Electrification, weight-loss drugs, AI, digitalisation, cryptocurrencies, ESG darlings, 3D printing and the metaverse are some of the various themes that have been moving global markets recently. However, constantly shifting business environments and rapid technological advances can sometimes lead to a bubble-bursting situation for some themes and their major players.
Looking to participate in the upside potential of one or more of these trends requires the assessment of their fading cycles, which leads to timing and concentration risks. Risks could be lowered by building a portfolio of diversified “beating-the-fade” companies which aims to avoid “boom & bust” situations, with a balanced exposure to select trends, ensuring the portfolio navigates different market dynamics smoothly.
Electrification and healthcare: two growth-generating or accelerating themes
Electrification
Electrification is considered a structural growth accelerator driven by CO2 emission reduction efforts and energy efficiency, against a backdrop of tightening climate regulations and volatile energy prices. Electrification presents a multitude of opportunities across different sectors, namely energy, utilities, industrials and materials. A wide range of companies active in the renewables field – mostly solar, wind and hydrogen –, as well as distribution providers with smart grids or EV charging, are expected to show strong revenue growth potential.
Nevertheless, these companies face significant challenges stemming from fierce competition and constant government interventions, such as volatile incentives, import restrictions and auction systems. In order to meet the increased demand for electricity, which is still only modestly replacing fossil fuels, companies also have to factor in a potential shortage of copper, disruptive infrastructure needs, strict safety considerations, and complex questions surrounding financing and environmental effects.
Consequently, execution in this segment is still seen as poor, with low profitability and volatile revenues. Some wind-related names struggle with high capex and low profitability, while solar-module-related names face extensive competition and strict import rules. This in turn translates into companies being positioned in the very early stage of the growing CFROI® (Cash Flow Return on Investment) lifecycle, with negative cash flows and distant break-even points.
Healthcare and weight-loss drugs
Healthcare is a core structural growth generator, driven by constant demographic changes and innovation breakthroughs. Innovations in healthcare, despite higher initial costs, can relieve strains on medical budgets with fewer or shorter hospitalisations, or increased productivity through healthier lives. Furthermore, the increased adoption of digitalisation and artificial intelligence (AI) could lead to further capacity and efficiency gains within the sector, and could offset some challenges in competitiveness, labour shortages and patient longevity.
Several healthcare names have been under pressure this year given the Covid-19 overhang and constant regulatory scrutiny. Therefore, in-depth knowledge of this “old” sector within a broader landscape, along with fundamental stock selection, is necessary to identify attractive long-term opportunities with justified valuation levels.
Within the pharmaceutical segment, the recent advancements in weight-loss drugs reveal some positive and negative disruptions with ramifications across several industries, including food producers, restaurants, sports and fashion. In fact, anti-obesity drugs are projected to reach USD 100 billion in sales by 2030, led primarily by the US market.
Balanced exposure to select structural growth trends
As investing in pure thematic strategies can lead to being solely dependent on the prospects of a theme and the viability of its major players, one should favour strategies that benefit from diversified sources of performance derived from a balanced exposure to selected structural growth trends.
However, identifying winners in growth-generating or accelerating trends requires a deep understanding of the related risks and opportunities, as well as visibility of the future value-creation profile of the segment and of the beneficiary company.
Looking for historical proof of a segment’s or a company’s viability by studying past CFROI® profiles at industry or company level allows one to steer away from “boom & bust” trends and volatile businesses with low predictability. Selecting diversified business models with comparably low-risk profiles ensures one’s portfolio is less dependent on themes’ seasonality and market timing.
