- Head of Multi-Asset Strategy – EMEA
- About Us
- My Account
The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
This is an excerpt from our 2023 Mid-year Investment Outlook, in which specialists from across our investment platform share insights on the economic and market forces that we expect to influence portfolios in the second half of the year. This is a chapter in the Investment Strategy Outlook section.
What do electric vehicles, student loan providers and cybersecurity companies have in common? Not much, on the face of it. However, they could each be considered thematic investments: companies that stand to benefit from long-term structural forces shaping the world, such as climate change, population growth or digitalisation.
Investing in these powerful trends could be a compelling prospect for investors looking to build wealth over the long term, especially against the current macroeconomic backdrop of greater volatility, higher inflation and more frequent economic cycles.
Today’s new and fast-changing macroeconomic regime will likely see investors face shorter and more pronounced cycles, as well as greater idiosyncratic risk. Yet disruptive trends with structural tailwinds can help investors turn change into an advantage. We think the characteristics of the current environment create a persuasive case for a thematic approach:
For a more cyclical world — An investor’s ability to time the cycle has historically been an important facet of investment success. In an era of more frequent and less predictable cycles, market timing may become more challenging. Thematic investments, which are driven by structural change rather than strong economic growth, could offer a way to reduce the importance of the cycle. This is supported by our research comparing the cyclicality of global equity sectors and global equity themes (Figure 1). Thematic allocations could also help increase diversification given how much cyclical exposure is typically found in a portfolio.
For a higher-inflation world — Thematic allocations may also help with other portfolio construction goals such as inflation mitigation — a goal that is likely to be of increasing interest to investors against a backdrop of structurally higher inflation. For example, climate change is likely to be a key structural driver of inflation; an allocation to thematic climate-change-related investments may help to mitigate its impact on a portfolio while also helping to meet sustainability objectives.
For a changing world — Traditional market-cap equity benchmarks are, by definition, backward-looking, with the weight of each company in the index determined by its historical performance. The inherent forward-looking nature of thematic investments allows greater exposure to structural change and future growth. This may be particularly relevant in emerging markets, where benchmarks often do not capture fast-moving economic growth. A thematic approach may lead investors to tomorrow’s beta, rather than yesterday’s winners.
For a less predictable world — Thematic investments may allow allocators to exploit perspectives that other investors either tend to ignore or are not able to focus on because of, for example, prescriptive sector and style classifications. A larger proportion of the risk taken by thematic managers relative to non-thematic managers is driven by idiosyncratic factors rather than sector and style. This can help thematic managers avoid investment blind spots.
For a better world — Thematic investors think about the world differently, choosing to look beyond traditional metrics of economic progress, such as GDP growth, and instead take a more holistic view, focusing on how economies are progressing towards a more inclusive and innovative future. Such a view reorientates investments away from sectors that are typically the beneficiaries of early economic progress — such as energy and banks — and towards the enablers of structural economic development — such as renewable energy and microfinancing companies. We have identified 15 global themes today that we believe are aligned with this investment opportunity.
Examining the investment universe with a thematic lens can generate some exciting potential investment opportunities. Here, we highlight three themes that we think offer potentially attractive entry points for longer-term-focused portfolios:
The transportation sector is being turned on its head by two major trends: the rise of electric vehicles (EVs) and the growth in vehicle technology. We expect this theme to play out for some time, likely driven by the need to decarbonise transport systems and the favourable total cost of ownership for EVs relative to internal combustion engine vehicles.
Key potential beneficiaries: EV manufacturers, companies throughout the battery supply chain, providers of semiconductors and hardware for connectivity and autonomous driving technology.
We believe education will see a decade of spending and growth unmatched by any since the post-World War II boom. Population growth will drive demand for education, especially in the developing world, where take-up of tertiary education has historically been low relative to the developed world. Meanwhile, the way we work is changing. Technological advances are creating an imperative for employees to upskill. Automation will render some job functions unnecessary, and affected employees will need to retrain entirely. The education industry itself is experiencing rapid change, with the rise of online learning broadening access to education and creating opportunities for disruptive companies.
Key potential beneficiaries: providers of tertiary education, such as universities, as well as companies that support students, such as student loan companies and housing providers; companies fulfilling the need for workforce reskilling or upskilling.
A new era in enterprise intelligence, with cloud-backed artificial intelligence (AI), is set to transform the way enterprises operate. Large-scale migration to the cloud is laying the groundwork for companies to exploit AI and machine learning, as access to large datasets helps the development of sophisticated AI programmes. Rising wages and skilled worker shortages will accelerate the adoption of AI, as companies seek to reduce labour costs and increase productivity. However, increased digitalisation will mean that companies will need to invest heavily in cybersecurity to avoid reputational and financial risk.
Key potential beneficiaries: a variety of companies within the software sector, including providers of cloud-based and AI software solutions, companies that are enabling advancements in AI and providers of cybersecurity software.
A thematic approach may offer the potential for above-average returns that cannot easily be explained by traditional country, sector or style factors. However, as with any investment theme, implementing this approach requires deep research and expertise in not only identifying the right long-term trends but also finding companies that are well positioned and poised to benefit from them. Themes take time to play out, so investors should be prepared to assess performance over a longer time frame, as well as understand associated risks, such as regulatory change and ESG considerations. However, we believe that there is a significant opportunity within thematic investments for long-term-oriented investors looking to build wealth over the long term against a backdrop of increased volatility.
To read more of our research around thematic investing and our framework for sizing and assessing allocations, access our white paper. You can also read more about each of the three themes we highlighted: transportation, education and enterprise intelligence
Trends and transformation: Ideas for the year ahead
Explore our latest views on risks and opportunities across the global capital markets as we look ahead to the second half of 2023.
The intersection of geopolitics and deglobalization
The geopolitical landscape is likely to remain complex and unpredictable throughout 2024. What are the key risks to watch out for and what are the implications for investors?
Commodities: Top ideas and evolving opportunities
To help clients plan for the coming year, our commodities experts share their top near-term, medium-term, and long-term investment ideas.
The US economy in 2024: A tale of transition
Our US macro expert sees changes in consumer and investment spending in the coming year, and highlights what she'll be watching for in terms of policy, politics, and profit margins.
How geopolitics and the energy transition may reshape global trade
We explore the potential near- and longer-term market effects of deteriorating US/China relations, coupled with the shift toward a low-carbon economy.
2024: a year of intensifying macro regime change?
John Butler and Eoin O’Callaghan explore why 2024 could be a year of intensifying macro regime change and what it means for investors.
Global Economic Outlook
Our macro strategists continue to expect that the interlinkages between countries, central bank policies, and market pricing will change, creating potentially attractive opportunities for active portfolio management and security selection.
Economic and market forecast in six charts
This visual summary of Wellington Management’s 2023 Outlook captures insights on economic and market forces shaping investment results from specialists from across our investment platform.
Multi-Asset Outlook: A recession is looming…or is it?
The economy has largely shrugged off the banking crisis and other concerns this year, while riding positive sentiment driven by AI enthusiasm and a possible soft landing. Members of our Investment Strategy team offer their macro and market outlook for the second half of the year, including their latest views on equities, bonds, and commodities.
How to weather the storm: A roadmap for more resilient portfolios
As we face a new era of elevated market and cycle volatility, Co-Head of Investment Strategy Natasha Brook-Walters assesses how asset owners can ensure that their portfolios are up for the challenge.
2023 Mid-year Investment Strategy Outlook
To help think through the asset allocation outlook and implications for 2023, we offer views from iStrat, our investment strategy and solutions group