Global Asset Tracker: Banks bet big on thematics to capture future growth

Technological innovation and sustainability are among the supertrends private bank CIOs are targeting [note this article went to press before the Russian invasion of Ukraine]

The Covid-19 pandemic has accelerated several overarching trends transforming the way we live and work.

These multi-year forces contribute to shape the global economy and the companies within it, changing their earnings’ drivers. As a result, CIOs and market strategists at private banks are increasingly focused on anticipating and taking advantage of these changes, identifying today the structural winners of tomorrow.

Their goal is to come up with cross-sector investment themes that are relevant, able to capture future growth and resonate with clients, while also diversifying investment portfolios.

All the 52 private banks that took part in PWM’s Global Asset Tracker study use investment themes to guide clients’ asset allocation. Three quarters of them agree “thematic investing is a key area of focus when building client portfolios”.

Technological innovation, (including AI, robotics and 5G) and climate change are the most popular themes in client portfolios today and likely to remain so in the next one to three years (see Fig 11 in this story).

These and other themes feature in CIO’s investment outlooks under a range of different labels and combinations.

UBS likes the “ABCs of tech” – artificial intelligence, big data, and cyber security – and recommends investors take advantage of tech volatility, triggered by monetary policy tightening. “Higher interest rate projections have increased the opportunity cost of investing in stocks, but for high growth stocks, long-term earnings growth is more important than starting valuations or changes in interest rates,” says Mark Haefele, CIO of UBS GWM.  “We retain our conviction that the ABCs of tech should experience strong earnings growth over the next decade,” he says.

Julius Baer believes in the coming of age of cloud computing and AI. “While the cloud is coming of age, further progress in artificial intelligence and further growth in data suggest a bright future ahead for the theme,” says Yves Bonzon, CIO at Julius Baer.

“We regard artificial intelligence as a ‘general purpose’ technology, driving efficiency gains for a wide range of industries.”

The global supply chain is gradually becoming more local, because of geopolitics and the pandemic, says Christian Nolting, global CIO and head investment solutions, International Private Bank, Deutsche Bank. “‘Glocalisation’ is a macro trend to watch. Local production may not always be the cheapest and may be a driver of inflation, but the time of ever-growing globalisation is over,” he adds.

Automation and robotics help shorten the supply chain, while also contributing to reduce wage costs.

In an inflationary environment, especially, the most appealing firms, across sectors, are those that use technology, automation and robotics to their advantage, be it to do their inventory management, to automate production and distribution, enhance marketing or use data to learn and innovate, explains Willem Sels, global CIO, HSBC Private Banking. As carbon emissions will eventually become a cost, the ability to embrace sustainability is gaining importance.

The focus is therefore on quality companies with pricing power, so-called ‘superstar firms’, which represent the top 5 per cent performers from an earnings perspective. They account for much of the earnings’ growth during the past decade.

“Covid has shown us how fragile global supply chains are, and we will see more local supply chains to enable production much closer to the consumer, thanks to technological advances” predicts Lars Kalbreier, global CIO, private banking, Edmond de Rothschild (EdR).

The theme also has a strong ESG component, given the much lower carbon footprint from regional or local production.

Sustainability

The transition to achieving net zero emissions is at the top of private investors’ agenda.

“Climate change and energy transition are the top two investment themes and key risks,” states David Storm, CIO Wealth Management International at RBC. “Beyond simple thematics, they are economic problems and require a whole portfolio approach to measuring, managing and mitigating risks and opportunities.”

Investors can mitigate carbon risk in portfolios with emissions allowances, look to invest in strategies focused on phasing out thermal coal or tilt towards solutions providers in the beaten-up renewable energy sector, he suggests.

With many of the world’s largest economies having committed to ambitious net zero targets, the focus will now shift to how policy-makers plan to enhance global climate resilience and deliver sustainable economic development while reducing carbon emissions, says Jean Chia, CIO at Bank of Singapore.

New initiatives are expected to emerge, focused on managing and mitigating climate-related financial and economic risks, including stricter regulatory requirements for climate risk reporting and disclosure by companies, as well as policy support for businesses and households to transition to a low-carbon economy.

“Climate change and ESG-related investing are very real, beyond the narrative of nice marketing messages, because regulations that kick in will actually affect earnings quality and earnings resilience at corporate level,” she adds.

Businesses that help design and develop climate-resilient infrastructure and buildings, improve water and food security, and devise energy-efficient, low-emissions technology and processes stand to benefit from evolving consumer preferences, policy incentives and regulations, and are likely to attract increasing interest and investment capital.

Investment opportunities are mainly found in companies in transition towards more sustainable business models, rather than sustainable established leaders. This is especially relevant in Asia where many countries are still not as prepared as their European peers, says Ms Chia. These firms are also likely to generate greater impact and have bigger upside.

A key consequence of the massive shift to sustainable investing is the potential increase of cost of capital for those companies that do not meet sustainability criteria.

“Probably, in a few years, companies that do not have a sufficient sustainable rating will not be investable anymore,” says Manuela D’Onofrio, head of investment strategy at UniCredit Group. Most investment managers are moving fast towards sustainable investing, with the top 10 asset managers all committed to rapidly transforming their funds into ESG ones.

This will lead to significant discrepancy in the market between sustainable, investable companies and the others, she adds.

The “tremendous acceleration” triggered by the pandemic towards the creation of a European budget with the Next Generation EU Fund, which has effectively created euro bonds, has provided significant investment opportunities in the transition to a green economy. In this space, Europe is at the forefront globally, and Italy is also very well positioned, she says.

While there is a clear emphasis on environmental issues, social sustainability and corporate governance are also gaining traction.

Companies that have a higher than average spend on human capital tend to produce a better return to shareholders in the long run, according to research.

“Corporate governance tends to be underestimated but is absolutely key, as there is a direct link between good corporate governance and long-term return on capital,” says EdR’s Mr Kalbreier, adding that he is happy to “pay a bit of premium for a company with the right governance.”

Innovation

Healthcare/health tech ranks as the third most popular investment theme in client portfolios today. Investments in technology and innovation are leading to new treatments and  diagnostics, as well as fresh approaches to improve productivity in the sector, for instance through telemedicine.

Healthcare stocks offer many benefits to investors in the current volatile environment. “Pharmaceutical and managed-care companies are well suited to inflationary pressure, while healthcare stocks underpinned by structural growth and capable of generating high cash flow can provide a defensive tilt to portfolios,” explains César Pérez, head of investment and CIO at Pictet Wealth Management.

“We like assets that can provide consistent dividends and stable earnings throughout the economic cycle, as such we see potential in the healthcare sector, where relative valuations look attractive,” he adds.

Genomics is also a favoured theme. “Beyond Covid-19, genomics hold great promise in addressing present and future health threats, thanks to declining costs and rising research,” says Julius Baer’s Mr Bonzon.

“Building on favourable regulatory tailwinds, an ageing population and rising chronic diseases, genomics remains a structural growth story.”