Introducing the Metaverse - the successor to the internet

Welcome to the Metaverse! A place where digital (Augmented Reality and Virtual Reality) converge with our physical lives. Creativity is limitless with location-defying worlds bringing people together. Be present inside the internet and not just looking at it. It is the next evolution of online experiences (Web 3.0). Furthermore, you can make money in it, and not just spend money on it. 

The phrase metaverse was coined a long time ago by Neal Stephenson, in his 1992 science -fiction novel Snow Crash, set in a near future, in which the virtual world and the physical world were inextricably interconnected.

Epic Games, Microsoft, Facebook and SK Telecom are seriously embracing this development. Burberry, Coca-Cola, and Visa are just a few of many consumer brands racing to be part of it. 

The Metaverse can be divided into 3 broad categories:

• MetaLives - the rise of virtual possessions, the close connection between digital access and health and wellbeing, and technology's broader role in creativity and lifestyles.
• MetaSpaces - the growing popularity of virtual venues and blended virtual/real world spaces, redefining home, events, and holidays.
• MetaBusiness - the uplift in "gamevertising" and emergence of new retail frontiers.

As COVID-19 restrictions ease, the acceleration of technology and its prominence will continue, boosted into greater acceptance by the pandemic. 

Investing in the Metaverse

When investing in a powerful new trend, a systematic framework is important to generate outsized returns whilst controlling risk. This is what Insync has in place.

We are in the early stages of the Metaverse journey. Like a lot of new innovations and trends, one can invest too early in the adoption phase. Most companies that are built primarily around the early phase of a trend are typically unprofitable and become unsustainable businesses, creating losses for investors.

Caution! The 'technology bubble' of 2000 provides an important case study of investing in a very early stage of the adoption phase. Most investors back then ended up losing over 80% of their capital. Innovative new technologies and trends take time to evolve into profitable business models. It was well over a decade before profitable winners from the internet emerged.

Facebook is well positioned to win in the Metaverse

The smarter way to invest in the Metaverse today is to look at existing highly profitable companies positioning themselves to both drive the trend and future-proof their business against potential disruption. 

Facebook's advantages are immense. It has more users, daily usage and user-generated content created each day than any other platform. It has the second largest share of digital advertising spend, generating billions in cash and free cash-flow.

With thousands of world-class engineers, and high-conviction from a founder with majority voting rights, it has the right stuff to succeed. It is a well-known fact that founder led companies tend to outperform. 

Facebook's Metaverse-oriented assets are growing rapidly.
Alongside the Oculus goggles are patents for semiconductor and brain-to-machine computing interfaces. Almost one in five Facebook employees are now working on VR and AR as it invests deeply to help shape what they believe is going to be the next major leap in computing platforms. Facebook's focus is to see it develop in a way that is fundamentally about people being present with each other and coming together (social aspect).

Facebook and the Metaverse workforce 
Teleportation, holograms, and roaming avatars--this isn't the latest sci-fi movie, this is the future of work. Covid has reshaped the future of work, pointing to a flexible hybrid model in the services sector in particular.

"We anticipate never going back to five days a week in the office. That seems very old-fashioned now," stated Alan Jope, CEO of Unilever. 

This thinking is aligned with employee expectations shaped from the pandemic: more than 70% want flexible and remote work to continue, according to a Microsoft 2021 survey.

This year Facebook introduced Horizon Workrooms, a "collaboration experience". It allows people to collaborate, communicate and connect through VR. The idea is for the experience to feel as close to in-person as possible, enabling "lifelike" conversations. Oculus will allow users to teleport from one place to another without moving from their sofa--not only for gaming and entertainment, but also for work. 

Facebook meets our stringent tests for the ideal 'quality compounder' business. It is also present across several of our Megatrends and is an emerging leader in harnessing and profiting from the Metaverse. 

How many New Year's resolutions have you already consigned to the dust bin? If the answer is none, I'm guessing that's probably because you learned long ago that it's futile making them to start with.

Change is hard, isn't it? From changing the way we eat and exercise to the amount of time we spend on social media, we tend to be stuck in our ways. You have probably found the same with your investment habits. Do you keep making the same mistakes? Do you swear you'll capitalise on the next market crash only to find yourself still holding excess cash when markets have fully recovered?

You're not alone. There are good reasons why it's so hard to change.

