PERSPECTIVE3-5 min to read

The world has changed – has the case for a strategic allocation to themes changed too?

As thematic investments continue to grow in popularity, we look at how they now fit into a strategic asset allocation amid the “3D Reset” that is reshaping the market landscape.

24/08/2023
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Authors

Lesley-Ann Morgan
Global Head of Pensions and Retirement
Joven Lee
Multi-asset Strategist

Thematic investments have tripled as a percentage of global equity fund assets over the past 10 years, now representing 2.9%, according to Morningstar. Instead of long-term low interest rates, we now have stubbornly higher inflation, accompanied by higher interest rates to combat it.

We believe the original themes of Demographics/ technological innovation and Decarbonisation will continue to persist. In addition, post-Covid, our research has identified a further ‘D’ to add to this list of themes – Deglobalisation.

Demographics

Aging demographics present a challenge to the economy. The working age population is set to shrink, reducing capacity for future growth. This will have an impact on companies’ profits, and to protect margins, companies will have to invest in technology to increase productivity. With a larger base of elderly people, a greater number of healthcare services providers and healthcare products will be needed to serve them.

Decarbonisation

Decarbonisation efforts are accelerating, with a greater number of companies increasing pledges to reduce carbon emissions. Investment in sectors such as clean energy and electrical vehicles have seen rapid growth in recent years, and will weigh on long-run demand on oil. In 2023, renewable sectors such as solar and electric vehicles are leading the push in clean energy investments

Deglobalisation

Deglobalisation has made allocations between regions more important than ever. In response to supply chain disruptions during Covid, many companies are planning on diversifying their production and bringing it back home (“reshoring”) or closer to home (“nearshoring”) to prevent geopolitical risks from impacting supply chains so severely again. 

We identified several criteria for a theme to be useful in longer-term investment, including structural in nature, durable/avoids fads, has a valuation upside, neither too narrow nor too broad.

The 3Ds are all structural in nature, are durable and avoid fads, there could be different angles to seize investment opportunities.

Demographics: The labour shortage is forecast to persist for years as the larger population of Baby Boomers retire, and as Millennials move past entry-level roles. This has resulted in a talent shortage due to a relatively smaller Gen-X and Gen-Z population. The healthcare sector is clearly defined in markets, and can consist of healthcare service providers, medicinal technology and even companies operating senior living facilities.

Decarbonisation: The path to net zero has been a key topic among investors in recent years. This theme is widely adopted across asset managers, with many launching new funds that invest in sectors such as clean energy, energy storage and sustainable infrastructure.

Deglobalisation: With a greater number of companies referencing reshoring or nearshoring in earning transcripts. However, this is a very long-term trend that will take years to unfold. Depending on each asset manager’s views, one may expect different regions or sectors to benefit from deglobalisation. For example, sectors that generate revenues domestically will stand to gain from this theme. Domestic-focused companies that are less reliant on global supply chains and trade flows may be less negatively impacted than companies that are.

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Authors

Lesley-Ann Morgan
Global Head of Pensions and Retirement
Joven Lee
Multi-asset Strategist

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