Six big investment themes advisors should be exploring

Analyst gives WP a deep dive into growth areas that have been accelerated by the COVID-19 pandemic

Six big investment themes advisors should be exploring

For many, the past five months have represented a seismic lifestyle change. From driving to a swanky downturn office for a lunch meeting in a suit and tie to Zoom calls in your basement wearing sweatpants trying to ignore screaming kids.

COVID-19 has rocked our world – and not in a good way. But the changes to the way we live our lives has accelerated disruption. Trends whispered in the corridors per-virus are now red-hot glimpses into the future, putting investors on alert.

Pedro Palandrani, a research analyst at Global X, an ETF company that specialises in thematic growth, income and international access ETFs, has co-authored a report into the next big themes.

He talked WP through the six areas he thinks investors should be examining for opportunities as the world grapples with the coronavirus.

1. Health and wellness
People are pursuing healthier eating habits during COVID-19 and, according to the International Food Information Council’s (IFIC) 2020 Food and Health Survey, 60% of Americans reported cooking at home more, and more than 20% reported eating healthier than usual.

Forty-three per cent of respondents indicated that they would adhere to stricter dietary guidelines in the coming year, up from 38% going into 2019. Many respondents also communicated a willingness to embrace meat and dairy alternatives. Consumers showed more concern that their environment is healthy as well. The share of consumers focusing on environmental sustainability reached 39% entering 2020, up almost 10% year over year (YoY). And over 40% of shoppers noted that they prioritize environmentally-conscious farming practices in their purchasing decisions.

What does it mean for investors?

Palandrani said: “The aspect of people taking a proactive approach to their health and wellness has been a little bit under appreciated. But right now, after all that we are seeing with COVID-19, it has been clear that we need to start taking care of ourselves in a proactive way.

“This is where the investment case fits in for a health and wellness-type strategy, not only for companies we've seen like the food and beverages industry, which of course is extremely important, but also companies that sell fitness equipment. Some reports have shown that fitness equipment sold has increased four or five times. Health and wellness is a very broad theme but it really touches on that new aspect of taking a proactive approach."

2. E-commerce
Recent sales numbers illustrate how e-commerce is made for the stay-at-home economy. For May and June, consumers spent more than $53 billion online, totalling 22% of all U.S. retail sales for that period. Notably, U.S., e-commerce home improvement sales increased 149% YoY, leading footwear (64%) and apparel (41%). Looking abroad, U.K., online grocery sales increased 76% YoY, demonstrating how COVID-19 stoked penetration in historically weak areas.The e-commerce boom has some retailers like Zara closing physical stores. In tech, giants Google and Amazon are responding to recent sales trends with digital advertisement enhancements, services support, and expanded digital payment services.

What does it mean for investors?

Palandrani said: “Before COVID-19 we used to think about low-hanging fruit categories for e-commerce like electronics and clothing. Electronic has close to 50% online penetration while clothing has about 25% online penetration – very high categories relative to the 11% online penetration that we see in the United States.

“But now after COVID-19 we're starting to see categories such as food and beverages, and groceries, but also in the health category. For the food and beverage category before COVID-19, the e-commerce penetration was 2.5%, auto was about 3% and for health, it was about 7.8%, so low relative to the broad retail segment.

“But these three categories alone represent 44% of total retail sales. These are three huge categorie that could take ecommerce to the next level. We're really expecting a lot of the future growth in the e-commerce to come from these categories.”

3. Social media
Anything that enhances the user experience remains front and centre in social media circles. Google launched Keen, a new application that tracks its users’ interests and hobbies to suggest relevant new content. LinkedIn designed its “10 Free Learning Paths” for those facing COVID-induced unemployment. The program, which includes partnerships with GitHub and Microsoft Learn, seeks to help workers develop and refine skillsets. LinkedIn also implemented a “support” reaction and an “open to work” feature on its platform.

Increased video viewership prompted Facebook to increase creator monetization opportunities through live ads, video ads, and new ad experiences. The move is a response to a surge in Facebook’s Portal sales and the rapid rise of Zoom. Support for creators also includes Instagram’s new e-commerce platform, which allows customers to purchase directly from creators through the app.

What does it mean for investors?

