Thematic Investments Made Simple
Thematic Investing Can Be for Everyone
Why should thematic investment themes be reserved for hedge funds and family offices? At thematify© we believe that anyone and everyone has a right to investment ideas and insights to help them to maximise their financial health and wellbeing.
Thematify© is the home for “thematic investing”, a style of investment that seeks to identify the most compelling macro-economic themes of the future, and the best investment vehicles to take advantage of them.
We try to keep it simple and low jargon, as the quality of an investment theme does not increase with its complexity. We do not claim to be experts in any specific thematic sector, but look to gain a deep enough understanding of every thematic sector efficiently to screen for the most likely to maximise future risk-adjusted returns and to present quantitative and robust investment rationales to support them.
Our process starts with scanning for ideas, applying our five factor selection criteria – thematifive© – and continues into regular reviews. Themes are usually updated every quarter.
Equity markets started 2024 at historically fair valuations. In such markets the potential for gains might be limited, while risk (in the form of downside losses) can increase. Our themes have a medium-term outlook and aim to perform better in risk-adjusted terms than general broad-market equities over time.
Please do read the Important Notice at the end of this page.
While the spot price rose in a relatively short timeframe from c. $30/lb to over $90/lb (see previous theme), the new fuel-contracting cycle has begun with uranium producers are locking in long-term contract prices at over $70/lb with escalations. We believe that the improved outlook for quality producer’s long-term earnings is not substantially reflected in their current share prices.
With global geopolitical tensions likely to remain high, the government spending allocations to this sector are likely to trend upwards. The sector itself is now more technology driven, and the nature of modern defense is likely to be different from before e.g. a focus on unmanned and remote approaches. Key component and new-technology providers will potentially benefit from this geopolitical backdrop.
US REITs have suffered a c. 20% lower return over the past two years compared to global equities. Being sensitive to interest rates, we see the future expected trend of lower rates as being supportive, while the sector has also modernised and shocks such as Covid are behind us. REIT investing is a stock-pickers market, however, as quality and value varies greatly both across and within specific REIT sectors.
Gold prices appear to have stabilised at a relatively high level. Support is provided by central bank continued steady purchasing and limited growth in supply. Geopolitics and interest rates peaking also indicate lower volatility. However, while the upside in gold prices may be limited, gold miners typically tend to out perform when prices are stable and delivering good cash flows and margins. Company specific risks are an important factor and the theme will not support all players.
Industrial robots are not new. But robotics is expanding in sectors such as healthcare, households, logistics, and agriculture, etc. at a remarkable pace.
Supported by AI, this may become a surprisingly important long-term growth sector to invest in.
Investment Themes Under Review
Oil & Gas
Oil and gas companies are priced for peak oil in c. 2035. With this more likely to be 2065 with a long tail, $300-$400 billion dollars per year of underinvestment in sustaining CapEx, and the utility of oil (in plastics, pharmaceuticals, engines, etc.) and gas (for fertilisers, cleanest carbon-emitting baseload power source for the developed world, etc.), and the political bias against them, producers of these commodities are currently relatively low-valued with the capacity to generate high long-term sustainable cash flows.
Coal
Coal is the cheapest non-developed-world source of bringing new power supply online (particularly in China and India), but political and institutional investment opposition, especially in the developed world, is leading to constrained supply.
In addition, metallurgical coal, necessary for steel production, is tarred by the same brush, but the continued ascent of humanity needs steel, and steel needs metallurgical coal.
Nickel
Nickel is a long-term beneficiary of the electrification of the world. However, prices are currently supressed due to dishoarding of Russian inventory and environmentally devastating production from Indonesia and the Philippines.
It is also economically somewhat sensitive and alternative materials for batteries are being sought.
Nevertheless, we expect nickel prices to bottom within the next c. 18 months, followed by a secular bull trend in this commodity.
AI Spinoffs
The biggest players in AI are either too large and diversified for high future returns, or already fairly-to-fully valued.
Spinoff areas, however, still indicate potential – while the chips sector has already been a successful thematic, the likes of cyber security, and data centres (which overlaps with a REITs sub-sector) look promising.
Tech Fin
Looking beyond the classic FinTech sector, technology is likely to reshape the finance sector. Finance has always embraced technology to enhance efficiencies and customer service. This trend may accelerate and disrupt sub sectors such as payments, investments, insurance, credit, trading, and many more. The winners of tomorrow may be new players and traditional players that can evolve their business models quicker.
Biotech
The Covid vaccine boost has abated. But recent advances in technologies such as mRNA and gene editing point to a new era in the battle against diseases such as cancer.
A potential opportunity may lie in select areas for highly specific stock selections.
Gold & Silver
Gold is the only over 5,000 year store of value that has actually been a store of value. Central banks can’t print gold, and as central bank and government maleficence continues to destroy the purchasing power of fiat currencies, we expect gold to be a strong, even if not exceptional, performer for the rest of the decade.
Silver is the speculative little brother of gold, which typically moves later, but further and faster, if and when gold sets the trend.
