Thematic investing is not new, but how does one distinguish a profitable theme from a fad. We all remember, some of us painfully, the dot com boom and bust at the turn of the century or the rather bizarre clamour to become ostrich farmers in the 1990′s. But, some themes are here to stay.
The basis for successful theme investment lies in the indentification of long-term structural changes in social, environmentaland demographic factors such as ageing and population growth. We call these long-term changes “megatrends”.
Pictet had indentified nine megatrends, each of which has identifiable long-term drivers which we believe will yield investment opportunities: agriculture, biotechnology, clean energy, digital communication, generic drug production, premium brands, security, timber and water.
The themes can be grouped into three broad categories: environmental, (timber, clean energy, water and agriculture) social; (premium brands, security and digital communication) and demographic (generics, biotechnology and once again water and agriculture).
The external environment is one of the most important factors influencing share price. Structural changes in the macro economic environment have implications for all industries and individual stocks.
Consider water as an investment theme. Population growth is the increasing demand for clean water worldwide, particulary in emerging markets. Investment opportunities exist across the entire water cycle from water sourcing to water distribution, waste-water collection and treatment. Investors provide vital capital to these industries which are striving to deliver the vital resource. Demand will only increase over time.
The rising global population also means a higher demand for food and the need for the agricultural sector to sufficiently increase output to feed the global population. In addition, a greater prosperity in emerging countries is leading to more meat consumption, which means land resources is needed to provide the necessary feed-stock for animals. The Pictet-Agriculture fund invests in companies who help increase professionalization in farming and help to ensure that the world is able to feed the growing population.
There is a significant difference between the dot com boom and bust in 2001 and the new digital era. Seven year old children can navigate across the internet with ease. Generation Y are immersed in technology. Digital media is the forum for communication – have you ever tried to part a teenager from their mobile phone!
With the digital revolution also comes the risk of information passing too easily across cyberspace. Corporations now spend billions of pounds in new technology to protect themselves and their customers from cyber attack. The result is an emerging security industry, which is seeking solutions to protect companies and individuals. But security extends beyond cyberspace, in an increasingly risk averse society people want to feel safer and protect their families from physical and emotional harm.
In volatile markets where share prices move violently it pays not to focus on what is happening in the short term, or investing in “get rich quick” fads, but to seek longer-term trends that will provide investment opportunities for the mid to long-term investor.
Details of Pictet’s global megatrend, water, agriculture and clean energy funds can be found in our investment club. Always seek professional advice before you invest.