The ASX shares that could win in the long term

Experts often talk about the stocks that they think will rise in the next year or so. Not this time though — let's talk about the next decade.

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Fund manager Damien Klassen

Image source: Nucleus Wealth

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If you're a regular reader of The Motley Fool you might be sick of hearing the instruction "buy then hold for the long term".

But boring you to death with repetition doesn't make it any less true — especially in volatile times like these.

So you might be surprised that many fund managers and investment advisors like to make short-term predictions much more than long-term forecasts.

That's because they are measured on their performance on a monthly, quarterly, and yearly basis. They can't afford to be patient — otherwise they'll lose customers!

However, one prominent member of the industry recently stuck his neck out.

Nucleus Wealth chief investment officer Damien Klassen this month examined what could happen in the years beyond the current economic downturn.

He then extrapolated those trends into specifically what type of ASX shares investors should buy now to reap massive gains in those years.

Back to the future 

So what will the world look like after the current down cycle?

Klassen, writing on the Nucleus blog, reckons the major deciding factor will be government responses to the coming global recession, downturn, or credit crunch.

"If there are significant direct fiscal interventions, as we saw during the pandemic, then inflation might return."

But the chances are, according to Klassen, the 2020s will end up "a replay of the 2010s" with low inflation.

"High levels of inequality mean not much demand — the rich save extra income," he said. 

"Central banks cut interest rates, hoping already leveraged consumers could take out even greater loans. Productivity gains don't end up in wages."

Unfortunately, Klassen forecasts that inequality is set to "stay for a while". 

"In Australia, a left-wing government is increasing tax on low and middle-income earners while cutting the tax paid by the top brackets. It is similar globally. There are no signs of any broad backlash."

Regardless of the macroeconomics, Klassen reckons there will be a major "game changer" for ASX companies in the next decade.

"The biggest potential positive for earnings is coming through artificial intelligence breakthroughs," he said.

"The sudden introduction of artificial intelligence to hundreds of millions of people is bound to have significant productivity gains."

Whether this is seen as a positive or a negative revolution is somewhat subjective.

"The difference vs the 2010s, for an investor, is that this time it is the service industries that look like they will benefit the most from the productivity gains," said Klassen.

"Or lose the most from job losses, depending on how you want to frame it."

Not value, not growth, but…

So what does all this mean in selecting ASX shares to buy right now?

Keeping in mind that Klassen is referring to long-term prospects, he advised staying away from value stocks.

"They tend to be the stocks with the least pricing power. Productivity gains will be competed away for most value stocks."

But that doesn't mean it's a wholesale flight to growth either.

"It will be hit-and-miss with this group due to changing business models," he said.

"But, given we are talking about stocks to buy as economies recover from the recession, it will be worth having some growth in your sights for at least the initial stages of the recovery."

The common denominator for the stocks Klassen would pick up are that they all represent quality businesses.

"These are the stocks with pricing power, higher margins and better returns on equity."

There are definitely businesses he would avoid at all costs.

"I would be careful buying intermediaries or wholesalers," he said.

"The internet has spent the last 20 years trying to disintermediate these companies. Any surviving companies should be worried that improved access to artificial intelligence will finish the job."

As for sectors, there are a bunch that will benefit from paying for fewer humans in return for the same production: information technology, media, legal, transport, healthcare, and finance.

"Advertising and [copywriting] will have their staff numbers halve for the same output. Media creation will become cheaper and easier," said Klassen.

"Finance will continue to see job losses in customer service roles. In corporate finance, stock broking and funds management, the rainmakers will be more productive and need less support staff."

Klassen reminded, though, that there is still plenty of volatility to swim through before these long-term predictions will hit the mark.

"We have a credit crunch to navigate first," he said.

"But we can clearly see where the next wave of productivity enhancements comes from. And they will likely underpin reasonably significant earnings growth after the credit crunch."

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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