Swing state: investment themes and opportunities in 2025 and beyond 

So numbers are still ticking up, but I'd like to just kick us off now. We've got a lot to get through. And before I do, I'd like to do an acknowledgment of country. And in the spirit of reconciliation, I acknowledge the traditional custodians of country throughout Australia and their connections to land, sea, and community. I pay respect to their elders, past, present, and emerging, and extend that respect to all Aboriginal and Torres Strait Islander people today.

Thank you all for joining us today on the launch of our 2025 themes and opportunities. My name is Jemma Beattie, and I'm the strategic investment advice leader for the Pacific. And I'm joined by Nick White, who is our Global director of strategic research. And Nick's going to take you through the detail today.

The themes and opportunities is our annual look at the factors that are going to shape markets over the medium to long term. And importantly, it considers the actions that investors should be considering as they fold these into the development of their portfolios. So this year's themes and opportunities is titled Swing states. And we're not just looking at political swings here. We're also looking at swings in markets such as inflation and concentration and all those things you're seeing coming through.

Now, as with last year, it's structured into three distinct sections. The first is regime change, and that's reflecting those one-off enduring shifts in conditions such as the new interest rate regime we've moved into. The second is supercycles, and these are the economic and socioeconomic cyclical trends such as geopolitical risks, supply shocks, and so on.

And the third is megatrends, those long-term, multi-decade forces, which are more slowly shifting our investment world such as artificial intelligence and the energy transition. So our full paper is now live on Mercer insight community. Please check that out. We'd love to have your questions. There's a chat function, so put those in the chat as we go through, and we'll have time to pick those up at the end. And now I'll hand you over to Nick, who's going to take you through the detail of the report.

Thanks, Jemma. And hi, everyone. Thanks for attending. So these are the themes for this year. So there's nine of them in total, three within regime change, two within super cycle, and then four within megatrends. And we'll whizz you through each of these. And they're covered in a bit more detail in material that you can get from your consultants when you reach out to them. But also, of course, please read the paper.

So within regime change, talk very quickly about highs and lows of benchmarks. This is really related to what's happening in the equity market-- the shrinking of the equity market, but also the increased concentration in the equity market. We'll come on to talk about that. State of rates is really following on from the story that we picked up last year about flatter frontiers and the better returns that you have offered by the bond market.

Private markets de-siloing is recognition of the increased interest in private markets and the need to take a holistic approach to private markets, not just because of the size of the allocations and the sophistication of the allocation, but because the nature of the private markets has changed so much. We'll talk about that.

Security of everything is deliberately titled because there's so many aspects to this, whether it's security of reserves, security of energy, security of resources, cyber security, all this is becoming a really massive issue with increased protectionism and populism creeping through the countries around the world. Balancing the economy is related to this, which is related to social inequity and the implications this has for social conditions such as housing and healthcare and what this might mean for policy going forward.

We talk about supercycles and megatrends and reality. Of course, we don't know which is going to be a supercycle and which is going to be a megatrend. Will a supercycle ultimately become a one directional megatrend? Who knows. But the four on the right, we can be fairly confident about. Is that the energy transition continues. but with temperatures where they are and emissions where they are, we're not just talking about mitigation anymore. We're talking about adaptation.

And in the context of circular economy, we see this as a trend in itself. We've been talking about this for a few years. But we really think that this is going to be huge going forward, simply because it offers so much more than sustainability benefits. It's all about efficiency and productivity and even security, which we've already referred to supercycles.

Natural reorder, we picked up last year. We're going to follow on from that this year. We see this really as a massive, multi-decade megatrend and a very, very serious one that needs addressing, but also creates opportunities. And AI into everything is really a reflection of just the explosion of AI. But more than just what's visible in markets, but also how it's likely to ripple through economies and industries.

So there's a whole load of ideas here, which we'll pick up as we go through. I'm not going to spend too much time on this page. But just to be clear on exactly what you're looking at here, you've essentially got three layers. So the top layer, we would consider this is really appropriate for most clients. There is some private market stuff here, which means if you're not a client who can invest in private markets, that may be restricted to you. But for most clients today, we're seeing allocation to private markets. And a lot of this is available across that space.

