Thematic investments can deliver idiosyncratic risk and resilient earnings growth
There are many other places to look for similar long-term investment themes. Some, such as mitigating the impact of climate change, represent both vast challenges to society and billions of dollars’ worth of growth-investment potential. Others, such as Big Data, artificial intelligence or 5G connectivity, have the potential to drive change in almost every part of our lives in perhaps unimaginable ways.
The advantages of these thematic investments, in terms of diversifying away from the business cycle, are twofold. First, they can be sources of resilient earnings growth during a period of widespread earnings deterioration; and second, investments that are leveraged to particular themes are often subject to idiosyncratic volatility, driven by newsflow around the theme rather than, say, the strength of the U.S. dollar or manufacturing PMIs.
Of course, investors who look through cycles too blithely can get sucked into bubbles—particularly during the later stages of a cycle. It is worth remembering that the dotcom bubble had its origins in the avoidance of a U.S. recession in 1998, when the Federal Reserve responded to a downturn in global demand and a series of emerging markets crises with three rate cuts: the resulting relief grew into market exuberance that soon over-ran the reality of corporate earnings.
Still, considering how the list of the world’s 10 biggest companies have changed over the past decade should remind us of two important things. Amazon did not become bigger than Walmart or Johnson & Johnson simply because it has navigated this business cycle more efficiently or aggressively, but more because it has been instrumental in changing the way our economy works. And the top four, which are all technology companies, are survivors of the dotcom bubble.