The world we inhabit today is characterized by profound and major changes. Technological advancements, geopolitical shifts, and societal transformations unfold at an unprecedented scale. As investors, we find ourselves standing at the crossroads of transformation and uncertainty. In this article, we will explore the concept of thematic investing — a strategic approach that capitalizes on emerging trends — and discuss how to navigate today’s volatile investment landscape.

The World in Flux

Themes — such as artificial intelligence, climate change, geopolitical shifts, and societal transformations — shape our future. They represent powerful trends that permeate our lives, disrupting traditional industries and creating new opportunities. Moreover, themes are not static; they evolve over time and have unique lifecycles.

While some would argue that there is nothing new about changes, we would argue that this time is different – today’s transformations happen so rarely that we refer to them as ‘once in a generation events’. For example, the US enjoyed more than 30 years as the sole global superpower after the Soviet Union was dissolved in 1991, but today we are starting to see the emergence of a multi-polar world that is changing the underpinnings of global interactions. China’s role as the world’s factory since it joined the World Trade Organization in 2001 is now being fundamentally reassessed as businesses diversify their supply chains. Artificial Intelligence (AI) is a foundational innovation similar to the invention of commercial electricity and internal combustion engine in the 1800s. Changes at the foundation level of how the world is organized gives rise to heightened uncertainty as impacts flow downstream.

For a world in flux, thematic investments offer a compelling proposition. By focusing on specific trends, we can align our portfolios with the forces that drive change. Whether it’s investing in clean energy companies or cybersecurity firms, thematic strategies allow us to participate in growth stories that resonate with the times that we are living in.

Advances in Thematic Investing

While thematic investing is alluring, we find that traditional thematic funds often lack agility. They are usually built around static themes, which may not capture the life cycle of trends in the real world. Imagine holding a basket of technology stocks during the dot-com bubble burst — painful, right? Similarly, sticking rigidly to a theme without adjustments can lead to missed opportunities or excessive risk.

Quantitative (quant) technology — the marriage of data science and finance — offers a solution. By analyzing vast datasets, quant models identify patterns, correlations, and anomalies that facilitate the early detection of emergent trends. When applied to thematic investing, quant models can dynamically adjust exposure to themes.

• Theme Identification: Quant models scan the market for emerging themes. Whether it’s the rise of electric vehicles or the proliferation of telemedicine, these algorithms spot trends early.
• Risk Management: Investing comes with risks. Quant technology assesses risk factors, including volatility, liquidity, and macroeconomic conditions. Good quant models, like good fund managers, ensures that exposure to risk is controlled and remains within acceptable bounds.
• Dynamic Allocation: Unlike static portfolios, quant-driven thematic funds can adapt to changing themes. When a theme gains momentum, allocations increase. Conversely, if a theme wanes, exposure is scaled down.

Human Judgment Meets Machine Intelligence

Effective thematic investing combines art and science. We believe experienced Fund Managers can play a crucial role in the process. Their expertise, intuition, and understanding of market nuances complement quantitative models. They interpret signals, validate hypotheses, and explain decisions. When regimes change, fund managers act swiftly, recalibrating models to adapt. Fund Managers also watch out for blind spots that quant models do not handle well, such as political changes, corporate governance issues, and data quality problems.

In the ever-evolving landscape of asset management, the integration of technology has become paramount. Maybank Asset Management’s Investment Science team was established with a clear mission: to enhance investment processes using cutting-edge quantitative technology. Leveraging data-driven insights, we identify emerging investment trends and dynamically adjust portfolios.

Given the nature of changes we face today, it is almost impossible for a human fund manager to rely on logical reasoning to figure out the impact of new trends and how it benefits businesses. Quant models are a more efficient way to monitor a broad universe and identify businesses that are capitalizing on emergent trends.

Illustrative Investment Themes

Three overarching themes shaping our world are Technology, Climate Change and Geopolitical Shifts. Specific trends that are identified by our quant models include

• Artificial Intelligence and Data Centres: The rise of AI is reshaping the global landscape. As AI applications proliferate, data centres are experiencing exponential demand. In Asia, beneficiaries of this trend include server hardware manufacturers. For example, firms that provide liquid-cooling systems have an advantage over traditional air-cooling systems due to the high power consumption of new AI chips. Investing in AI seems obvious but is not without risks from trend breaks and high valuations. For instance, some beneficiary stocks can quickly become fully priced as market excitement causes valuation to rise faster than actual business prospects.
• Surging Demand for Electricity and Power: We are experiencing a once-in-a-generation surge in demand for electricity, driven by demand from new data centres. Surging power demand, in a sense, is partly derived from the first trend of AI, and represents a broadening upstream into the supply chain as the trend grows bigger in scale. According to the International Energy Agency (IEA)ⁱ, data centres already account for around 1% of global electricity demand, and demand is set to double by 2026 to more than 1,000 TWh. Beneficiaries include utilities as well as manufacturers of power equipment such as transformers and electricity cables.
• Malaysia’s Investment Upcycle: : In Asia, Malaysia has become a clear beneficiary of the data centre investment cycle. Billions of dollars in investments have poured into the country, including from tech giants like Google, Nvidia, and Microsoft. The state of Johor Bahru in particular has seen rapid investments. If all planned data centre capacity comes online, Malaysia could become one of Asia’s largest data centre hubs.
• Climate Change and Nuclear Energy: Leading countries worldwide now recognize nuclear energy’s pivotal role to achieving net-zero greenhouse gas commitments by 2050. During the COP28 climate conference, more than 20 nations signed a declaration to triple nuclear energy capacity by 2050. Beneficiaries are uranium mines and nuclear energy operators. Interestingly, our quant model also identified an apparel company that helps consumers adapt to a warmer world with a popular new series of sun-protection clothing.
• Geopolitical Shifts: Rising geopolitical tensions worldwide have prompted fundamental changes, such as (i) higher defence spending, (ii) supply chain diversification and (iii) higher logistics costs. Notably, a record 18 out of 31 NATO member nations are on track to meet defence spending targets in 2024, recognizing the importance of security capabilitiesⁱⁱ. Businesses are also diversifying supply chains to enhance resilience, despite higher complexity and costs to their operations. Middle East conflicts have introduced a geopolitical premium to shipping costs, as global shipping fleets divert their routes to avoid attacks in the Red Sea.
• K-Beauty: As Korean pop music and Korean dramas rise in popularity across the world, we are also seeing increasing acceptance of Korean cosmetic products, especially in the USA. K-beauty offers more differentiated products at competitive price points made possible by an efficient supply chain. Our quant model has been very successful in picking out small K-beauty companies that were not well-covered by research analysts.

Conclusion

In this era of transformative change, thematic investments offer a compass. They guide us toward growth areas, but their fluidity demands adaptability. By embracing quant technology, skilled fund managers can ride the waves of change. Themes may evolve, but our commitment to staying informed and agile remains constant.

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ⁱhttps://www.iea.org/reports/electricity-2024/executive-summary
ⁱⁱhttps://edition.cnn.com/2024/02/14/europe/nato-defense-spending-target-intl/index.html

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