Thematic research in a multi-asset context

Key points

• Our themes highlight to us areas of potential opportunity, and they also reveal companies, sectors and asset classes that face significant headwinds, and which we should therefore avoid.
• Our China influence and great power competition macro themes have indicated that as Western economies seek to reduce their reliance on China, we are likely to see the deflationary effect of globalisation diminish.
• However, trends identified by our smart everything group of micro themes could create some significant productivity gains and lead to a more deflationary force.

Thematic research is one of the many research capabilities our investment teams have at their disposal via our multidimensional research platform. Themes are instrumental in helping us understand the investment backdrop, providing us with a long-range lens through which to view the structural changes that are taking place across the globe. Our themes highlight to us areas of potential opportunity, and they also reveal companies, sectors and asset classes that face significant headwinds, and which we should therefore avoid.

Our themes encompass macro themes, which encapsulate geopolitical and economic shifts, and micro themes, which capture key technological, social and environmental trends.

Importantly, for our mixed-asset portfolios, we tend not to focus on a single theme; we consider the spectrum of themes to ensure that we are aware of the broad backdrop that is driving change across global economies.

Themes and asset allocation

Our China influence macro theme recognises that China is a much bigger part of the global economy now than it was 20 years ago, and what happens to China has significant implications for the rest of the world. It also links to our great power competition theme – the West continues to be much more aware of the security concerns related to its reliance on China, leading to trade and tech wars. As Western economies seek to reduce their reliance on China, we are likely to see the deflationary effect of globalisation diminish, as those economies move away from offshoring manufacturing to low-cost locations, bringing it back to developed markets. We therefore expect to see slightly higher levels of inflation and interest rates in the future.

We have had very little exposure to bonds in our mixed-asset portfolios for quite a long time. However, more recently, as central banks have raised interest rates and moved away from quantitative easing (QE), and governments have been more focused on providing support to the real economy rather than financial markets – often referred to as ‘people’s QE’, we have had the opportunity to increase exposure to fixed income.

In contrast, trends identified by our smart everything group of micro themes, covering areas including big data and artificial intelligence, could create some significant productivity gains and lead to a more deflationary force. This could not only create investment opportunities, but also cause considerable disruption to many industries. Therefore, at times, there may be competing forces driving our themes, and we are continuously assessing which overriding trends will play out over the longer term.

Bringing micro and macro themes together

We also see a number of interesting opportunities stemming from our big government macro theme, a key element of which is environmental policy, which is likely to drive substantial capital into areas focused on decarbonising our economies. The difficulty with this is that all countries are trying to decarbonise at the same time, so the costs are rising. Our Earth matters micro theme, which was created nearly two decades ago, has evolved into natural capital, to reflect that with the growing understanding of the importance of environmental issues, we are likely to see investment accelerate. We therefore need to find the companies that can benefit from this spending on natural capital.

We think that it will not only be clean energy such as solar and wind power that will benefit, but also other forms of decarbonisation. Take HVAC (heating, ventilation and air conditioning) equipment, for instance. 40% of global carbon emissions come from heating,¹ and so upgrading this equipment is one of the easiest ways for a company to reduce emissions, given that new systems are considerably more efficient than legacy ones. Investors are frequently asking investee management teams about their lifetime carbon emissions, and so an efficient way to show progress on this matter is for companies to upgrade their HVAC systems, as the payback time of the investment during a period of high power prices is relatively short. This is why clean energy has evolved into a new decarbonisation theme, to highlight that it is not just about the buildout of renewables; there are many other solutions that can play a role in decarbonising our economy.

Source:

¹https://www.iea.org/reports/renewables-2019/heat

Analysis of themes may vary depending on the type of security, investment rationale and investment strategy. Newton will make investment decisions that are not based on themes and may conclude that other attributes of an investment outweigh the thematic research structure the security has been assigned to.

Authors

Paul Flood

Head of Mixed Assets Investment