And then we've got sections below. We talk about those available to large in-house teams or using OCIO where there's a-- really, it means that you've got an in-house capability to be able to dig a bit deeper, decide whether it fits your portfolio. But it may not be true for-- it may not be suited for everyone. And then at the bottom, there's specific client cohorts, tends to be some kind of orientation that a client would have that would lead them to these areas, whether it's a strong sustainability or impact orientation or indeed sensitivity to inflation, for instance. So those kind of assets would be more appealing to those individual's clients than they would to others.

So let's get into the first one, highs and lows benchmarks. Everyone knows what's happened with the explosion in AI and the tech boom. We don't want to make it clear that the tech boom 2.0 is fundamentally different to tech boom 1.0. It has been driven strongly by fundamentals as well as price multiples. Whereas, of course, tech boom one was all about price multiples. And of course, the tech wreck was a lot bigger than we expect this one to be.

At the same, this level of concentration, we don't believe that this should last forever. And where there tends to be unwinding of concentration, which is not good for active management, the unwinding can be good for active management. So should favor active managers and hedge funds. It's also important not to forget those areas that have been underperforming in recent years, such as value and emerging markets. And certainly, you can see from the chart on the bottom right that there have been long, large swings in leadership between the US and EM.

This is not a promise that that swing will happen anytime soon, but it does suggest that there is some natural swing that occurs in this area. Hence one of the references to swing state. Most of what I said, I think, is captured here in these summary pages, and you'll see this throughout the deck. There's issues to address on the left and options to consider on the right.

And I think really, the only thing to mention from this page that I haven't mentioned already is the diversification that's offered in private markets. The private markets, as the public markets shrink and companies stay private for longer, and indeed, some public companies go private, there is increasing diversification in the private markets compared to the public markets. So if you are restricting yourselves to public markets unnecessarily, then please consider to test your liquidity and see whether you can use that liquidity budget in a more effective way.

State of rates. Certainly, prior to the explosion in inflation and interest rates, what was referred to as risk creep, where investors would take on more credit risk, take on more interest rate risk, take on more liquidity risk just so they could get some decent yield. We just continue to believe that this is not necessary, and that's despite interest rates coming down from their peaks.

Private credit in particular, it continues to benefit from banks retrenching for certain types of lending. And there's a particular area that we are interested in at the moment, which is asset-backed finance. There's a great paper on the MercerInsight Community, which I hope you've all been introduced to. It's an excellent dataset that captures all of our research as well as research from across the industry. And there's a particular paper in there about private-rated secured lending that refers to this space, which is called asset-backed finance.

Now, it sits somewhere between investment grade public credit and direct lending, so it's got reduced downside protection compared to traditional private senior direct lending. But also, the potential for enhanced return relative to listed investment grade credit markets, even though it offers lower liquidity. But we see it particularly attractive space in this environment today. So look out for that paper.

Don't think there's much more to add there, really apart from a statement just to remain dynamic. We are still in transition in the interest rate cycle. What goes up must come down, but it doesn't come down in a nice sweet move, and it didn't go up in a nice sweet movement. So expect volatility. Expect expectations to be volatile before they eventually they settle down into some kind of pattern. And also generally, expect more volatility going forward because of everything we're going to be talking about in this session. So dynamism is key.

In terms of private markets, a couple of things going on here. This slide is really to highlight the need to look at private markets holistically. First of all, multiple clients around the world, and you can see it in the dollars, you can see it in the numbers, are really increasing private market budgets. No longer looking at it just in terms of liquidity risk, but more in terms of return and risk adjusted return enhancement, which is indeed the way that we look at private markets. And we have substantial private market allocations in our reference portfolios, for instance, which underpin our advice to clients. But there's a couple of particular reasons why you want to look at private markets holistically.

First of all, you want to ensure that it is optimized, for want of a better word across the different asset classes such that you're capturing the best opportunity in the asset class as it develops, but also because increasingly we're seeing blurred lines between asset classes, such as between real estate and infrastructure, or using energy transition as an example.

And the energy transition ranges from renewable energy generation within the infrastructure space towards technological innovation needed to impact the hard to abate sectors, which would be sitting in the private equity space. You get the picture. To take a holistic view across a solution means taking a holistic view across product market asset classes.

