Our thematic investing approach involves gaining exposure to companies and themes that benefit from major global trends over the long term. This means gaining exposure to the drivers of megatrends, such as demographics, energy transition or geopolitics. Investments, therefore, could be in areas where there are big shifts due to evolving technologies or changing demand patterns.
The financial markets focus mostly on short-term trends – what will central bankers say next week, what will the inflation print be next month, or what will the next quarterly earnings season mean for markets? Using our thematic investing approach, we zoom out from short-term news flow and focus on the bigger trends in the world in order to form investment frameworks on a medium-to-long-term time horizon. In this research update, we present our latest thematic outlook for the next 3 years.
Eyes on the future…
We believe innovation is likely to continue apace in the long term. Our thematic investing approach prefers so-called “S-curve” themes. This is where technologies and business models are already established but may still be a long way from widespread adoption, growth and value creation, for example cloud computing. Most companies involved in S-curve themes are able to invest in innovation to build better products, services and stronger ecosystems.
…but mindful of the present
However, after almost 15 years of exceptionally low interest rates, the economic backdrop has changed materially since 2022 due to higher inflation, post-COVID shifts and the war in Ukraine. We are now in a phase of higher cost of capital, many unprofitable themes and rise of risks like geopolitics, de-globalisation and demographic challenges.
While thematic investors ought to consider exposure to technologies of the future, it’s important not to lose sight of the fundamentals. In the near term, we believe there should also be a strong focus on companies with strength in time-honoured metrics (such as a robust balance sheet) and better resilience in the face of challenging economic backdrops. The recent stress in the US banking sector, due to the collapse of Silicon Valley Bank, is a reminder of the risks that companies with weaker fundamentals face when conditions deteriorate.
After a major expansion in the money supply post-pandemic and a strong rebound in 2021, we have been in a less exuberant global backdrop since 2022. While China is already picking up, much of the rest of the world could be in a “reset” year during 2023 as economies, companies and consumers adjust to volatile markets, less buoyant economic conditions and changing spending patterns. Thereafter, the possibility of a mild and less tentative recovery in 2024 emerges. By 2025, we could reach a new normal where, while some pressures remain due to persistent global issues, innovations and a new long-term cycle point to a rosier outlook. We believe three aspects will drive this journey in financial markets, some of which are already in motion:
Understanding the topics that may become key discussion points by 2025 is important, irrespective of current macro events. These topics are likely to influence the path to 2025 and beyond, presenting both opportunities and risks for the long term:
Careful analysis with eyes on future
From an era of “disruptive innovation” where most innovation themes performed well, we believe we are now in a position where the market is likely to also care about the fundamentals. We assess companies within the major themes and megatrends by looking at their quantitative and qualitative aspects. We prefer those themes and megatrends with higher quality companies, where the risks from balance sheets, high expectations or high valuations are less pronounced. Most companies within themes have exposure to future technologies, so by gravitating towards higher quality themes, investors can get exposure to long-term growth and trends while limiting risks.
Our preferred themes
Amid market uncertainties, our preferred themes seek to strike a balance between growth and defensive qualities. Overall, we still see some residual risks to 2023 revenue forecasts of thematic companies but the correction in equity markets and earnings resets since 2022 start to offer some select opportunities for the long term.
WATER & WASTE
ROBOTICS & AUTOMATION
We avoid themes that have high proportion of unprofitable companies, long lead times for innovation or market scaling and saturation emerging in their markets. These themes tend to have more exposure to a weakening consumer and higher risk from early-stage innovations.
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