, Facebook, Microsoft, Apple, too, committing to becoming carbon-neutral through different means, whether that’s using renewable power on-site or what have you.
Finally on the government side of things, China and the US, they’re responsible for around 35% of greenhouse gases, and we’re just starting to see positive action from them on reducing emissions. The Biden Administration recommitted to the Paris Agreement the beginning of this year and committed to becoming carbon-neutral by 2050. That is stipulated in the American Jobs Plan as well, which could really make this a reality putting some of those investment numbers on the goals that we think would be very, very beneficial for the renewable energy and clean tact themes.
China, they’ve also pledged to be carbon-neutral by 2060, and they’re outlining different plans for that. Then other countries like Korea and Japan, Canada, as well, have made similar commitments. Europe continues to lead here with the EU and other countries in the region, other areas in the region really demonstrating leadership on this for the past decade, two decades. Investment from them is just going to continue but we really think all of this taken together is progress toward reaching investment in the technologies that’s really going to be required to address these negative impacts.
With that, going to pass the microphone over to Jay to finish up the webinar.
Jay Jacobs: Thanks, Andrew. So just wanted to talk about some of the key takeaways from today’s webinar. First and foremost, the pandemic was an unusual situation, to say the least. Of the many impacts of COVID-19, one of the most dramatic that we saw within the investing landscape was the acceleration of the adoption of several destructive themes during the stay-at-home economy and the reopening economy. That shift towards digital preferences, ordering stuff online, entertaining ourselves from home, building into our society more safety and flexibility to be able to operate within the COVID-19 pandemic with some sense of normalcy As we adapt to the post-pandemic world, we might be able to put COVID-19 behind us from a health perspective, but many of the lingering impacts of the pandemic are going to stick with us. Those changed consumer habits are likely to continue going forward. The economic impacts of COVID-19 are going to carry forward for potentially decades, and the changing attitudes and politics, not just domestically but internationally, are likely to stick with us as well. Several themes that we’ve mentioned today we think are going to thrive during the new normal economy including cannabis, syntax, US infrastructure development, and clean tech.
I’ll just remind everyone, if you enjoyed the research you’ve seen today, we are constantly publishing our research at globalx.etfs.com/research. You can also follow us on Twitter, and I will pass it back to Natalie to wrap some things up. We will save a little bit of time for questions if people want to stick around for that as well.
Natalie: Great, thank you, Jay, and thank you for such an informative presentation. We will take advisor questions. If you do have a question for our speaker, please submit those in the box to the right of your slides, and we’ll get to as many of your questions as possible.
With that, Jay, I’m going to turn it back over to you for our first question.
Jay Jacobs: Thanks, Natalie. We see our first question coming in. What does the new normal mean for stay-at-home economy themes like cloud computing and video games? Pedro, I’ll pass that one over to you to answer.
Pedro Palandrani: Yeah, absolutely and really good question. The reality is that many of the behaviors acquired during the pandemic are going to stay with us as we enter this new normal economy that was discussed throughout the presentation. For cloud computing, it is clear that the new working environments are likely going to remain hybrid with employers allowing employees to work from home more often than before. Actually, that’s something employees want to see now from employers. For that to happen, the use of cloud computing solutions should remain in place. For video games, on the other end, the reality is that this is really a new form of social media outlet for many around the world. Billions of people using video games every single day. You can see companies like Roblox, for example, they sell over 3 billion hours of engagement last year up 120% from 2019. Importantly, the company sent 2 billion chat message each day, so that clearly shows that people use video games to stay in touch with friends and family and even make new friends in many cases.
Beyond that software aspect, I think it trends like cloud gaming, greater penetration of AAA video games in mobile devices, and even growing monetization opportunities like micro-transactions or new downloadable content in the video games industry is going to continue to drive these themes further this year.
Jay Jacobs: Okay, thanks, Pedro, and we’ve seen a couple questions come in, which is what are the tickers for the themes that we’ve been talking about, the ETFs that are tracking those themes. I’ll run through those quickly. The first one, FinTech, the Global X FinTech ETF is F-I-N-X, FINX. The US Infrastructure Development Fund, the ticker’s PAVE, P-A-V-E. Our Global X Cannabis ETF is POTX, P-O-T-X, and our clean tech fund, Global X Clean Tech ETF, is CTEC, C-T-E-C, so quick rundown on the tickers there.
Andrew, I’m seeing a question for you come in. Is the American Jobs Plan already priced into infrastructure development stocks? Is it too late or not?
Andrew Little: Yeah, I think that’s a really great question based off of the different approaches there are to investing in US infrastructure of some of the market dynamics we’ve seen more recently. First, I don’t think there are too many investment vehicles that really do look at companies that are generating 100% or 50% or more of their revenues from the United States, so I think that maybe broadly, infrastructure companies, whether or not they are well-positioned to involve have seen definitely some benefit from this plan, but I don’t really think this specific group of names here that are going to benefit have fully priced in the revenues that we feel they’re going to realize from the American Jobs Plan. It’s really going to be based off of the way the plan is designed to benefit the companies more relative to other companies that are generating their revenues from the United States, so a double benefit there.
Then also, I think more recently we’ve seen somewhat of a transition or obviously there’s been a little bit of ups and downs recently, but we’ve seen heightened tension toward value types of names, industrials, materials. That was mainly a month ago or so that we really were seeing that, but I think that that kind of – those different shifts in those different dynamics have muted really the impact of US infrastructure spending and the benefit from the American Jobs Plan.
Moving forward, I do expect to see continued benefit for those names within the US infrastructure space and I think they will definitely separate themselves from maybe other more general infrastructure names and just non-associated value sector types of rotations.
Jay Jacobs: Alright, thank you, Andrew. I see we’re a little bit on bonus time here, so we will cut it off. Apologies if we weren’t able to get to all the questions here today, but we will do our best to follow up with everyone. Sincerely, thank you, everyone, for joining today’s call. I hope you enjoyed it.
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