Furthermore, though there's been a lot of innovation in the private market space. This refers to secondaries and co-investments, which are not so much innovations, but are increasingly part of portfolios and allowing clients and investors to really play their portfolio quite nicely, get balance in it, really manage the liquidity in it. Particularly good at managing Jacobs, for instance. But also from secondaries point of view, actually the return history of secondaries has really been quite attractive compared to some of the other sectors, certainly in terms of volatility.

The innovation has extended to ways to provide liquidity to investors beyond these two areas, such as evergreen or semi liquid strategies or even in the ETF space. And it's the reason why we've seen so much more interest from wealth clients in this area who perhaps weren't interested until these innovations came around.

And the only thing to mention perhaps from this space that I haven't mentioned already is global real estate. As we know, there has been a lot of chatter about the pressure on real estate. It's really important to look forward in real estate, because where that pressure has impacted on valuations. This may be a different cyclical downturn. To the cyclical downturns we've seen in the past, you could argue some of it is structural because of the impact of COVID and working from home and so on, all of which we still experience today, even though economies are recovering.

But the reality is, we've got considerable gapping in the real estate market. You talk to our real estate team, really excited about the opportunities. They're seeing gaps of performance of 1,000 basis points between the lower quartile and the bottom quartile. Loads of opportunity to really capture strong thematic opportunities with really fantastic valuations and set yourself up for a really good, strong returns going forward. The way to maximize that is to ensure that you do cover across all sectors, across real estate, but importantly across global as well, so that you can maximize your opportunity set.

We move into the security of everything. As I mentioned, here you can see the highlighted areas in the text. Security of energy, Homeland Security, security of resources, security of reserves, and we'll talk about cyber security in a moment. It's a really accelerating area. We're looking at a whole load of thematic managers at the moment, and it's really interesting talking to them. Few of them are talking about this security story and how it's promising so much and delivering so much.

Security of energy is interesting. Security of energy, of course, in the crisis of-- well, first of all, COVID for supply. But then, of course, the conflict, Russia-Ukraine conflict. That focus was very much in the very short term on fossil fuels, ensuring that we had gas, ensuring that we had oil, et cetera. But it very quickly moved on to acceleration of renewable energy programs.

And this is because the interest in renewable energy has shifted from one that was focused mainly on energy transition, which is a critically important principle, of course, but beyond that into just good economics, because the prices have come down of the construction of renewable energy, and also security. Because if the sun shines and the wind blows, then you have home-grown energy that you're not reliant on overseas suppliers for.

Now, of course, to ensure that you have that energy when the sun doesn't shine and the wind doesn't blow, you need that battery. You need that grid transmission. And these are all part of the next wave of infrastructure build out that we expect to see coming through. And it does need a hell of a lot more. There's far more money going into renewable power generation than there is into grid and transmission, for instance, which they clearly need to come as a pair for it to work. But be interesting to see how that unfolds. But it's also related to the adaptation area, which I'll come back onto in a moment.

A greater focus on Homeland Security is a really interesting one. You see in the bottom right, anything related to security or resources. We've seen protectionist policies in relation to critical minerals increased five-fold in the last five years. It's really fascinating to see just how much it's accelerated and just how much that interest in the area and the focus on the area has increased over this time. And you see some of the charts below. The number on lithium there, demand is expected to grow from 2023 to 2040 by nearly nine times in the net zero outcome scenario.

Security reserves is an interesting one, of course. I think we've talked a lot over the last couple of years really about non-US Central banks looking to diversify their reserves away from US dollar assets and areas such as gold being a beneficiary. I think you've seen some headlines literally in the last couple of days about this idea of having a currency to compete with the US dollar. Whether that's a reality or not is questionable. But the fact that these conversations are having are happening is really just an indication of just how much of an impetus there is across emerging market central banks to really diversify those reserves going forward.

Cybersecurity is huge. Hacking really is an absolutely massive-- a massive issue. Cybersecurity breaches are occurring almost daily. Malware and ransom attacks are rising by extraordinary numbers in incredibly short periods. And the average cost of a single data breach has increased by nearly a quarter since 2017. These are really quite shocking statistics there. Our sentinel team who deal with operational research and they come in and they do cybersecurity reviews, they're really deep in this space. And I don't think they've ever been quite so busy, simply because of this.

