It’s a strange time in the financial markets, and that’s a problem for investors. The solution may be to start focusing on big ideas.
Here’s the issue: Stocks are at record highs, but not because forecasts for earnings and economic growth are optimistic.
Traditional safe havens like cash and bonds offer little comfort with interest rates already at record lows.
So the choice investors have right now seems to be buy stocks at record highs with no good reason to see gains continue, or buy bonds at record highs with no real opportunity to generate yield.
Or park your funds in the bank and earn nothing.
The solution to this is to “sit back and see longer-term secular trends,” said Joseph Quinlan, a market strategist at Bank of America Global Wealth & Investment Management.
He means that investors have to focus on specific industries that are growing at a faster rate than the overall economy, and find companies and markets that are going to keep growing irrespective of what is going on around them.
Quinlan is a thematic strategist, and he and his counterparts at other banks are tasked with identifying these big trends that will defy the rest of the world economy, like the growing need for healthcare worldwide and the increasing adoption of technology used to make machines — like cars — smarter.
“If you can build it on a foundation of powerful themes that are going to work for longer periods of time, that’s a great foundation,” said Dan Roarty, chief investment officer of global growth and thematic at AllianceBernstein.
“In my mind, it’s much better than starting with a benchmark and trying to build a porfoltio plus or minus around the benchmark,” he told Business Insider.
One area that Quinlan is excited about right now is what he calls “emerging healthcare costs.”
The Organisation for Economic Co-operation and Development (OECD) estimates that more than half of the adult population in its member states, mostly developed countries, is overweight or obese.
Although food insecurity is still a concern in many developing countries, the opposite is becoming a problem for some of them, too. That’s happening as per capita incomes rise, combined with more sedentary lifestyles and the availability of more processed foods.
Emerging countries are estimated to account for a third of global healthcare spending in 2025, up from 28%, or $2 trillion in 2015, according to BMI Research.
“The investment opportunity: ballooning waist lines and aging populations in the emerging economies will necessitate more spending on health care services, medical devices, diagnostic equipment and pharmaceuticals,” Quinlan wrote in a recent note to his clients.
This is just one example of several other ideas that thematic investors are sifting through for the possibility of superior returns.
It’s global in nature — an important characteristic in identifying growth themes. That’s because very few US companies compete against only US companies. So with this approach, it’s important to not have a bias toward one’s home country.
“This is less about small-cap becoming a mid-cap,” Quinlan told Business Insider, referring to the growth of a small company. “It’s more about the global brand leaders that have been around for 50 to 100 years that are just going to tap into this underlying demand and growth as it takes place.”
The theme that AllianceBernstein’s Roarty finds most interesting right now is one he calls “intelligent machines.” Basically, devices are becoming smarter, thanks to internet connectivity and advanced sensing capabilities.
He anticipates that carmakers would incrementally continue taking some functionality away from humans and giving it to cars, like quickly braking to avoid a crash or autopilot altogether. It’s a great opportunity for businesses, even as insurance companies become more comfortable with covering the associated liabilities, Roarty said.
“As the penetration of those active safety features continues to grow, you can still get very strong growth, regardless of maybe some short-term weakness in the macro economy,” Roarty told Business Insider.
Fact or fad?
But it’s important to be able to tell when a theme is just a short-term fad. For that, Roarty and his team pass every potential theme through a few filters.
They ask whether there’s a real opportunity that can translate into sales and cash flow, and whether its prospects are near enough into the future — usually five years — to mature. Additionally, they are interested in only exploiting investable, public companies that are liquid in areas that are misunderstood or underappreciated.
“It’s best to look at a basket of stocks to invest in,” Kelly Bogdanov, vice president and portfolio analyst at RBC Wealth Management, told Business Insider.
That’s because sometimes the growth potential of some companies is not immediately clear.
And while thematic investing focuses on long-term growth, there are companies that have attractive growth rates right now. For example, companies in growth industries that are also trading at a discount to the broader S&P 500 on a price-to-earnings ratio basis could be a good get for the nearer term, she said.
“We’re going to get back to an environment where it’s not all about fear, and where fundamentals matter,” Roarty said.
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