Thematic equities in focus - Q2 2021

After being significantly targeted by investors in Q1 2021 – mainly for profit-taking purposes – our Connected Consumer theme performed well over the last quarter. We continue to see an increasing adoption of online consumption and the overall tone from businesses related to this area was encouraging, with most of them highlighting a strong level of activity and confidence in consumer demand. This is also evidenced by a dynamic level of corporate activity including M&As and IPOs. For instance, Proofpoint marked the biggest M&A deal to-date in the cybersecurity sector after announcing that they had received a bid from a private equity buyer at a 34%¹ premium to the prevailing market price.

The quarter was also positive for our Automation theme. The high demand we saw in the second half of 2020 in China has now spread globally to the US, while Europe is also beginning to recover. We also observed very strong leading indicators for Japanese industrial activity, such as machine tool and robot orders over the last few months. Whilst Japanese equities have underperformed global markets year-to-date, driven by a slower vaccine rollout, the outlook for automation businesses appear strong, with demand improving and companies having a greater international focus. Moreover, it is worth highlighting a strong recovery in healthcare-related names. For instance, robotic surgery companies – those more exposed to elective procedures – are recovering following a challenging period due to COVID-19. The prospect of vaccinations should allow this market to return to more normal levels later in 2021, with patients that should have been treated in 2020, likely to be able to have these procedures once we see some stability.

Leaving out the automation angle but keeping healthcare in mind, our Ageing & Lifestyle theme also behaved positively over the quarter. We saw a particularly strong contribution from names related to the treatment sub-theme. Global ageing populations bring a host of opportunities, we are expected to live longer on average and spend differently that extra time. But ageing populations, like all things, also bring challenges, one of which is an increasing prevalence of age-related diseases. For instance, dementia is an age-related disease severely impacting population, particularly Alzheimer, accounting for c.60-80%²  of dementia cases. Drug development for Alzheimer’s disease has been particularly challenging, with no new drugs having been approved in the US in the last 20 years. But in June 2021, the US Food and Drug Administration (FDA) approved Aduhelm, the first drug for Alzheimer’s that many believe tackles the underlying cause of the disease. While the drug’s approval was not without controversy, it shines a spotlight on a big unmet medical need, offers patients hope for the future and paths a new wave of innovation and opportunities for investors.

After being highly coveted in 2020 by investors, some profit taking was seen in Q1 2021, although the CleanTech theme has recently been regaining some momentum. For instance, we have noted the resilience of investment in the energy transition as corporates and countries seek clean energy, storage and energy efficiency services in order to achieve their net zero targets. Policy momentum also continues to be positive across all major regions, but there is still a long way to go in the race against climate change. Encouragingly, countries with net zero targets together represent around 61% of global emissions, 68%³ of global GDP⁴  and 52% of the global population. Progress talks will continue at COP26, the United Nations’ climate change conference, which will be held in Glasgow in November 2021. More than 190 world leaders are expected to attend to discuss plans of action in their countries in the collective fight to limit global warming to 1.5 degrees. 

The Transitioning Societies theme behaved less positively over the quarter.  This was particularly the case with China impacted by the latest government move to reform their $100 billion education tech industry, a step that roiled a slew of firms and stirred questions about what the nation’s regulators may do next. Certainly, the regulatory risks have been more heightened recently, but this ‘government component’ is something that must be managed when investing in China. As active, fundamental investors, we try to have a good understanding on governments’ priorities and we constantly assess policy initiatives and their potential impact on various sectors/industries. It is worth noting that policy changes can also be positive and create opportunities; for instance, China’s recent commitment towards green energy and carbon emission reduction.

Macroeconomic conditions have been mixed since the beginning of 2021 and we have seen several themes fluctuating based on investor appetite. For instance, the CleanTech and Ageing & Lifestyle themes have sold off in Q1 2021 and have recently started to recover. Whilst performances have been somewhat disappointing for those themes in the short term, we believe investors should look ahead and focus on the long-term drivers supporting those structural growth opportunities. Patience is a virtue for investors believing in thematic equities and as long-term investors, we are not trying to time the market nor the style rotations which are often unpredictable and dependent on factors entirely out of our control. Instead, our approach remains – and will always remain – focused on evaluating the fundamentals of businesses, their underlying growth drivers and assess any changes.

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