And it's mainly because so many-- as the risk increases, the spending to manage that risk increases, as you can see on the right. This is just one of the many upward-sloping charts that you're going to see in this presentation going forward. Of course, this is the downside of AI. AI is both helping and hindering the cybersecurity risk issues going forward. And of course, technology needs to keep up. Cybersecurity needs to be as sophisticated as the next hack, not the last one.

Issues to address. I think the only thing I haven't mentioned here is really the need for currency policy. Maybe this is a bit 101, but the 101 is always important. Currency, living in Australia, living in Sydney, as I'm speaking to you today, we live and breathe currency, so having a currency policy is very much an active decision, even if you decide to do nothing about it. Because having unhedged assets can be good for your risk.

There is no doubt that wherever you are in the world, you must have a policy. It must be an active decision if you're going to be passive, if that makes sense. In this kind of environment, we've got-- rapidly moving from a unipolar world to a multipolar world. With that comes volatility. With that comes currency, volatility, and also currency manipulation, as we know. So currency policy is absolutely crucial to ensure that it doesn't swamp the returns that you otherwise thought you would get without currency impacts.

Balancing the economy, the last one within supercycles. And really, this is around the social issues of what's going on in economies today. Economies may look healthy, but they're very, very polarized. This is a year we've talked about it a lot about and the industry has talked about it a lot about being a huge voting year. We've seen enormous breakthroughs in populism, enormous support for populism, and a lot of this comes out of the polarization of societies. And for voters really to be bought by promises of change.

You can see on the left hand side that there is an inverse relationship between income inequality, which is referred to as the GINI index, typically seen. You can see that inverse relationship between the GINI index and the trust that people express in institutions as measured by surveys today. It's a fascinating alligator chart, that one, when you see it, which gives you some sense of just how important it is to manage that inequality, I should say, across economies.

Home ownership is a classic one. Home ownership amongst the 25 to 34-year-olds has halved since the 1980s. One of the classic social contract statements is that each generation should have more wealth than the previous one, and it looks that that is broken. That contract is broken now because of this extraordinary wealth wrapped up in baby boomers. And of course, as that is passed down, this is likely to perpetuate inequalities. And indeed, it has implications for tax structures and so on going forward, you would imagine. But of course, these things are political.

This is also issues with housing gaps and health provision, each of which can be addressed, which are also having significant investment opportunities for clients. We move into the megatrends now, and the first of this is transition today. And you'll note that we're calling it transition as opposed to energy transition. There are five streams to the transition as we see it. Energy transition is one of them, which we refer broadly as climate mitigation.

But increasingly, we're moving towards adaptation. 2024 is going down as the hottest year in the last 174 years on record, potentially breaching this 1 and 1/2 degrees threshold that's been talked about so much in the context of climate change. So adaptation will become absolutely critical. So that's two, climate mitigation, adaptation. The other three really are circular economy, the natural world, and the fair transition on the grounds that a global transition is needed, and that means that we need to bring the emerging markets. Whether the developed market is shifting a hell of a lot faster in terms of emissions than emerging markets even if the innovation perhaps is moving faster in China than anywhere else.

The charts on the bottom actually give some sense of the acceleration. The good news is that in 2025, renewables, solar, wind and hydrow, are expected to generate more electricity than coal for the very first time. And that's already happening in the EU, but it's not happening at the global level. That's expected to happen in 2025, which I think is an exciting positive. We've seen the exponential acceleration, as you can see there in the chart on the left. So it's good to see those numbers coming through.

And of course, every infrastructure portfolio sees renewable energy generation as really part and parcel as opposed to something kind of radical and sustainability-labeled. The issue is that emissions and temperatures have continued to rise. However, I've already mentioned the 1 and 1/2 degrees emissions continue to rise. And this is an issue, which means investment needs to significantly accelerate both in the rollout of renewables, but broadly in that grid and storage that I've already mentioned. And critically in that next wave of innovation, i.e., Those areas needed to deal with the hard to abate sectors.