Palandrani said: “The attractive thing from these companies from an investment perspective is that they are monetizing their user base better than ever. If you look at Facebook, they have billions of users, so how much can they grow their user base? We're actually not expecting to see a ton of growth coming from new users but where we're seeing a lot of the growth coming is from monetization opportunities.

“The average revenue per user is growing a lot faster than the number of users that these companies are bringing to their platform via social commerce – the intersection between social media and e-commerce -  where companies like Facebook, with their Instagram platform, is introducing new e-commerce capabilities.”

He added: “Technology is actually becoming a defensive sector, which may sound crazy. But given all the information we know from COVID-19, we can really see that these companies have been able to mitigate the impact and continue to thrive and grow their top-line revenue in the double-digit range”

4. Video Games & Esports
The COVID-19 crisis has console and video game sales soaring. In the U.S., consumers spent $977 million on video games, accessories and consoles in May, a striking 52% YoY increase. Share prices for industry leaders Activision Blizzard, Nintendo, and Take-Two Interactive are up approximately 25% since early March. The upcoming PlayStation 5 console and Xbox Series X launches are expected to continue the industry’s momentum. Mobile gaming continues to roll as well. The industry is expected to hit a record $100 billion in revenue by the end of 2020, according to analytics firms App Annie and IDC. For comparison, $100 billion would be triple the sum of console revenues from the Nintendo Switch, Xbox One and PlayStation 4.

What does it mean for investors?

Palandrani said: “We’re talking about a $150 billion industry which, just for context, is larger than revenues from the box office and professional sports combined. This is a massive, massive industry. Honestly, we have seen investors shy away [in the past] but now the interest has picked up tremendously.”

He added: “There is still a lot of education to do with investors about this theme, specifically because it is undergoing a massive transformation.”

5. Cloud Computing
A surge in U.S. military and civilian agency interest in space has triggered an increase in space-related cloud computing projects. Amazon Web Services plans to launch a dedicated segment for Aerospace and Satellite Solutions. And Microsoft entered a 3-year, $8M contract with NASA, securing Azure as the organization’s main provider for cloud services. Back on Earth, with remote work budgets increasing 4% YoY in 2020, firms now consider cloud computing the third most critical technology behind digital transformation and cybersecurity when it comes to spending. As remote work budgets are increasing, 49% of firms are purchasing or expect to purchase cloud technology that supports their remote work infrastructure.

What does it mean for investors?

Palandrani said: “Many companies are allowing their workers to work remotely on a permanent basis. That wasn't the case a few months ago so everything related with cloud computing is showing a rapid adoption and acceleration.”

He added: “For investors, we think data centres [are important}. There are a lot of companies like Nvidia or AMD that provide the key technology that goes in data centres and we have seen this industry growing very rapidly. Within our ETF, we segment cloud computing with software service companies and infrastructure service companies, and these are your large public cloud companies like Amazon, Microsoft, IBM, and Alibaba. But we also have a bucket of companies within the data centre REIT space.

“There is a large opportunity within the hardware side of things for cloud computing. Ultimately, all this information needs to be stored somewhere physically, and that's the function data centres serve these days.”

6. U.S. Infrastructure
The Trump administration proposed a $1.5 trillion infrastructure bill to bolster the American economy. The bill lays out plans to spend $300 billion to build and fix roads and bridges; $100 billion for low-income schools; and $100 billion for transit and telecommunication in rural regions. The news sparked U.S infrastructure stocks to jump, with U.S concrete shares, marking a 22.5% increase week over week, and also igniting hopes of bringing manufacturing back to the United States.

Though it’s possible this particular bill could materialize in the not-too-distant future, how the administration plans to finance such an ambitious project remains to be seen. Adding to the uncertainty is that financing for the administration’s $2 trillion infrastructure plan from April 2019 has yet to be hashed out.

What does it mean for investors?

Palandrani said: “It's very political induced but at the end of the day, we have also seen some private deals and states actually investing money on infrastructure. This is a bipartisan agreement that money needs to be invested in infrastructure. I think there's a strong support for building and repairing infrastructure, given that we have growing populations, aging infrastructure assets and also changing forms of transportation. All of that really impacts the need for additional infrastructure spending.”