Why you should look beyond the obvious for unique thematic investments

The world of thematic investing is vast and it's easy for investors to fall into the trap of trend-chasing. But even those who can separate the quality from the meme-crowd opportunities may find themselves stuck in the shallows of obvious choices - in the world of investing, the obvious choice is often the overcrowded one. 

Then, there is the added challenge of accessibility. Some of the biggest opportunities from the megatrends of today are difficult for most investors to access, due to offshore regulations, high minimums, or a range of other reasons.

So, how do you find the best opportunities in a world where everyone is racing for their slice of structural growth exposure? 

For George Toubia, chief investment officer for Westpac Private Bank, it's about thinking deeper. He looks beyond the obvious to identify a set of beneficiaries from a structural theme at the earliest stages possible, across regions and sectors, and within industries. 

He applies a strict lens to what he views as an opportunity. It has to be medium-to-long term, and the concepts of robustness and durability are critical.

Armed with this analysis, Toubia then turns to the means of exposure and his universe spans public and private markets. In fact, he notes that, presently, private markets feature prominently in the portfolios of Westpac Private Bank clients - but it comes down to finding sensible opportunities for each investment theme and that can vary based on regions and markets.

In this wire, I discuss with Toubia what the changing market dynamics mean for investors, why he uses private markets for certain investment themes, and those opportunities he is seeing in some of the biggest megatrends today.

The reversal of the market regime

“We’re now in a new five to 10-year market regime that is the reversal of the last 10-15 years. That means a steady, consistent withdrawal of global liquidity, the return to an appropriate cost of capital, assets progressively returning to their medium-term fair values, businesses adjusting accordingly and a healthier level of exploitable volatility,” says Toubia.

While some commentators have started discussing the potential for material rate cuts in 2024, Toubia argues that we are in a completely different interest rate and liquidity paradigm to the prior 10 years. Therefore, it would be unrealistic to think we will truly return to the artificially low interest rate environment of the past - it isn't structurally sustainable.

As part of understanding the new market regime, Toubia says an objective mindset is required to identify the structurally new areas of business, industry and regional opportunities that will be different to the last decade.

“Investors need to think about which opportunities have just emerged and which have durability in the new environment and be ready for these ahead of time,” he says.

He likes investments to have high barriers to entry with market inefficiencies in their favour, be it on the private or public side. The direction of regulation and innovation is also a major fundamental consideration for Toubia.

The result of that is what Toubia describes as a "thematically-led investment proposition," which doesn’t look like the traditional equities versus bond approach. 

The global megatrends that Toubia views opportunities in

There are a range of areas that are beneficiaries of megatrends like tighter credit conditions, the rise of the middle-class in Asia outside of China, and the profound implications of the structural shift from globalisation to regionalisation, he notes. 

In addition, one area of elevated attention for Toubia is global healthcare, supported by drivers such as an accelerated pace of scientific innovation in US and Europe, and the changing care model with an increasing ageing global population. Another consideration is the improving backdrop for private credit across many parts of the world.

But Toubia emphasises that it's crucial to have a sound understanding of the US and Chinese economies to identify the right and evolving investment opportunities. The two biggest economies after all are going to have a significant impact on the progression of major trends.

“If you don’t have a deep structural understanding of these two big ecosystems at all levels, it has multiplying and profound effects on everything you do globally, and to some degree, domestically,” says Toubia.

Take healthcare as a theme, include the added trend of a globally ageing population, and apply it to China.

“We’re just starting to see the marked deceleration in China's overall population with more than 250 million aged over 60 years already, a number that is increasing as a proportion of total population, which in turn will continue to grow in terms of their healthcare needs,” says Toubia.

You can see how investment opportunities aligned to that shift can start to emerge from this.

Then turning to the energy transition, Toubia considers where the US, Europe and China are focusing their government spending to accelerate a marked shift in their energy mix, which Toubia expects to enter a rapid phase within the next five years.

Toubia notes that, with respect to China, the idea of elevating and supporting domestic champions is a national long-term policy priority, such as in various areas of consumption, advanced technologies and in the growing electric vehicle (EV) space.

“In particular, the innovation in all forms of electrification, including electric vehicles is not just going to be about domestic leadership in Chinese markets. They are going to be some of the most powerful competitors in the European market too," he says.

China is also a global leader in making EV batteries, dominating the lithium and cobalt supply chains. 

Toubia's view on a missed opportunity in the market

Toubia says that, for some time now, his assessment has identified that the US consumer has been and will continue to be more durable in terms of its vitality and contribution to opportunity, than many consumers in other countries, purely based on objective measures and conclusions. Yet market participants and global investors have generally been dismissive of that for what is now a long period of time. 

To that end, he notes that 70% of the US economy comes down to consumption, compared to 60% of the Australian economy. US consumers are also earning more interest on their bank accounts than their mortgages payments, and overall, the proportion of US consumers’ monthly income needed to service debt is not significant. In addition, while energy costs are up in the US, they aren’t at extreme levels, and are far less than the high energy prices in places like the UK, Europe and Australia. 

Another area of attention by Toubia is the significant investment commitment to elevating the quality of infrastructure in the US. 

Why is this important?

Toubia argues for one that investors should be more attentive to countries with less structural flexibility, sporadic focus on innovation and high debt burdens assumed by consumers, such as the UK, some parts of Europe and Australia, than the US. 

Secondly, knowing this helps you extrapolate which investments are best set up for the environment ahead. For Toubia, these attributes inform the structural attractiveness of a number of specific investment avenues within domestic America and in those other geographies.

How you can apply these insights in your portfolio

“Take an objective view and ask what are the sensible ways to get access to the opportunity. What are the areas that offer robust risk-adjusted growth potential,” says Toubia.

Some factors that can support a durable investment include regulatory support or government stimulus.

He adds that you also need to consider regional issues in the approach you take to investing.

“In Asia, you need to think about liquidity, exits, what type of regulatory regime you’re relying on and how rules and regulations are enforced.”

Toubia says that to that end, he has favoured public market investments in Asia, while in Australia and the US, it’s a combination of private and public markets.

While Westpac Private Bank clients are in a more unique position where they can access specific and tailored exposures in public and private markets, other investors still have options they can consider for their portfolios. 

It's worth taking a leaf from Toubia's book and considering what exposure you are looking for first, then working out if the more relevant expression lies in public or private markets, then whether this entails direct investments or indirect via actively managed funds or passive options such as ETFs.

There are a range of fund managers in Australia who offer actively managed funds that specialise in private credit and debt in a range of sectors and themes. Equally, the world of specialised thematic ETFs has grown significantly in recent years.

Finally, don't forget to consider the robustness and durability of not only the opportunity you identify but the investments you consider for exposure - it's critical if you want to take a longer term lens in your approach.