And that might mean areas such as hydrogen and sustainable fuel. The hard-to-abate sectors, if you're not familiar with them, are heavy transport, so trucking, shipping, and flying, and heavy industry, which is aluminum, cement, and steel, for instance. And there are solutions in this space, but they need to be scaled up and they need to be at a price point that make them more attractive such that they can be rolled out faster than they can be today.

China is a really interesting one in this mix because China's emissions growth more than offset advanced economy emissions reduction, which is clearly a sad thing in terms of global emissions. At the same time, China stands out as the largest global investor in clean energy with far, far faster production times. Now, of course, these far faster production times is why there's such a sweep of protectionism creeping through other countries because they're seeing China so far ahead. They're ahead in EVs. They're ahead in solar. They're ahead in all of these areas.

While the world needs that acceleration, it also needs that reduction in emissions to come through, which is really why we need transitioning that economy and other economies as well. So interestingly, there are predictions that suggest that India will be the second largest emitter by 2050 unless they transition faster than they are currently expected to. So this need to bring economies along as part of the transition is so important.

And actually, emerging market infrastructure is a really interesting prospect for investors to get into, be part of that transition, but also clearly make good money. It's not without its risks, clearly. Go into it with your eyes open and try and manage those risks as much as you can, and these can be attractive assets.

I think I mentioned everything on this summary, so I will move off and keep going onto the next one. Circular economy is absolutely fascinating. This is a huge growth area, or at least a potential growth area. I should say that quite slowly because that mixed statement that I gave you there is because intuitively, the circular economy offers so much that is needed right now.

First of all, the circular economy has sustainability benefits, but it also has huge efficiency benefits. There are extraordinary savings that can be made across multiple industries if the circular economy really becomes embedded in industries. There are opportunities for winners to significantly outperform the leaders simply because the efficiency gains that they can make by capturing and putting value on waste and making things a lot more cheaply and efficiently than those who are using virgin materials.

But also, it offers security because in the same way that renewable energy is home grown, waste is home made. So if you can get value from waste, if you can get materials from EV batteries, if you can get materials from phones, if you can get materials from construction, demolition waste, something like-- some statistic. It's crazy. I haven't got it to head, so I'm going to have to double check this. But something like a quarter of all waste in the US is demolition waste. Extraordinary numbers. There is value in that, of course, and we're increasingly seeing construction companies use that.

Why is it so important from a sustainability point of view? We do need to get back to that. It's because the way we use and produce materials today is responsible for 45% of greenhouse gas emissions and 90% of biodiversity loss. And humanity is using nature, anything from nature 1.7 times faster than a planet's biocapacity can generate. We need not one world, but two. We don't have two. So the circular economy is a solution to that really fundamental sustainability problem as well.

The chart on the left that rather busy, but rather nice looking chart. It's called the butterfly diagram. This is created by the Ellen MacArthur Foundation. It talks about essentially the technological cycle on the right hand side and the biological cycle on the left hand side. And it needs a bit of explanation to explain it. But really, it's more than just about recycling and capturing waste. It's about changing entire business models to really-- where we're sharing, such as car sharing, whether we are-- you're seeing these vintage shops with clothes.

But also, it comes into-- rather than just manufacturing and selling washing machines, going back to the old time when we actually rented these things. So they actually they continue to be owned by the renting company such that they're on the hook to repair it. So it's in their interest to make them last longer. But also, on top of that, they still own the materials. They can reuse the materials in construction later. And these are huge savings for those companies and indeed the renters who can save money going forward.

The are rather busy table on the right hand side is from Oliver Wyman, a sister company of Mercer within the Marsh McLennan Companies suite, and they did some very detailed modeling. You see there are some very detailed numbers there, but some very detailed modeling on the savings that can be made across these different areas. One in particular is the built environment and infrastructure.

A good example here locally is the Quay Quarter Tower, which is the old amp building, if you know Sydney very well. And when it was built, it retained 68% of the building. It saved 12,000 tons of emissions, $130 million of building costs, and a year of building. Extraordinary numbers. It won world building of the year, and it was dubbed the first world's upcycled skyscraper, which is a term I love. I think that's great.

