In 2020, the virus acted as a powerful catalyst for some key themes selected a year ago, such as disruptive innovation, the digitalisation of consumption, and technological innovations in the health care sector. Our environment-related themes also benefited from sustainable investing. On balance, we are optimistic that 2021 will be a year of robust economic recovery, underpinned by historically-low short- and long-term interest rates. This should be a propitious environment for equities, credit, commodities and real estate, in particular. Our 10 investment themes for 2021 mainly focus on tactical and structural themes geared to equity markets.
Theme 1: Vaccines, recovery and reflation
2021 vs. 2020 will likely be the year of Recovery vs. Recession, Vaccine vs. Virus, Reopening vs. Shutdowns, Reflation (moderate) vs. Deflation, and Dollar Weakness vs. Strength. Monetary policy will remain easy and fiscal policy accommodative. Early cycle investing means balancing portfolio allocations: Non-US equities vs. US equities, Small-/mid-cap equities vs. Purely large caps, Cyclical vs. Growth shares, Non-Dollar currencies vs. the US dollar (for USD investors). Base metals, Precious metals, Inflation-linked bonds, Infrastructure and Real estate stand to profit from this new economic cycle.
Theme 2: Low volatility absolute return: facing the challenge of a negative-yield world
In a world of the ongoing financial repression, dominated by zero yields on cash and negative yields on more and more sovereign bonds, investors continue to grapple with the challenge of finding positive-yielding, low-risk solutions.
For clients unwilling to move further up the risk curve, we believe that an attractive way to diversify non-yielding cash is to invest in low-volatility, positive-yielding alternative investments.
We propose three classes of low-volatility, positive-yielding investment solutions:
- Alternative UCITS funds with a focus on Global Macro, Long/Short Equity, Event-Driven and Relative Value strategies
- Absolute return bond funds
- Structured products
Theme 3: Sniffing out yield truffles
Bond yields have been falling steadily for the past 40 years. With low (or negative) rates in developed markets, yield-hungry investors need to move away from traditional government bonds.
This theme is aimed at defensive investors seeking yield. We recommend a minimum investment of 12 months in fixed-income solutions, infrastructure funds and real estate.
Theme 4: Constructing a new diversified portfolio for a changing world
Traditionally, the optimal portfolio is composed of 60% equities and 40% bonds. However, bond yields are now so low that they are increasingly losing their role as an offset when equity markets fall. It is therefore necessary to add one or more other asset classes to this traditional mix in order to increase the expected return without raising the level of risk.
This theme is aimed at investors with a defensive or even moderate risk profile wishing to build up a portfolio, or adjust an existing portfolio, in order to adapt it to the current market environment of low interest rates.
The proposed diversifiers have little or no correlation to equity markets on a historical basis. However, they can be volatile and therefore require an investment horizon beyond 12 months.
Theme 5: Enter the dragon: China’s opening of capital markets and economic reform
Beijing’s five-year plan focuses on domestic demand, as well as the opening up the domestic system and RMB internationalisation. China’s priority in technology innovation and self-sufficiency benefits domestic tech companies. The lifting of restrictions in domestic financial markets, plus the inclusion of China A-Shares and onshore bonds in major global indices are increasingly opening up China’s onshore financial assets to foreign investors.
Our recommendations:
- Basket of Chinese technology stocks, Chinese technology funds/ETFs.
- Basket of A-Shares, A-Shares funds/ETFs.
- China’s onshore bond ETFs.
- China’s bond/balanced funds that include tech stocks, A-Shares and/or onshore bonds.
Theme 6: New consumption habits in a post-lockdown world
The new breed of younger consumers purchase differently today: they like to shop and spend time online. In addition, they are often more interested in having an experience than owning a tangible good. This phenomenon is also serving the sharing economy.
Due to the Covid-19 crisis, a new ‘home-based’ consumption trend has accelerated towards more e-commerce, cocooning, do-it-yourself (DIY), gardening, healthy living, the care of animals and so on. There is significant pent-up demand, as households were not able to spend as per normal during lockdown. This very demand is about to be unleashed and vaccines could be a potent catalyst.
