Thematic thinking

07 August 2020

8 minute read

By Damian Payiatakis, London UK, Head of Impact Investing

Identifying the structural trends transforming society and the global economy, and investing in these themes early, is key to positioning portfolios for long-term growth. We highlight four themes that seem to offer compelling opportunities in the coming decades and should be considered.

Some speculative investment opportunities have very short time horizons. Other options may be delivered in a few years. But, most investors want to protect and grow their wealth over decades, or even generations.

As events change, so do expectations for the asset classes, sectors and companies that investors might consider when building their portfolios. While the future is unknown, understanding long-term trends likely to shape the world can help investors see beyond periods of uncertainty and build more diversified, resilient portfolios.

In See beyond: thematic investing we introduce four trends that are expected to fundamentally alter our society in coming decades.

Globalisation reversion

Globalisation is not a new phenomenon and the past 30 years has seen a level of interconnection never seen in the world before. However, more populist, nationalistic tendencies in some of the largest economies, allied with more protectionist policies by some, threaten to reverse globalisation, making the world less interconnected and geopolitical tensions more likely.

The pandemic seems to have exacerbated the situation. With ongoing economic disruption, rising inequality in society and various anti-globalisation movements including trade wars, tension between the west and China plus Brexit in Europe, globalisation appears to have entered a critical phase.

Globalisation is receding and some changes (such as reorganised supply chains and increased intellectual property protection) might take place across countries and industries fairly quickly. That said, a complete reversal of the model created in the last three decades looks highly unlikely. Especially as reversion is likely to create its own challenges that cannot all be overcome and globalisation offers companies and investors opportunities that should not be ignored.

Investing for a sustainable world

Urgent, global challenges in the area of sustainability offer investors access to some of the largest and fastest growing sectors of the economy. Across a range of three environmental and three social themes, we see opportunities to deploy capital while helping attempts to solve global challenges:

  1. Climate change and energy needs
  2. Reducing environmental footprints
  3. Conserving biodiversity and ecological systems
  4. Improving growth and employment
  5. Improving health and well-being
  6. Promoting equity, justice and community

Notably, these themes align with the UN’s Sustainable Development Goals (SDGs) which committed 193 countries to social, environmental and economic targets for global development around seventeen shared goals. The SDGs aim to promote prosperity while protecting the planet.

Investors should be looking for companies whose goods and services are directly addressing one or more of these SDGs. The intention should be to invest to help find solutions, not simply avoid detriment.

Those that invest in the right solutions to these long-term trends may find attractive opportunities that may also provide the satisfaction of making a positive difference to our world.

Smart everything

In the next decade, we see an acceleration of technological investment almost everywhere in the world. The combination of artificial intelligence, 5G and the internet of things will fundamentally change the way we live, leading to a data-driven, “smart society”.

The opportunities emerging from digital disruption and the shift to a “smarter world” are countless. Efficient processes that bring comfort and connectivity (such as 5G, smart cities and smart transport) at an increased speed might provide the first incentives to investors who consider investing around this theme.

However, the flipside concerns regarding data governance and privacy could either create opportunities (cybersecurity and data centres) or additional risk (data privacy and digital ethics) to different business models and their investments.

A smarter world may not only be more efficient and frugal, but also sustainable in the sense of utilising its “smart ways” to drive positive change and tackle wider problems in the world.

Demographic shifts

Investors who are seeking to benefit from long-term trends, should consider the maxim that “demography is destiny”.

We see demographic shifts as both population changes and overarching societal trends, influenced by political, cultural and economic factors. These entail demographic change (for instance, aging populations, inter-generational changes and population growth in emerging markets) and contemporary societal issues such as women’s empowerment, diversity and social equity.

We see trends relating to demographics in particular being key source of disruption given their relative predictability compared to those with more exposure to economic shifts and political fragmentation. The changing demographics across age, geography and gender, the world is likely to change the world considerably and in many ways.

Investors can find opportunities in understanding how demographic shifts may change the nature of how we work, live and age as well as how power and wealth might shift between groups.

From vision to action

For many investors, thematic ideas complement their core portfolio as “satellite” investments

The four themes we’ve presented are powerful, transformative forces that are likely to create market trends and opportunities for investors’ portfolios over decades. For many investors, thematic ideas complement their core portfolio as “satellite” investments. These satellites can be through public markets or private opportunities. Concentrating on a single theme can help gain greater knowledge of the sector over time, though may increase some cyclical risks.

Alternatively, some investors seek to build their core strategy with one made of several thematic allocations. Investors need to have strong convictions about the themes and a long-term time horizon that may be needed. They will also likely benefit from support in selection and portfolio construction to avoid unintended biases. Finally, some investors, particularly with family businesses, can use thematics as a complementary, risk diversification or strategic investment. Here investors thinking can be akin to a corporate venture capital arm seeking to leverage existing business strengths and weaknesses in line with market opportunities.

In the end, these structural changes will shape the trajectory of the global economy, and so influence investors’ portfolios and returns too. So even if not investing thematically, it’s useful to understand the trends that others may be watching. It is not necessary to invest in every new theme. However, investors should be able to find exciting opportunities to match their long-term ambitions for their portfolios.


Market Perspectives August 2020

Financial markets remain fixated on pandemic risks, and hopes of a COVID-19 vaccine, as spikes in infections occur in regions of leading economies.

Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.

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