But they're really hard numbers, both on the efficiency gains and on sustainability gains, that really put some evidence that circular economy should be the future. And the reason I say it hasn't been the future is because actually, a few years ago, we were talking about only 9% of waste was recycled. Now it's only 7%. So we are going in the wrong direction. But this is such a no brainer in terms of its deliverables that we have to assume that will change. But it'll only change if companies do it, and the leaders will win over the laggards. And there will, of course, be regulation in this space.

So moving on to talk about the natural reorder. We have talked a lot about this. It's a fantastic piece related to food transition called "We are what we eat," written by a colleague in my team, Matt Scott. Again, that's on the MercerInsight Community. I really recommend that you read that. He and colleagues presented at the global investment forums, and everyone five stared it. It was the highest rated session. So I really strongly recommend that you read that piece.

Really, what this paper is about is what you can see on the page here, is that there's a food transition that really needs to happen. Partly because farming and deforestation for agriculture, they are massively negative sustainability benefits, just in terms of land use, in terms of species destruction, in terms of water use, and water pollution, and there's a lot that needs to change.

But there's other subtle things that need to change as well, which is what we produce and how we produce. And that requires a mixture of modern techniques such as precision farming or vertical farming, but also traditional techniques such as more sustainable farming or regenerative agriculture and so on. Which actually, if you talk to managers in this space, and they'll say that they're all across it because sustainability-- they live and breathe sustainability. The farms that they work with or have purchased are already making strides there, particularly here in Australia, they're living and breathing it. So the transition is in place, but there's money to be made as that transition takes place. So it's an asset class to investigate going forward.

It's just an example here of the different assets involved. And you can see here it ranges from traditional forestry through some of the food transition areas that are regenerative agriculture, vertical farming, towards more of the impact areas on the right hand side, such as ecosystem and wetland and river restoration. And the return implications of these, they do vary-- these are very general numbers, obviously.

It really depends on the actual asset that you invest in, very clearly. But to give you a sense that this is a very broad and diverse universe, far more than most people appreciate. And indeed, we're getting a lot of interest from clients in this area with the potential for us to be creating diversified solutions for them.

Not much more to add here, I think, but just to say, I think this is closely connected to a whole range of things-- security of resources, security of soft resources, in this case, soft materials, soft commodities, food, food security, can't get much higher than that really. And these are big issues, particularly in areas such as the Middle East. And we're seeing an awful lot of issues in the Middle East that are unrelated to food, but they will exacerbate food issues. It's huge for unrest.

But it is also related to the circular economy and this capturing of the third of food that we waste all the time, which an extraordinary number. There's huge potential in these areas for investors to get their heads around. The last trend then is AI into everything. And we say everything because it's very, very clear and transparent what AI is doing in the markets. We've seen the dominance of the Magnificent Seven and the tech boom 1.0 versus 2.0.

They are fundamentally different. But really, what we're seeing is this massive arms race in AI not just within the big mega tech players, but also just about in every company around the world. I would joke that every CEO seems to have changed the word technology to say AI, because everyone wants to do more. They certainly want to be seen to be doing more. And of course, we've seen the benefits of AI. And who wouldn't want to be doing more with it, as long as you can manage the risks?

We did a survey on the right hand side of asset managers to get a sense of how they're using it, and they were generally positive. The results were pretty similar across the board. Whether they were using it or planning to use it, there was a general expectation that it was going to be fairly beneficial. Couple of mixed results. So for instance, expecting liquidity to increase at the same time as market efficiency to increase, but also market concentration to increase. So all of those things just didn't necessarily seem to all connect. But these are because there are so many players involved.

This last page here is really around just how we expect AI to ripple through industries, whether it's across providers, enablers, deployers, or disruptors and what speed the company is moving out within their industry, whether they are an innovator, an early adopter or majority players or laggards. And just because you're an innovator does not necessarily mean you're the winner. Sometimes it is the next stage. The early adopters, the enhancers who make more money out of these things think-- VHS, maybe, Betamax and VHS from years gone by, showing my age there. But there is no doubt that AI really is rippling, rippling through industries, just about every industry you can think of.

So it's in precision farming. It's in port containment management. It's in healthcare, innovation. It's just about everywhere. So this idea that it's all about the mega tech players, it really isn't. It is everywhere, and we would naturally expect that I vacuum to suck in a whole load of two players along the way. So there is certainly more money to be made. Clearly, we need to be watching valuations in this space because there is a lot of hype. But there is benefits to economies and benefits to returns still going forward.