Our brain plasticity changes dramatically from the time we're 25 years old. We start life with an extremely plastic brain - ready and eager to be adapted to the world in which our body needs to live. 

It is full of a messy web of billions of connections that offer up many billions more possible future brains. 

As we experience the world and learn, some connections strengthen and many others are removed until our brains are wired for adulthood (the first six episodes of the Huberman Lab Podcast explain this process in fascinating detail).

Roughly 25 years after we're born, that process stops. It is possible to change the wiring (some people who become blind as adults learn to use the "seeing" part of their brains for other purposes, for example). But it is many magnitudes harder than it was in our youth. (In our podcast, Stocks Neat, my colleague Gareth likened the adult brain to driving a Kia Sportage after previously driving a Ferrari - not nearly as fast, or as fun.)

This has two important implications.

Firstly, what you experience in the first 25 years of life shapes you forever. For the first 16 or so years, your parents most likely control what sort of environment that is. From 16 to 25, though, you have a lot of control over how the world shapes your brain. That is going to be the easiest period of life to form habits, good and bad. Healthy diets, exercise and drug habits can all become a permanent part of life.

Unfortunately, most of us perusing the Livewire website are well past the age of 25. For us, it is important to recognise that changing who we are is nigh on impossible. 

If you, like me, are stuck with the less-plastic brain, we're best off spending our time understanding our strengths and weaknesses rather than trying to change them. What experiences influenced the first 25 years of your life? How do you think that might impact your optimal investing style?

If you grew up on a farm like me, you would rapidly grow accustomed to cycles and stress. At least once every summer, I would watch the storm clouds roll down the Wellington Valley and destroy the drying lucerne hay that was our family's livelihood (the smell of rotting hay bales has stuck with me for life). It wasn't uncommon to watch a whole crop float down the river in a flood.

It's probably not surprising that my tolerance for risk and capacity to deal with stress is higher than average. Moreover, hard work, patience, and knowing how to live with inevitable periods of hardship have been essential to the growth of Forager Funds.

When it comes to investing, at least, very few traits are unequivocally good or bad. My flaws are a result of that exact same environment. A tolerance for risk can be healthy; it can also be dangerous. A strong work ethic can get things done; it can also stunt the growth and development of junior staff.

There are many different paths to investment success. The trick is to choose the path that's right for the way your brain is wired.

For me, my risk tolerance and understanding of cycles mean I can run a concentrated portfolio of stocks. I can keep cash for market downturns because I know I will be "greedy when others are fearful", as Warren Buffett put it, and often well before the market bottoms. 

But I need checks and balances around me to ensure I don't take on too much risk, including individual stock limits and thesis roadmaps to stop me becoming overconfident.

Someone who grew up with two school teachers as parents might be far less risk-tolerant (my parents were actually both teachers, too, but that was simply a source of funding for the farm losses). 

A better investment portfolio for them might be a diverse collection of index funds. Knowing they are unlikely to be comfortable investing in times of distress, they should commit to being close to fully invested all the time and, preferably, looking at the market as infrequently as possible.

I have some investors as clients who couldn't guess their investment balance with Forager to the nearest 20%. Those who check CommSec five times every day probably view that as lazy and reckless, but these people have been highly successful. 

They simply worked out long ago that looking at their balance every day only causes them to do stupid things. As long as I am investing my own money alongside theirs, letting me worry about it has been their recipe for success.

Introspection can be uncomfortable. And the idea that we are almost impossible to change can be downright scary for some. But, soon to celebrate my 44th birthday, I've found it all quite liberating. Those New Year's resolutions were nothing but a bore to start with.

Everyone is different, of course, but that's what makes humans - and investing - so interesting. 

Written By Steve Johnson

Funds operated by this manager: 

Premium Asia Fund, Premium Asia Income Fund, Premium China Fund

2022 is shaping up as potentially another challenging year, with the combined effects of the ongoing COVID crisis together with evolving inflationary pressures presenting governments and central banks around the world with some challenging policy decisions.

In this article, Sarah Shaw (4D's Global PM & CIO) and Greg Goodsell (4D's Global Equity Strategist) examine these near-term issues.

