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Why Covid-19 has driven thematic investing

Why Covid-19 has driven thematic investing

We have all become accustomed to unprecedented events this year.

Investors have witnessed a record quick bear market and recovery while the fall into negative territory for oil prices turned conventional wisdom on its head. 

Amid all this, one change has gone unnoticed though: the demand for thematic investments.

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While active equity fund flows plunged deeper into negative territory over the first five months of the year, the thematic equity sub-sector continued to experience positive flows.

Appetite has even increased since the Covid-19 outbreak and passive thematic funds tell a similar story. 

Why are investors so keen to pursue thematic opportunities, even as they reduce conviction in active investing more generally?

In times of uncertainty, investors look to areas of the market that are likely to deliver with greater certainty. Investment themes, with strong structural drivers such as an ageing population or online consumerism, look better positioned than most to weather the storm. 

By their very nature, themes are less affected by short-term noise, and long-term investors can reap significant returns by gaining exposure to structural trends. While Covid-19 certainly presents headwinds for many assets, the crisis has had the effect of speeding up the timeline on some of these structural trends. 

Consumption trends are changing

Naturally, more people are buying online as a result of the pandemic, thereby accelerating existing trends.

The rise of e-commerce, which has been benefitting the largest players like Amazon and Alibaba, as well as smaller players like Ocado in the UK, has received an additional virus-related tailwind.

Looking specifically at China, we have seen e-commerce penetration levels increase further as a result of Covid-19.

We expect many of these new habits to be long-lasting, adding further support to the larger China consumption story, one of the most important themes across global economies today.

China’s economy is structurally shifting from an export-led to a consumption-led model and will be a major force for corporate earnings growth. 

Source: MOE, NBS, Wind, CEIC, Frost & Sullivan, Goldman Sachs Global Investment Research, GSX, company data, February 2020.

China has also seen a notable acceleration of growth in online demand for consumer services like healthcare and education.

The former has been driven by increased demand as well as direct policy support from authorities as they have looked to tackle bottlenecks in the healthcare system.

One of the less commented upon beneficiaries of the pandemic is the athleisure space, where a number of brands have brought forward their longer-term aims of moving towards a direct to consumer model - as opposed to selling through third party retailers.

Nike and Lululemon are leading the way and the benefits for these companies are numerous, including higher brand value, better product development and superior profitability.