This equity theme is targeted at dynamic investors who want to profit from new global consumption habits. This theme can be played with individual stocks, many of which are large caps and thus very liquid. On the other hand, some of these new habits are still in their infancy and will thus require diversification and/or more time to reach full potential. Therefore, funds, trackers and structured products represent other investment solutions for gaining exposure to this theme.
Finally, various new trends in streaming, music, gaming, online shopping, and e-payments are more mature and profitable in Asia, and promise greater potential than in the West. Above all, we recommend global diversification.
Theme 7: Shifting generational influences: how demographic trends are improving the quality of life
The developed world is on the cusp of surging demand for housing, driven by a combination of demographic trends including an oversized Millennial cohort in the US that is now entering prime house-buying age. Ageing populations worldwide and the disproportionate health care costs in the later years of life are trends that are driving a desperate need for health care systems to extend healthy life years, while controlling costs. Preventative lifestyle and health care measures offer long-term structural growth opportunities for urgently addressing this public policy issue.
Structurally growing demand for housing in the US, Europe and Asia favours:
- US and European homebuilding stocks
- Building materials and DIY retailing stocks
- Demand for copper and lumber raw commodities
- Residential housing-focused REITs
Improvement in healthy lifespans drives demand in:
- Pharmaceutical/biotech companies focused on oncology and Alzheimer’s/dementia treatments
- Global medical device stocks
- Home fitness equipment and fitness trackers
- ‘Nutraceuticals’ – food and beverage companies operating in health-enhanced nutrition
Theme 8: Enablers of smart technologies
Humanity is reaching an important new stage of development: the knowledge economy is increasingly at the core of our activities. To enable innovation, a number of disruptive technologies, such as 5G and Artificial Intelligence, are required and being rolled out.
In turn, these technologies are spurring demand growth in semiconductors, infrastructure, storage and cybersecurity, enabling Big Data processing and consumer profiling.
This is a global equity theme.It is a core long-term holding intended to figure prominently among other investments in megatrends.This theme is still in its infancy and will take several years before it reaches a certain degree of maturity. Sales and earnings growth rates will be impressive in the foreseeable future.
Theme 9: The energy transition and the ‘green deal‘: long-term opportunities
There is a growing awareness that human society and the global economy are both closely related to the ecosystem, CO2 emissions and energy sources.
The energy transition is about structural shifts from centralised, fossil fuel-based production that did not have to pay for negative externalities, towards a clean/renewable and decentralised energy model.
We see huge demand for products and services in this area driven by innovations, government policies, CO2 targets and changing consumer and investor preferences towards sustainability.
We focus on two sub-themes:
- Technological innovation and equipment in solar, wind, geothermal energy, hydroelectricity and fuel cells (hydrogen)
- Energy storage, power and grid equipment makers, batteries and related chemicals/materials
We will focus our attention on equities of companies that are key players in these areas by also using actively-managed funds or thematic ETFs.
Theme 10: Strong governance as an aid to low-risk outperformance: investing in trust and profitability
Recent examples of corporate fraud have highlighted the importance to investors of the Governance criteria in ESG, in terms of reducing risk when investing in equities.
Since 2015, European companies with a strong track record of Corporate Governance (relating to transparency and shareholder rights) have collectively outperformed the STOXX Europe Index consistently, particularly when allied to an above-average level of profitability.
We believe that investors wishing to invest in companies with excellent ESG credentials should focus on companies with strong Governance, since this aspect of ESG is often neglected in favour of the more visible Environmental and Social criteria.
Marrying strong corporate governance with high profitability is an attractive long-term defensive equity strategy and a good alternative to sovereign and corporate bonds. Prospective returns from stocks with a combination of strong Governance and high profitability remain very attractive when compared with sovereign bond yields that are frequently negative, and with corporate bond yields that are currently as low as 0.5% for Euro BBB credit.
While equity exposure to companies with strong corporate governance and high profitability is our preference, this theme also applies to corporate bonds, as over time, stronger governance should be reflected in improved credit ratings.