2022 outlook
While the pandemic in all its forms will prevail longer than was initially hoped, the effective development and deployment of vaccines and treatments means the world will increasingly move to an environment of living with and managing the virus - reverting from a pandemic to an endemic. We continue to believe that the global economy will ultimately emerge stronger for the experience. The huge amount of fiscal and monetary stimulus is still to be fully deployed in economic terms with, of course, much of that spending focused on badly needed infrastructure investment around the globe. All this investment will be a strong positive for the global economy over coming years, improving efficiency, productivity and output. In addition, many of the changes that have been forced on businesses by the pandemic will, we believe, lead to a stronger, more efficient economic environment post the virus. As such, we remain generally positive on the economic outlook for 2022 and beyond.

However, the two key factors dominating economic discussions and providing some near-term threat to a generally robust outlook as we enter 2022 are COVID-19 (again) and evolving inflationary pressures.

COVID-19/Omicron variant
 We believe the global economic recovery is continuing, although the Omicron wave has likely pushed out the timing of the full recovery. However, once we move to a more stable environment where we learn to live with the virus, infrastructure in all its forms remains integral to a sustained economic recovery and returning society to 'situation normal'. We have consistently maintained that there is no global growth recovery without roads, railways, pipelines, power transmission networks, communication infrastructure, ports and airports.

While the ongoing COVID saga keeps pressure on equity markets, we continue to believe it represents a unique buying opportunity for infrastructure investors. The infrastructure investment thematic has not been derailed by COVID, but rather has been enhanced by the pandemic - huge government stimulus programs are fast-tracking infrastructure investment (in particular the energy transition), increasingly stretched government balance sheets will see a greater reliance on private sector capital to build much-needed infrastructure, and the interest rate environment remains supportive of infrastructure investment and valuations.

Global inflationary forces
Over recent months, global inflation has been emerging as a key economic risk. In the US in December 2021, consumer prices accelerated at the fastest pace since 1982, hitting 7% (annualised), bolstering expectations that the Fed will increase rates in March. The US is not alone, with inflation picking up around the world and seeing interest rates already on the move (Brazil, UK) or with expectations of moves in 2022. 

Broadly, the price increases are being driven by a combination of supply chain disruptions, causing critical supply shortages of key items (such as computer chips), together with the huge global monetary stimulus pushing up the amount of money in the global economy, with inflationary forces being the consequence (e.g. Australian house prices). Importantly, we are also seeing real wage pressure in certain industries and markets as a result of the combination of COVID disruptions and job rotations as stimulus flows through. This is compounding near-term inflationary pressure.

Central banks are already beginning to tighten monetary policy in an attempt to curtail these inflationary forces. After its January 2022 Fed meeting, Chair Jerome Powell said the Fed is ready to raise rates in 2 months. He spoke after the FOMC communicating that it would hike 'soon' and then shrink its bond holdings. Mr Powell declined to rule out tightening at every meeting this year, said officials may have to move sooner and faster on shrinking the central bank's US$8.9 trillion balance sheet, and warned there's a risk of a prolonged period of surging prices.

The risk now is that if the Omicron variant continues to spread, this may itself lead to a crimping of global growth just as central banks take their feet of the stimulus pedal, compounding the slowdown.

Ultimately, we believe central banks will act prudently and cautiously in easing policy. We are also of the belief that they may let inflation run somewhat ahead of target over the short to medium term to assist in the reduction of headline nominal government debt to GDP levels.

But just at the present, uncertainty prevails and caution is warranted. In this regard, infrastructure is an asset class that can do well in an inflationary environment and we believe it is a sensible portfolio allocation at the current stage of the economic cycle. As discussed in a number of our previous Global Matters articles, many infrastructure stocks have built-in inflation protection, either directly linked to tariffs or indirectly through their regulatory construct.

As such, in an inflationary scenario some parts of the infrastructure universe, namely User Pays, may enjoy the perfect storm over the short/medium term -interest rates supportive of future growth, economic activity flowing through to volumes, and explicit inflation hedges through their tariff mechanisms to combat any inflationary pressure they may experience.

