Keeping it real and grounded in reality

Thematic investing in an inflationary world

The return of inflation, exacerbated by a spike in energy prices in the wake of Russia’s military intervention in Ukraine, has been the defining feature of financial markets in 2022. Central banks have been slow to acknowledge the new reality, interest rates are rising at a pace not seen in decades, and investors are coming to terms with the prospect of a recession and its potentially damaging consequences for the world at large.

The stockmarket’s reaction to these challenges has been stark. Energy has been the standout sector as a beneficiary of higher oil and gas prices, defensive stocks have provided a safe haven in an environment of uncertainty, and growth stocks, many of which commanded exorbitant multiples, have been decimated as higher bond yields triggered a reappraisal of how financial assets are priced. The triumph of the new economy has quickly turned into a painful come-uppance.

Why invest in global themes?

Thematic funds, which are often associated with exuberant growth, have suffered in this new market regime, but this does not mean that thematic investing is a busted flush. It merely highlights the need for discipline. Fundamentals and value are the key determinants of long-term return, in our view, not just growth in isolation. Recent events serve as a telling reminder that investors ignore valuation at their peril. Investors need to keep it real, both figuratively and in an economic sense.

Themes grounded in reality

It is also important that thematic portfolios are sufficiently diversified to be able to cope with a variety of market conditions. Four major themes currently dominate the changing world we live in: demographic change, the need to address environmental challenges, the expansion and renewal of infrastructure and technological innovations. Every day, every individual is affected. Our goal is to exploit the long-term opportunities arising from these thematic trends in a disciplined manner. 

Demographic change is ongoing. As the population ages, people's needs change. Another trend is urbanisation, i.e. the shift in the population to towns and cities worldwide. On the one hand, we are focusing on solutions for the ageing population and the trend towards a healthier and smarter life. On the other hand, we are targeting companies that meet the demand of modern consumers and benefit from global urbanisation.

In the course of climate change, people's environmental awareness is increasing rapidly. In order to achieve the specified climate targets, CO₂ emissions must be drastically reduced worldwide over the next few decades. The path towards renewable energies plays a decisive role here. But also the supply of clean water, the sustainable handling of waste and the efficient use of resources by way of recycling are in focus here.

Without infrastructure the daily things of our everyday life, which we take for granted, are inconceivable. In the same way, the economy can only grow and prosper if it has a functioning infrastructure. By 2030, there will be an investment gap of several trillion US dollars that needs to be closed or at least reduced. From roads to airports to railroad networks, companies that we could invest in include those that guarantee the smooth functioning of the economy and our everyday lives.

The rapidly advancing digitalisation apparently knows no bounds. Business processes are being shifted to the ‘cloud’ and all electronic devices are being networked with each other. Furthermore, the mobility sector is on the verge of major changes. These include alternative drive models (e.g. electric motors, hydrogen drives) and autonomous driving. Some of the companies involved in these areas have great growth prospects ahead of them.

We are resolutely focused on the multi-decade trends that underpin our thematic approach and remain as optimistic as ever about the growth opportunities provided by structural change in economies and society. The market downturn has led to increased nervousness, but we strongly believe that the volatility we are seeing is presenting attractive entry points for investors with a long-term investment horizon. We remain true to our investment mantra: themes grounded in reality.