And with that, I'm going to pause and take questions. The only thing maybe I will add from this page is just to give you a sense as to where I opportunities really are. The run in the mega tech players may last. It may not last. I've already talked about that potential unwinding of concentration going forward. But as we say, it's because it's rippling through industries that really gives the opportunity for early stage VC in the private market space to give you a broad spread of next wave innovators and adopters, and that's where, indeed, we will be looking.

R&D programs. Companies with expansive R&D programs are particularly interesting at the moment. They're the ones we really think could be part of the next wave. Please, if you want to find out more, this paper is out. So go to the Mercer website, or you can download the themes and opportunities 2025 report. So you can download it there, or you can get it from the MercerInsight Community. Or please reach out to your Mercer specialist who will give you the full rundown. And more importantly, be able to tailor the advice that we're giving you here to whatever program you're looking to build and indeed your particular client needs. And with that, I will pause and Jemma, maybe we can go to questions.

All right. Thanks, Nick. A lot going on there. First question come through is just with that information, if you were to highlight three things that investors might want to focus on right now, what would they be?

Yeah, sure. So I showed briefly that summary page of the opportunities that we look for. We call it themes and opportunities because clearly, we're not looking to just find megatrends and super cycles as a bit of background. We're actually looking for opportunities, whether they are expected to be growth opportunities or whether they are there to manage the emerging risks that we're seeing. Or if it's not actually a tangible investment, it's about an enhancement to a process.

So, for instance, in climate transition, how are we enhancing our climate transition analytics? Are we looking for natural capital analytics and so on? So I'll give you just a couple there. So I did mention asset-backed finance. I would talk to your consultant or your fixed income specialist to really get some detail there. But that paper that I mentioned on secured lending that you'll find in the MercerInsight Community, we do think that's a particularly attractive space at the moment. As we've seen the kick up to rates, but we've also seen some settling in rates. Asset-backed credit, we expect to actually be finding that balance between what's liquid and what's returning.

Global real estate, go into it with your eyes are open. Use your specialist and really capitalize on the pockets of opportunity in global real estate rather than just go sweeping global real estate. But there is no doubt that going forward, there are some really, really attractive returns to be made in that space, partly because the downturn was so significant. In terms of other risks going forward from a process point of view, I mentioned just there that climate transition risks are enhancing all the time.

But increasingly, we need to be providing analytics on nature, analytics on circular economy and this next wave. And regulation is coming. Regulation, as always with these things, come from the EU first, and then it ripples out. And the EU are very generous in giving the rest of the world a template on how to roll out regulation. We expect that to happen in the context of nature, for instance, in relation to deforestation and traceable products.

When you look at a product, there's such a thing as a digital passport where it has, where did it come from? Where was it sourced from? Was deforestation involved in any of the vegetation used in this product? So that you can look through modern slavery, supply chains, and so on. This digital passport is really interesting. That's expected in the next few years. That these things only work if they're global. However, as soon as they hit one region, they have global implications because as we know, supply chains are global. And that's happening in the EU.

EUDI is a really interesting one as well. It's actually having to show-- having to justify the products you've got have not been associated with deforestation in the past. And again, that's going to have global ramifications. And we'd expect such policy to be rolled out more globally. The last one I'd say then is mentioned about currency policy, which I'm sure lots of you would already have.

Maybe it's the time to revisit it, because it's not something that's necessarily revisited that often. If you haven't got one, definitely, please look into it. Work with your consultant to build a currency policy. It's really important in the next decade or so to know that the currency aspect of your portfolio, that you understand it, you're managing the risks associated with it. And if anything, you're turning it into a positive on your balance sheet rather than a negative. So there's your ideas-- asset-backed finance, global real estate, portfolio analytics, and nature and circular economy, and currency policy.

Thanks, Nick. Thanks. And I think another question related to some of the themes you mentioned there in terms of biodiversity and food. To what extent, if any, are these sorts of things priced into markets right now? People comments and views on to the extent energy transition may be priced in, but food and biodiversity feels, at the moment, a little bit more remote. Do you have any views on that?

