Many investors consider future trends when making investment decisions. Popular examples of investable trends include the growing demand for green energy, mainstream adoption of electric vehicles and cybersecurity.
The thesis is that if you can correctly spot/predict a trend in the early stages, then you can invest in the companies and sectors that are best positioned to benefit economically. This is called thematic investing.
What is thematic investing?
Thematic investing is an approach that seeks to capitalise on megatrends and/or long-term structural changes. Most thematic trends tend to relate to three broad categories being (1) demographic change, (2) technological innovation and (3) climate change.
The goal is to invest in sectors or companies that are likely to benefit substantially from these changes. For example, electronic vehicles (EV’s) will likely benefit from increasing consumer demand because of an increasing focus on climate change. If you agree with this thesis, then you may be attracted to investing in not only EV manufactures but the downstream industries such as battery, sensor manufactures, rare material miners (e.g., lithium – Australia is the largest exporter of lithium) and so on.
Can you pick trends with consistent accuracy?
The main challenge with thematic investing is that it’s a higher risk strategy because it relies on your (trend) expectations materialising. Our expectations can often be shaped by our world view, personal experiences and the dominant narrative of the day. However, these things may not be useful when making investment decisions.
Also, because these themes are based on future outcomes, we must realise that expectations, products, technology and so on can change very quickly. Again, using EV’s as an example, whilst some valuable advancement have been made, there’s still plenty of opportunity for significant development in the future. Challenges such as battery storage, manufacturing costs, faster charging, battery recycling all need to be addressed. And the solution may not rest entirely with lithium batteries, but an alternative technology that is not discovered yet.
How trends ultimately play out is inherently difficult to predict.
Do you need to pick trends?
An argument can be made that you don’t need to pick trends because when themes eventually materialise and result in value (profitable businesses/sectors), they will eventually be included in traditional share market indices.
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