By Samrat Khosla & Vinay Joseph
The pandemic has driven an acceleration of a wide variety of investment trends. Investors are also responding to these shifts by allocating greater capital into thematic investments. At the start out of 2021, we enlisted six broad investment themes (cyclical and structural) that we believed could capture the underlying acceleration.
Cyclical Themes
Cyclical themes are influenced by alterations in the business enterprise cycle such as the outlook for financial and earnings development, valuation and interest prices alterations. Cyclical themes have a shorter time horizon of 12-18 months. The 3 cyclical themes are:
Rotation into worth-style equities: The rotation into worth-style equities from development-style equities is most likely to sustain as the drivers for outperformance stay in location provided, i) A reflationary atmosphere (recovering development, increasing inflation and increasing nominal bond yields) supports worth-style equities, (ii) A far better danger-reward as overall performance and valuation divergence with development-style equities is nonetheless huge and (iii) A favourable sector tilt provided dominance of cyclical sectors in worth indices amid light investor positioning.
Race for revenue amongst bond investors: Our view of a modest rise in nominal bond yields amid a benign policy atmosphere is most likely to drive a search for yield amongst bond investors, supporting an outperformance of higher-yield corporate bonds (AA/A). Further, an enhancing credit cycle, a most likely reduction in credit default danger and appealing valuations for AA/A corporate bonds compared to AAA corporate bonds are essential supports.
USD to depreciate: The US Dollar downtrend is most likely to obtain momentum, minimizing the US exceptionalism narrative. A weak USD is typically excellent for broad-based investment returns specifically for non-US assets like Europe and emerging markets.
Structural Themes
Structural themes intend to have a multi-year investment horizon and are influenced by structural trends, such as demographic shifts, public policies, regulation. The 3 structural themes are:
In the world of “yield-free” danger: Decadal low bond yields have lowered bond’s capability to act as a buffer against sharp equity drawdowns. Further, equity valuations are substantially greater compared to previous cycles, most likely resulting in reduce lengthy-term returns. To counter this, investors would have to have to raise exposure to revolutionary sources of returns (greater exposure to equities), revenue (bigger allocation to reduce good quality bonds or longer maturity bonds) and diversification (raise exposure to alternate assets).
Disruptive innovation: We count on adoption of current technological breakthroughs to accelerate development in 5 sectors—fintech, e-gaming, electric autos, 5G/IoT and healthcare technologies.
Climate investing: The worldwide acceleration toward “net-zero”, elevated corporate disclosures and person interest in climate-associated dangers and higher investment and portfolio flows into climate-associated locations are essential drivers for the overall performance of climate investments. We see possibilities in the option/clean power transition space, and water scarcity and circular economy plays.
A essential query is how greatest to incorporate thematic investing in asset allocation?
Investors can use 3 approaches to thematic investing – complement current core investments with satellite thematic portfolios, substitute some current exposure with thematics and integrate thematics into one’s core allocation.
In our view, there is no single correct strategy towards thematic investing.
However, what ever an investor’s strategy, thematic investing advantages investors by capturing greater sources of development, as getting on the correct side of development and disruption is vital for lengthy-term returns. Other advantages of thematic investments include things like the possible for enhanced returns more than a complete business enterprise cycle, mitigating conventional business enterprise dynamics and also mitigating downside dangers more than multi-year time horizons. In our view, as equity returns moderate to a more sustainable pace and the business enterprise cycle matures, thematic investing can offer you investors a targeted strategy.
Khosla is MD & head and Joseph is chief investment strategist, Wealth Manage-ment, India, Standard Chartered Bank