INSIGHTS BLOG

INVESTING FOR A CHANGING WORLD

Roy Davidson, 25 September 2019

The world is rapidly changing with new technologies, ageing populations and changing consumer behaviours creating opportunities for new companies, and forcing existing companies to rapidly reinvent themselves.

What is thematic investing?

Thematic investing has gained in prominence in recent times, with investors looking to benefit by getting ahead of the large social, environmental or economic changes shaping the world.

Thematic investing typically refers to a ‘top-down’ approach, where an investor identifies an overarching driver, or theme and attempts to gain access to this via investments in individual companies or funds. This is the opposite of a ‘bottom-up’ approach which begins with an individual company’s competitive position and prospects, and goes from there.

At the end of the day, identifying a theme is only half the job, and both approaches have to be used to identify a quality company with a sustainable competitive advantage and an attractive outlook.

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So, what are some of the themes shaping the current investment landscape? Below we identify five key themes for investors to consider:

The ageing population

In most developed economies, the population is getting older as the baby boomer generation ages and life expectancy improves. According to the United Nations, by 2050, the global population of those aged above 65 years will be more than double what it is today. As the population ages, demand for services provided by the healthcare sector, for example, will continue to rapidly increase.

Cloud computing

Cloud computing entails outsourcing on premise data storage and management, lowering costs, and improving security and flexibility. This is not a new trend, but the move to the cloud is still in its early days. Ways to access this theme range from the large providers of cloud computing to technology companies offering a cloud-led ‘software-as-a-service business’ product.

Digital payments

While by no means new, especially in New Zealand, payments will continue to shift away from cash towards digital means. This remains a competitive space with a large number of companies competing to offer ever more convenient methods of digital payments.

Sustainability

Consumers are increasingly demanding more sustainable solutions, be it recyclable packaging solutions or more environmentally friendly forms of transport. Those that can adapt to these changing consumer preferences will survive and prosper, while those that can’t will see their market positions continuously eroded.

The rising Asian middle class

The rise of Asia, in particular China, in recent decades has been nothing short of stunning. With higher levels of prosperity, Asian consumers have increasingly demanded goods from offshore, including New Zealand’s ‘clean green’ food products, though accessing these markets hasn’t been without its risks.

Beware of fads

Sometimes, it is all too easy to confuse an investment theme with a fad. A fad could be described as a craze where expectations become far-removed from reality. Examples could include cryptocurrencies like bitcoin, or marijuana stocks.

While there may be a large future market here, if shares in companies that currently have no revenues to speak of are being driven by pure speculation, you’re reading about it in all the newspapers, or your friend you haven’t seen since high school has got rich quick on the back of it, it might just be a fad.

While hindsight is 20/20, as a general rule, it pays to avoid these fads and always invest in companies with proven business models, sustainable competitive advantages, and that operate in an industry you understand.

Quality defensives still have their place

With all of this in mind, quality companies that operate in a lower growth sector, but with resilient demand, still have a place. Often these companies are referred to as ‘defensives’ and can provide good portfolio balance to withstand periods of market weakness.

An example is the consumer staples sector, which produces products that people rely on in their day-to-day lives. This might include food, shampoo, cleaning products and so forth. Should economic conditions worsen, demand for these products should hold up and investors will flock from higher risk companies into the relative safety of defensives. These companies often have very high value brands, and strong market positions which enable the payout of a healthy dividend.

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