Thematic equities in focus: quarterly update Q3 2020
An improving sense of confidence from management teams
Equities globally have enjoyed a solid third quarter, recovering nicely after a turbulent first half of 2020. Overall, corporate earnings have largely beaten expectations, management teams emphasized an improving sense of confidence and, in some cases, they also articulated a better visibility for the remainder part of the year. Macroeconomic data has been broadly positive, as developed market economies gradually re-opened and household finances have been typically protected by government fiscal stimulus. Whilst equity markets have been more muted in September – with concerns of COVID cases resurgence and uncertainty associated with the upcoming US elections – we remain convinced that the disruption caused by COVID 19 has accelerated existing secular trends, improving the outlook for a number of themes within the Evolving Economy, with the long term drivers of all five themes remaining intact:
It is worth recognising that our Connected Consumer theme performed strongly over the last three months – and into 2020 as a whole – as demand for digital interactions has increased during the current situation. The COVID-19 pandemic has seen the largest spike in e-commerce demand in a decade and the entire online consumer journey – from research to purchase – has already accelerated: social media advertising are becoming increasingly influential, new e-commerce customers are likely to stick with their spending habits, home delivery services are expected in timely manner whilst safe and secure payments are the bare least an online seller can offer. To support the increasing amount of connection and use of data, companies have somewhat been forced over the last past months to adapt their framework, from cloud security to server capacity. Whilst COVID-19 has pull forward online consumption, it is important to point out that its overall global penetration level remains widely low, below the 15% level1 . Meanwhile, our Automation theme is likely to take advantage of big data developments with current rollout and adoption of 5G Technology. Whilst the infrastructures/base stations are already settling in at a rapid pace, especially in Asia, we anticipate healthy adoption of new 5G handsets as they get launched. This is supportive of automation equipment used to manufacture these 5G handsets (consumer electronics is one of the largest buyers of industrial robots) as well as a range of semiconductors that are used in 5G devices. Looking forward, the broader adoption of 5G will allow for enhanced connectivity and communications that we believe will spur the development of increasingly smart and automated factories as well as connected vehicles.
Elsewhere in our CleanTech theme, we noted the resilience of investment in the smart energy solution. Large corporates are becoming increasingly vocal about their commitment to sustainable growth underpinned by Net Zero targets, which will be achieved through a combination of energy efficiency, renewable energy and its supporting infrastructure. Governments are also highly supportive with European Union (EU) approving a green recovery plan of €750bn: Next Generation EU. It is clear that energy efficiency can and must occur across the most polluting industries with economic support solutions and implementation of technologies such as smart grid. The smart grid introduces a two-way dialogue where electricity and information can be exchanged between utility and its customers. It’s a network
of communications, controls, computers, automation and new technologies working together to allow businesses and consumers to take control of their energy use whilst making the grid more efficient, reliable, secured and greener. The smart grid also enables new technologies to be integrated such as wind and solar energy production, plug-in Electric Vehicle charging and the digitalisation of the home. The smart grid is already starting to replace ageing infrastructure in modern cities – such as Sydney, Barcelona, Copenhagen – and utilities can better communicate with us to help manage our electricity needs.
Consumer discretionary companies operating across our Ageing & Lifestyle theme have benefited from better-than expected demand as COVID-19 brings into focus the importance of living a healthy and active lifestyle. With regular gym-goers having to stay at home during coronavirus lockdowns, they have turned to fitness apps to make purchases, learn tips and complete a range of home training programs, including virtual classes and personalised nutrition plans. Similarly, outdoor apparel specialists have been well-placed to benefit from increased consumer appetite for outdoor activities that are less impacted by social distancing requirements to combat COVID-19.
In Transitioning Societies theme, whilst macroeconomic activity data confirmed the emerging economies continued to recover into the third quarter, the momentum of industrial production appears to have moderated and consumer demand has yet to gain further momentum. However, we believe that the increasing domestic consumption from a burgeoning middle class and a related ‘catch up’ in terms of product penetration and industry consolidation will provide relatively attractive growth opportunities for long-term EM investors exposed to the right themes and companies. If we take China for example, it is clear we have seen a pickup in health awareness after the pandemic. People are increasingly considering the benefits of regular exercises and – in the same vein as our Ageing & Lifestyle theme – we've recently seen a surge in active lifestyle products such as sportswear or bicycles.
Despite the headwinds many businesses have faced in 2020, the outlook of the themes of the Evolving Economy remains intact. The global population continues to age, its emerging middle class continue to grow, and people will increasingly consume online whilst moving towards a more automated society. Importantly, businesses and consumer convey a sense of climate urgency, which is likely warranted as this decade may be our last chance to act...
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