Gen Z income is expected to surpass that of millennials by 2031, according to a Bank of America report.
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With Generation Z (Gen Z) expected to dramatically accelerate or change consumer trends, experts weigh in on how this cohort can best invest as it comes of age.
A recent Bank of America report said that Gen Z, those it defined as being born between 1996 and 2016, would be the "most disruptive generation ever."
They are now entering the workforce for the first time, and BofA said their income would surpass that of millennials' by 2031, with "The Great Wealth Transfer," from older cohorts only adding to their consumer power.
In a recent podcast by management consultancy McKinsey & Company on how this generation is changing the future of shopping, Bo Finneman, a partner at the firm, said that as a population Gen Z would reach scale in the next 10-15 years.
However, he added that "we're really looking at them as the core influencers today that have a really big impact on both millennials and Gen-Xers in terms of what they buy."
So how can you identify and invest in the consumer trends being shaped by Gen Z?
Look at stock indexes
One of the most straightforward ways to gauge consumer trends is to look at what makes up stock market indexes, Carsten Menke, head of next generation research at private bank Julius Baer, told CNBC over the phone.
"In the end, the composition of an equity index like the S&P 500 is a mirror image of how consumers spend their money," he explained.
Part of the reason the so-called "FAANG" stocks — Facebook, Amazon, Apple, Netflix and Google (Alphabet) — have grown so much, Menke said, was because people are spending more on areas like "cloud computing, services like AI, like video streaming etc."
Over half of the 9,800 U.S. teens polled in a biannual survey by investment bank Piper Sandler, released in October, said Amazon was their favorite e-commerce website. More than four-fifths owned an iPhone and 89% expected an iPhone to be their next phone, which Piper Sandler said were all-time highs in the 20-year history of its survey.
Technology
Many professional investors have warned about the rising share prices of big technology companies, comparing their increasing valuations to the dotcom bubble in 2000, suggesting they can only climb so much higher.
However, Peter Garnry, head of equity strategy at Saxo Bank, suggested that this growth could still continue for some time given that younger investors were not actually looking at the valuations of those stocks but instead buying companies based on "narratives, stories and themes."
Video gaming is another sector well-placed to benefit from Gen Z's increasing consumer buying power, with the BofA report pointing out that they represent 90% of the industry's users.
Adam Vettese, analyst at investment platform eToro, told CNBC over email that Activision Blizzard is a stock to watch in this sector. It is the maker of the Call of Duty and Crash Bandicoot franchises, among others. Its third-quarter results saw customer numbers increase 23% year-on-year, "suggesting solid long-term growth potential."
Sustainability
The role of sustainability in shaping younger generations' consumer behavior, and how that drives the growth or demise of certain companies, is a well-established investment theme. BofA's report highlighted some areas that are seeing notable shifts.
This included the consumption of meat, with the report citing a Euromonitor finding that Gen Z is the first cohort where the majority of people adhere to some kind of meat restriction.
Indeed, more and more companies producing plant-based or lab-grown meat alternatives have emerged and gained more traction over the past few years. Only earlier this month did regulators in Singapore approve Eat Just's cell-cultured chicken, becoming the first country in the world to give the green light to selling lab-grown meat.
Menke pointed out Beyond Meat is currently the only company purely operating in this space that is available to invest in on the stock market.
But he believed more of these companies would be listed on the stock market in 10 years from now. He also told CNBC over the phone that general food producers like Nestle and Danone, which are already listed, would need to transform their businesses accordingly.
These key food companies have already been developing their plant-based brands, with Danone even setting the goal of having its plant-based sales worldwide reach 5 billion euros ($6.1 billion) by 2025. Similarly, consumer goods giant Unilever recently said it is aiming to have 1 billion euros of its global annual sales come from plant-based meat and dairy alternatives by 2027.
Menke said that for these companies it is "crucial to understand how the consumption behaviors of the consumers are changing in order not to be left behind."
Likewise, Menke said companies in the mobility sector offering more sustainable solutions should see increased demand and growth from Gen Z.
This applied to companies producing electric vehicles and also businesses like Uber and Lyft, which provide mobility services, he said.
Bank of America's research showed that just 31% of 18-34 year-olds were considering buying a car in the next year, while also citing Euromonitor data showing that households including people aged 15-29 claimed to own the most electric vehicles of any age group.
Investing by country
The ageing population of developed markets versus the growing younger population of emerging markets has been talked about for some time now.
The BofA report highlighted nine in 10 Gen-Zers live in emerging markets, with India standing out as the prominent Gen Z country. Meanwhile, Europe is the first continent to reach "peak youth," with more people aged over 65 than under 15 years old, a milestone the U.S. is expected to reach in 2022.
While it might be tempting to invest in countries according to these demographic changes, Saxo Bank's Peter Garnry told CNBC via telephone that it's not as simple as that.
Globalization has made the markets of different countries much more synchronized, so "a lot of the largest companies in every single equity index are multinational by definition," said Garnry. In some emerging countries, he said investors might also still find it difficult to access that stock market or encounter trouble with corporate governance.
Garnry also pointed out that some companies listed in developed countries will offer access to emerging markets. For instance, he said that Jumia Technologies is a company based in Berlin, Germany, listed in the U.S. but delivers e-commerce services to Africa.
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