I would say it is very remote. I think even at the global level, we're still trying to land on exactly what the policies should be. And it's proving a bit more problematic than perhaps people were expecting. One of the issues that it's not-- it's a lot more complicated than climate. Climate, you can zero in on a single statistic like emissions.

Biodiversity and nature, first of all, it's much more local. It is much more asset-specific, and it's a whole range of issues related to water, related to pollution related to soil use and reforestation and so on. There are so many issues to look at. So it's a lot more complex to deal with. Where you've got complexity, you get mispricing. Also, on top of that, the impetus to deal with it is accelerating, but it's not truly embedded. It seems to me that there's some recognition at the global level, but there isn't much of a response coming through. So the idea that these things are priced in, I think, is-- it'd probably be naive to say that it's fully priced in.

The other thing that I would say is it's quite interesting in the context of inflation. We don't necessarily think that inflation will be super high in the future, but we do think it's subject to outbreaks. We've got protectionism. We've got potential for conflict. We've got energy transition. We've got security resources. All of these things are potentially inflationary.

That doesn't mean that the medium of inflation will be high, but it does mean that skew could be up there. And in those periods, remember that changes in inflation are very different to changes in prices. Prices don't come down the same way that changes in the inflation does. And we've seen that now. Who went to restaurants recently. OK. That's a Western whoa, obviously. Oh god, my restaurant got more expensive. But this is a real thing. Once it's in the system it stays in the system, and every inflation kick will be like that. And actually, in the natural capital space, these are-- they can be a pretty good inflation hedge over time compared to some other assets.

Thank you, Nick. Thanks. Another question related to energy transition. What is the likely path of energy transition now with the election of Trump? And importantly, what does that mean for Australia and Australian investors?

So with energy transition, obviously, it's about policy, and policy could be significantly impacted by Trump. I think we're waiting to get a sense of really what comes through. There are unknowns with the Trump government coming. There's unknowns with any government coming in. But arguably, there's more unknowns with the Trump government. That to say, regardless of who had got into the White House in January, protectionism is bipartisan. And energy transition is more than centralized policy. It's about individuals as well.

For instance, here in Australia, solar was driven as much by the people putting solar on their houses as it was by large scale, utility scale solar being rolled out around the states. And even then, when central government in times gone by were not as supportive as the current government on energy transition. The states were actually still making moves in that area. So I think it's difficult to say what's known and what's not.

That said, with the energy transition and with the slow energy transition comes more and more impact coming through. And when we get the first hurricane 6, which at some point will happen, you have to think that mitigation and indeed, unfortunately, adaptation will be well in the headlights then, regardless of who's in power in the White House. So that's a slightly fuzzy answer, but the reality is we slightly don't know. And it's not going to be slightly [INAUDIBLE]. It's quite difficult to not answer that without being political, and I'd rather not be political.

[CHUCKLES] Thanks, Nick. Question on the circular economy. Obviously, it feels like it's very much in its infancy. But as you said, there's a huge opportunity there. What's it going to take? Do you think that will be driven by consumer demand or is it actually really going to take significant change and regulation for that take off?

I think it is-- it will definitely come through in regulation. But if companies are sensible, it'll come through just through companies looking to do this anyway. The Arab example I gave, which is Quay Quarter Tower, that was just the companies themselves saying, I understand how the circular economy works. I understand what it means for construction, and I understand what it then means for the economics.

And you've got leaders in every industry, many of whom have got associations with the Ellen MacArthur Foundation, who were really instrumental in bringing the circular economy to the world. But as a company understands the economics of the processes that they have and they look to source things differently, and they look to capture their waste and use their waste differently, it will naturally come through the economy. In the same way as renewable energy now is as much about economics as it is about people wanting to reduce emissions. The same will be true about the circular economy, because they'll just see it as a part and parcel way of just making their processes more efficient and raising their productivity.

Thanks, Nick. Thanks. Probably just one more question that we've got coming through is, it feels at the moment, there are, more than ever, some very significant and uncertain themes coming through where we just don't know where they're going to land. And they're new. We can't predict where they're going to land. So should investors be more optimistic or more nervous, really, about what these outcomes are going to look like in the future?