How to trade the rise of the millennials

Step-by-step, Generation Y will gain impact and influence at all levels. Soon they will dominate the workplace and consumption trends. Investors thus should ask themselves: Who or what are the millennials and what makes Generation Y tick? And most importantly: How can investors benefit? 

Those born between 1980 and 2000 belong to the millennials. This generation, as with others, is connected with certain behavioral styles and thought patterns. Some are just stereotypes, but some truly fit. For example, Generation Y, another name for the millennials, shows typical shopping habits. Since this generation becomes more and more important as a class of buyers, their consumption habits produce winners and losers.  

Furthermore, in 10 years millennials will make up roughly 75 percent of the employable population. Forward-looking investors should factor this in and also take into consideration what the investment philosophy of the millennials could mean for the financial markets in general.  

In the U.S. alone, Generation Y consists of roughly 86 million people. Analysts predict that this group will have purchasing power of $1.4 trillion. As a result, more and more studies try to more precisely analyze the consumption behavior and the work ethic of the millennials.  

The results are not entirely uniform, but they show a few characteristic patterns. Uniform are such catchwords as tech-savvy, multi-media savvy, family-orientated, socially engaged, interested in work-life-balance and on the search for self-fulfillment. According to a study by Viacom International Media Networks, millennials describe themselves as tolerant, flexible, curious, looking for positive things, communicative and connecting.  

The latter two adjectives probably can be attributed to the rise of the social media. This is not only the preferred communication channel of Generation Y, but also contributes to shaping their character. Thanks to Facebook and smartphones, the circle of acquaintances is bigger and more heterogeneous than in former times. People exchange messages much quicker and independent of their proximity to each other, and physical possession of things has become less important than earlier, since many things can now be easily rented or downloaded.

Lending, renting more important than owning  

These trends have an effect on certain sectors. Cars, for example, are not as compelling as a status symbol as they used to be. Proof of this can be seen in the rise of car-sharing providers or driving services. Millennials also buy real estate less often than was the case when Baby Boomers (born between 1946 and 1964) were in the same age range. The number of home owners among young adults fell from 43 percent to 37 percent between 2005 and 2013. Young people instead live at home longer, which also reinforces the trend toward lending and renting because of a lack of storage space.  

How millennials function can also be seen in sports. Whereas the team sport of football is on the rise, the single-player sport of golf has significantly lost popularity. Golf is time consuming, costly and lacking in variety – all things, that do not fit to the millennials’ lifestyle. 

However, only time can tell how many of these behavior patterns will be permanently maintained. When the millennials grow older, a rethinking process could take place with regard to cars and real estate. (Ultimately, such purchases remain in question since youth unemployment is quite high these day and there is often a lack of money for such big investments.) In this context, it should be noted that the “flower power” generation has changed and now do the adult things they once scoffed, like mowing their front lawn.  

Generation Y soon will overtake the corridors of power in business and politics and preserve at least part of their current ways of thinking and acting. 

Companies that want to stay attractive, therefore, should work on their social image, since that is important for millennials, as is fair treatment for all. Thus, market researchers predict that trade unions will experience a certain renaissance.  

Policymakers also have to rethink, if they want to regain lost credibility, since Generation Y’s confidence in politics is rather low. In the U.S., the Republicans have to worry more about that than the Democrats. That has to do with the fact that the racial composition of the youngest generation in adulthood is more heterogeneous than ever before and as an electorate, they are on average more democratically minded. 

Independent of the political stance, it is important from an investor’s point of view to understand which companies will benefit from this population group and its growing purchasing power. Particularly interesting in that context are the consumer preferences of young women.  

They can be seen in the Brand Affinity Index obtained from a survey by Goldman Sachs and the magazine Teen Vogue. Unfortunately, the U.S. clothing chain Forever 21, though ranked number one on that index, is not listed on the stock market. This also applies to the number two, Victoria’s Secret, but the supplier of women’s underwear belongs to the listed retail chain L Brands and thus can indirectly be traded via that stock. 


Sportswear, healthy food companies should benefit  

Also benefiting in the clothing sector are sportswear companies like Nike and Dick’s Sporting Goods. Their business environment is favorable since millennials tend to have a more active lifestyle. In addition, Nike has already proven its ability to successfully target Generation Y.  

The chain store Dick’s Sporting Goods tries to employ a similar strategy by expanding its e-Commerce business, improving the marketing measures or making use of former sport stars. If the studies are correct, millennials on average have more healthy eating habits compared to earlier generations. That should help food companies with appropriate products in their portfolio. Unfortunately, companies such as the natural grocery chain Whole Foods Market already have a high valuation. A better choice in that respect is the fresh-cut fruit and vegetables supplier, Fresh Del Monte Produce.  

The valuation of that Cayman Island registered company is reasonable, with a P/E of roughly 13 based on the earnings forecasts for the year 2015. Apart from the food business, needless to say that companies like Apple and Google are among the biggest profiteers of the rise of the millennials, since they obviously have the products Generation Y really wants. Based on that fact, Apple and Google are long-term investment opportunities. 


Banks, Wal-Mart and McDonald’s have an image problem  

In contrast, a company like Wal-Mart still has to prove whether it fits the lifestyle of the millennials, as this was the case with the Baby-Boomers. The huge size of the stores and the big-volume packages sold by the world’s biggest department store are often not appropriate for the single households of Generation Y. Furthermore, the retail giant has an image problem since staff have been known to sue the company over perceived poor working conditions. This circumstance brings minus points, since millennials pay attention to the principle of fairness.  

Nor are the habits of Generation Y good for fast food chains like McDonald’s. Banks also have a hard time, not least because their image is still negatively affected by the aftermath of the credit crisis. According to a Viacom International Media Networks millennial study, among the 10 most unpopular brand names are four U.S. banks, including Citigroup, for example.  

The survey showed that 71 percent of millennials would rather go to the dentist than listen to what banks are saying.