Global Asset Tracker: High conviction themes move to core of client portfolios

Identifying powerful forces, which can transform the global economy by shifting the priorities of societies, driving innovation and redefining business models, is an increasingly important aspect of private banks’ investment strategies. 

Investing in expected transformations early is crucial to positioning portfolios for long-term growth opportunities. Moreover, such high conviction and global investment themes are generally unconstrained in terms of sector, geography or size, and can be used in the core part of client portfolios. 

Secular themes such as technological disruption or digital transformation, ageing populations and climate change highly resonate with private clients as they impact on daily life. They are also believed to be the most promising in terms of performance, according to the 50 major private banks which took part in PWM’s fifth annual Global Asset Tracker survey (see Fig 1).  

Moreover, they help investors to stay invested in equity markets.

“High conviction themes, which we call supertrends, represent an entrepreneurial approach to equity investing,” says Nannette Hechler-Fayd’herbe, CIO for International Wealth Management (IWM) and global head Economics and Research of Credit Suisse. 

“Because of high valuations, it requires conviction to invest into equities and these investment themes are a way of developing conviction.” 

Also, investment themes help investors to look through some of the short-term volatility and focus on the longer term. “Many investors spend far too much time thinking about when they should enter the market, rather than how long they should stay in the market,” adds Ms Hechler-Fayd’herbe. “But historical data analysis shows that staying in the market is the best recipe for long-term returns.”

The “beauty” of the thematic approach is that it brings companies from different sectors into one strong theme. Ageing demographics is a rising, unrelenting trend, which is taking its toll on society both in developed and emerging economies, most notably China. 

The global population aged 60 and above, about 1bn today, is projected to double to more than 2bn by 2050, according to the UN. This will affect a wide range of sectors such as healthcare, insurance, and the consumer industry – including travel, tourism, and the sports sector, as people stay fit for longer  – as well as real estate. 

Increasing demand from silver-haired individuals for products and services that suit their lifestyles and meet their needs will create new business opportunities, and new supply chains will emerge. Investing in the theme allows the construction of diversified portfolios, mixing defensive sectors, such as pharma, and more cyclical areas such as consumer, explains Ms Hechler-Fayd’herbe.

Cutting out the waste

Ageing demographics brings investment opportunities in healthcare and health tech. The healthcare sector represents around 10 per cent of global GDP, but only 5 per cent of generated data. It is also one of the most wasteful, with around one third of expenditure made in vain, reports Alan Mudie, global head of investment strategy, at Société Générale Private Banking. 

“With the advent of artificial intelligence able to exploit vast quantities of big data and the increased prevalence of wearable devices and monitors, health tech companies represent the key to better treatment and care and to enormous cost savings,” he adds. 

Another global investment theme gaining traction is that of deglobalisation, in this age of protectionism and trade wars. 

If China and the US are fuelling the deglobalisation trend, this is also occurring beyond the US-China conflict. Brexit is likely to result in greater frictions in UK-EU trade; Japan has taken steps to limit technology exports to Korea; and the US has threatened to impose tariffs on European goods. 

To manage risks, investors should seek domestic and consumer-oriented investments, which are insulated from trade flows, explains Mark Hafele, global CIO at UBS GWM. Countries and sectors that derive a high proportion of their revenues domestically are likely to be more stable choices in an increasingly protectionist world, with the global bank favouring US and Chinese markets, while being cautious on the eurozone. 

The shifting trend from globalisation to localisation is creating opportunities in regional and local markets, including mid- and small-caps, according to BNP Paribas. But deglobalisation entails more political and geopolitical uncertainty, which could lead to market volatility. Investors should hedge their portfolios with safe-haven assets, such as gold, Japanese yen and tactical long dollar opportunities, recommends the French bank.

It is also important to look for long-term beneficiaries of the US-China rivalry, and the redistribution of supply chains is expected to benefit southern Asian countries for low-end consumer products, and Taiwan and South Korea for sophisticated upstream manufacturing products.

The competition between the two superpowers will likely accelerate technological advances, as technological superiority and leadership in innovation is what the two are really fighting over. 

The US and China both believe that whoever controls the standards of the next generation of industries including AI, robotics, high-end manufacturing, electric vehicles and technology will dominate the global economy, says Niladri Mukherjee, head of portfolio strategy, chief investment office at Bank of America. 

Although the signing of the ‘phase one’ trade deal provided hope for the world’s manufacturers, finding an agreement in a second phase of talks will prove more challenging. This would need to address long-standing issues relating to intellectual property violations and forced technology transfer by China, as well as subsidisation of Chinese industries. 

It is improbable the two nations will find an agreement on those existing issues, with China unlikely to make any major changes to its economic model. Over the next few years, technology standards are likely to split between the two countries. One would be controlled by the US and its companies, the other by the Chinese government, with a cohort of countries following either set of standards. 

However, it is unlikely that in 2020 and even in the first half of 2021, presidents Trump and Xi will want to escalate tensions, believes Mr Mukherjee. The US president needs to project a strong economy heading into the November election, so he will not want to raise tensions with China which could damage the stockmarket. 

On the other hand, President Xi needs to show a strong economy and strong leadership heading into July 2021, which marks the 100th anniversary of the communist party, and he will not upset the truce. 

Deglobalisation is set to pick up over the long term, though, and it will drive restructuring of supply chains to be much more internally focused, with production happening closer to final consumers. Investors should favour countries with large consumer economies, able to attract supply chains and production, and economies with a rising supply of high end skilled labour, rich access to natural resources, education, healthcare, and innovation, according to Bank of America.

Technology also plays a crucial part in the deglobalisation process. “We are entering a new phase of globalisation, where technology plays a key role as it allows companies and countries to reorganise their supply chains,” explains Vincent Manuel, global CIO at Indosuez Wealth Management. 

Moreover, if carbon prices increase, with the introduction of  higher taxes, companies will be incentivised to relocate their production closer to consumers. These considerations also support the positive outlook for tech companies, both in the US and China. 

 “A series of technological breakthroughs, ranging from big data processing to robotics and automation, are changing current business models and entire industries,” says Philipp Bärtschi, CIO, Bank J. Safra Sarasin. 

However, he says, investors should keep in mind Bill Gates’ comments, that we always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10. “A solid research framework that can assess those changes objectively and reliably is key,” adds Mr Bärtschi.