Dividend Value
Value stocks have suffered compared to growth stocks in both recent years and longer-term from the global financial crisis. It is hard to predict when and if this may turn.
However, with interest rates expected to decline, steady high-dividend issuers with supportive valuations could be expected to provide superior risk-adjusted returns.
Asian Tigers
While benefitting from long-term demographic and consumer trends, some of the key tigers have been marked down by markets.
These may present a long-term opportunity, with some markets (such as China) being understandably yet significantly low-valued compared to more developed markets.
Food Evolution
Food evolution focuses on innovations in agriculture and food production, including precision farming, biotechnology, and sustainable practices. This theme emphasizes efficiency, reduced environmental impact, and food security.
Additionally, the rise of alternative proteins and plant-based foods supports growing demand for healthier, organic, and locally sourced foods along with a push for transparency and traceability in food production.
China Retirement
China’s population aged 60 and over reached almost 300 million in 2023, i.e. around 20% of the total. Over the next decade this is expected to double to c. 600 million, larger than current US or EU populations. This poses several threats to the Chinese economy including a possible pension funding crisis.
However, could this massive cohort also provide some opportunities for post retirement needs?
Renewable Energy
Renewable energy has gradually become mainstream over the last decade. Close to 15% of primary energy is now sourced from renewables. The per unit cost of renewable sources is in many cases at parity with fossil fuels.
While hydro power dominates, wind and solar have been steadily growing. Renewable energy generation is an interesting area, as are new technologies; the theme has evolved beyond manufacturing and installation of new capacity.
Space Spend
The likelihood of practical commercial opportunities emerging in space (starting with the Moon) is very low in the short to medium term. However, what makes this theme worth exploring is the investment and spend that space is generating. Government spending tends to dominate, but procurement relies heavily on the private sector, and private spending is also on the up. With a greater perceived competition , these budgets will grow and some like the US (with its strategy to leverage the private sector) will provide an attractive revenue stream.
We initiated this theme in Q1, 2021 on the back of a positive demand outlook and underinvestment in production.
By the end of 2023, the spot price of uranium increased by over 300%, and we paused this theme in consideration of the rise having potentially outpaced fundamentals and with a view to switching to a more equities-based approach to take advantage of the uranium fuel new contracting cycle and the supply and demand dynamics indicating a persistent shortfall in long-term supply.
Copper was initiated in Q3 2022 when the copper price was c. $3.5/lb as it is expected to be one of the main beneficiaries in the coming long-term transition to a world powered by electricity.
However, with broad equity markets at all time highs and increasing recessionary concerns, we no longer think it is the right time to enter positions for this economically-sensitive theme.
We identified a long-term underpinning trend towards corporate sustainability and ‘net zero’, with Carbon Credits as an opportunity with no company-specific risk.
Following the large ESG push during the recent pandemic the political focus appears to have drifted away from ‘carbon neutrality’ in the short term.
Along with increasing recessionary concerns, which, if played out, would likely see a reduction in industrial demand for energy and so commercial buying pressure for carbon credits, this economically-sensitive theme has been paused.
Reviewed, Not Pursued
Dormant
Lithium
Strong demand case on the back of electric vehicles, but supply could catch up soon, limiting the upside for this mineral.
There is no shortage of lithium, and recent price spikes have been more related to restrictions in refining capacity than raw supply.
We did not expect the extreme price spikes of the past to repeat.
Metaverse
Metaverse presents an interesting opportunity for consumer engagement, but a tangible business case was hard to quantify at the time of review.
Crypto Currency
Crypto currencies have obviously performed exceptionally well. However, as rational long-term investors rather than speculators or gamblers, it is difficult to determine an investment rationale more substantial than the fear of missing out or one based on fundamental intrinsic value.
This may change in the future, where the biggest risk around (quality) crypto currencies may be the risk of zero exposure. At that time, despite potentially having missed the biggest part of the moves, the risk-adjusted returns were not considered to be high enough.
Climate Change
Climate change is a significant and sustained long-term trend, supported by some scientific circles. Given its supposed inevitability, and political interest, such trends can trigger new investment opportunities.
We remain confident of the future financing flows expected around the theme but found it too broad and better addressed with sub themes such as the energy transition, reinsurance, and carbon credit opportunities.
Hydrogen
Climate change expectations spurred a spike in hydrogen interest and investment. While hydrogen has potential as a new energy source, it is currently not clear how well it can compete, outside specialist applications, with other ‘renewable’ sources of energy.
We considered that more time is needed to determine whether this theme is likely to attract substantial institutional cash flows, and even if it is, the theme was potentially better invested in via complements such as platinum for fuel cells.
Platinum
Platinum is potentially a key beneficiary of the search for new energy sources, as an input for hydrogen fuel cells. However the case for fuel cells as compared to electrification & batteries, renewables, nuclear, hydrogen etc. has too much uncertainty attached to it for a confident expectation in risk-adjusted returns.
Nevertheless, at c. $900/oz, platinum appears to be at cyclical lows compared to the other ‘precious metals’, and if a recession takes it close to it’s global cost of production (of c. $600/oz), it may present as an excellent opportunistic investment.