In contrast, Regulated Utilities can be more immediately adversely impacted by rising interest rates/inflation because of the regulated nature of their business. The flow-through of inflation is dictated by whether the Utility's return profile is 'real' or 'nominal'. If the Utility operates under a real return model, inflation is passed through into tariffs much like a User Pay asset. This model is more prevalent in parts of Europe and Brazil, for example, and limits the immediate impact of inflationary pressure - and in fact can positively boost near-term earnings. In contrast, if the Utility is operating under a nominal return model, it must bear the inflationary uptick reflected in certain costs until it has a regulatory reset, when the changing inflationary environment is acknowledged by the regulator and approved to be incorporated in new tariff/revenue assumptions. This nominal model is the standard model for the US Utility sector. As such, those Utilities in a real model will weather inflationary spikes a little better than their nominal peers.

However, in terms of interest rates shifts, the issues for both real and nominal models are consistent. For a Regulated Utility to recover the cost of higher interest costs, it must first go through its regulatory review process. While a regulator is required to have regard for the changing cost environment the Utility faces, the process of submission, review and approval can take some time or can be dictated by a set regulatory period of anywhere between 1-5 years. In addition, the whole environment surrounding costs, household rates and utility profitability can be highly politically charged. As a result, both the regulatory review process and the final outcome can be quite unpredictable.

The differences between User Pay and Regulated Utility assets should see certain sub-sets fundamentally outperform during a rising inflation/interest rate period due to a more immediate and direct inflation hedge. At 4D we remain overweight User Pay assets and, within the Regulated Utility sector, favour those with real returns. However, should the market overreact to the economic outlook we would use it as a buying opportunity across all sectors.

Key ongoing macro themes
While COVID/Omicron and inflation expectations dominate current day-to-day equity market discussions, there are a number of other important investment thematics in play that will impact decisions for decades to come. Many of these themes are long-term positives for infrastructure investment. Over the past 6 years 4D has addressed a range of such issues and we revisit a number of them in the Annexure so as to provide more detail on our current portfolio thinking and positioning.

However, in summary, current investment forces that we at 4D find particularly interesting include the:

• re-opening trade - capturing the stimulus and pent-up consumption around the world;
• global need for infrastructure investment;
• emerging middle class, which offers a huge opportunity with infrastructure both a driver and a first beneficiary of improved living standards;
• global population growth but with changing demographics - the West is getting older, but much of the East younger;
• active positioning for inflation/interest rates - with current overweights to the inflation trade;
• emerging markets - the recent underperformance of emerging market infrastructure equities is not warranted given the attractive earnings fundamentals and long-term sector dynamics; and
• energy transition - environmental and climatic challenges underpins the need for even more spend on infrastructure.

What could derail our outlook?
While we are generally optimistic regarding 2022 and beyond, there is no doubt that we have had a couple of tumultuous years. There are a number of residual factors that could adversely affect our view, including:

• whether COVID-19 vaccines are effectively deployed globally and in a timely manner, delivering the expected health benefits and leading to subsequent economic recovery;
• governments and central banks prematurely taking their feet off the 'go' pedal before the global economy has the opportunity to properly get back on its feet;
• the actual shape of the economic recovery, which is crucial, remains to be fully seen (V, U, L or W);
• President Biden is unable to make diplomatic progress and we see renewed Chinese/US tensions on a variety of issues: trade, Hong Kong, South China Sea, COVID-19 origins;
• the current standoff with Russia and the Ukraine could deteriorate further, dragging in Europe and potentially NATO involvement;
• longer-term, how all the massive global fiscal stimulus (much of which will be sourced from central banks) is paid for;
• the question of whether 'Modern Monetary Theory' will earn its stripes; or will too many dollars chasing too few goods see currencies devalue and inflation escalate ('Monetarism' and Milton Friedman's economic theories)?;
• whether inflation comes back faster than anticipated, forcing central banks to act ahead of plans via interest rate increases; and
• if so, these rate increases could place pressure on borrowers of all types who, given recent history, would be very unaccustomed to a rising interest rate environment.

We continue to monitor the near and long-term trends and will actively position accordingly as events unfold.

Conclusion
In terms of investment opportunities, we're still spoilt for choice, with significant value having emerged across the entire infrastructure universe as a result of the ongoing pandemic and increasing macro concerns. Despite the near-term concerns, we remain generally optimistic about the global recovery story. Our portfolio remains diversified, with a strong bias to attractively valued, high quality names with solid balance sheets and superior management teams. We remain overweight User Pay and real return Utilities in the current inflationary environment, while capitalising on significant long-term thematics across the portfolio.