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.
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.
Why are investors so keen to pursue thematic opportunities, even as they reduce conviction in active investing more generally?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.
Healthcare innovation is here to stay
Medical innovation is a longer-term theme that is important to both patient outcome improvement and cost reduction. In the US, 20% of GDP is already spent on healthcare.
That figure cannot continue to grow indefinitely.
Looking specifically at China, we have seen e-commerce penetration levels increase further as a result of Covid-19.We see medical innovation as an important structural trend that will present compelling investment opportunities.
While this theme was well-established prior to the pandemic, the search for a vaccine and treatment for Covid-19 has increased coordination between the private sector and the US Food and Drug Administration (FDA).
This public sector support for innovation is likely to continue driving this theme even after the crisis.
Sustainable investing not just for bull markets
The trend towards sustainable investing was already well in motion before the pandemic, and fund flows speak to the acceleration of this trend.
The idea of sustainability as a luxury, employed in bull markets but discarded in bear markets, continues to lose credibility.
High-quality management teams focused on sustainability are more likely to build businesses that are resilient in a downturn, and this was clear in the depths of the market sell-off in March.
The crisis has also brought into sharp focus the intersection between public health, migration and climate change.
Climate change induced migration will have far reaching effects for disease control, and public and private entities will need to co-operate to understand and manage these dynamics. While this trend was in place before the pandemic, a renewed sense of urgency has brought these issues to the forefront.
Investing in individual themes or a collection of high-conviction themes is increasing in popularity, and the current environment is only likely to continue to speed up this trend.
While the pandemic is presenting a multitude of challenges for society and investors, thematic investing benefits from explicitly acknowledging that the world has become more complex and interconnected.
This has only served to bolster the argument that investing for the long term in structural themes that span regions and sectors is an important area for investors to consider.
Isabella Labak is a multi-asset investment director at Fidelity International
