Theme 3: Playing the Net-Zero Game
One of the most pervasive investment themes in today’s environment is decarbonization—the global-energy transition. With more pronounced changes to the world’s weather patterns becoming evident over time, many governments are moving past mere verbal commitments toward concrete regulatory steps and investment programs aimed at combatting climate risks. This so-called green revolution, to some extent a large-scale reimagining of how economies work, will obviously require capital investments in order to be successful, and we believe getting on the right side of what is likely to be a decades-long phenomenon with transformative global potential will become increasingly mainstream next year.
Climate mitigation/adaptation strategies are one way to play this theme, but investors also shouldn't underestimate the value and potential benefits of environmental-social-governance integration in general in the context of their overall investment portfolios.
Theme 4: Going Long Secular Thematic Trends
Since the arrival of COVID-19, several secular thematic trends have broadened out and gained momentum, creating compelling new investible opportunities. These include, but are not limited to, financial technology (fintech), enterprise intelligence and innovation, and a combination of these two trends that has recently helped to spawn the “metaverse” megatrend.
Not surprisingly, such trends reflect the global macroeconomic backdrop. For example, enterprise intelligence has been spurred on by mounting wage inflation and labor shortfalls that are pushing many companies toward automating more tasks where they can and making greater use of cloud-based computing capabilities. Such evolving corporate needs and decisions are becoming more apparent not only in developed-market economies, but also in their emerging-market (EM) counterparts, especially China. This will be worth watching next year.
Investors can target theme- and/or sector-specific strategies tied to the trends that most interest them. Notably, however, thematic investing of this sort is not the same as index investing. You need to do your homework to ensure you’re buying what you really want.
Theme 5: Taking a Deeper Dive into China
We think China's extraordinary growth and development over the past few decades demand that it be both a topic of investment discussion and, where appropriate, perhaps a standalone portfolio allocation or the main component of an investor’s total EM exposure. Of course, this is often easier said than done, given the complexity of the Chinese economy and the systemic economic, societal, and structural changes that are still going on in the country. The good news: with such seismic change comes numerous opportunities for discerning investors. However, China’s recent regulatory announcements and their well-publicized negative impact on some Chinese assets have highlighted the need for investors to properly understand and carefully evaluate these opportunities.
Thus, with the right approach, we believe investing in China should remain an attractive investment idea in 2022 and beyond, despite recent bouts of market volatility (FIGURE 3). Consider either a dedicated China fund or a more diversified EM strategy.