We identify and explore four sectors that could be set to perform well both now and going forward
Sectors for investing in the short and long term
Healthcare, miners, technology and infrastructure are sectors I expect to perform well over both the short and longer-term. Some of these sectors share driving factors for their recovery during this period, with some more nuanced reasons for individual sectors.
Key factors over the short-term clearly stem from the pandemic and the last decade of monetary expansion with the absence of fiscal measures, while over the long-term, innovation, demographics, and fiscal expansion will likely be supportive too.
Demand is on the rise for healthcare products and services, with global healthcare spending projected to reach $8.7trillion in 2020. Outside of the US, which accounts for 44% of the global market, China continues to expand its national healthcare system and social security spending on healthcare is estimated to rise over 50% in Japan as the country struggles to cope with the challenge of an ageing population.
While the daily news flow may often suggest otherwise, it’s important to recognise we are living through remarkably positive times across many key structural areas. Healthcare spending is expected to reach 10.2% of GDP across OECD countries by 2030.
The defensive aspects of this sector will continue to see consumers buy healthcare products even in uncertain times, the recent consumer stockpiling evidencing this argument. Innovation will also continue to play a big part in ensuring better healthcare provision at lower costs. The combination of technological advancement in areas such as genome technology and constantly changing demographics mean healthcare has both defensive qualities and growth prospects.
I believe there are a number of factors that will likely drive demand for miners in the years ahead including climate change, fiscal expansion, the historic low valuation of the asset class, pressure on the US dollar and stronger balance sheets.
Big mining groups have learned the lessons from wild swings in commodity prices from several years ago as Chinese demand naturally slowing down left many in a precarious situation. This forced them to cut back on cost and capital expenditures, reduce debt and leverage ratios, and now leaves some well capitalised to wade through the current crisis, while any rise in underlying commodity prices feeds down more easily to the bottom line.
Managing the transition to a low-carbon economy will be the cornerstone of our political, social and economic lives for the foreseeable future, although investors will need to remain attentive to the fact that sustainable investing is by no means risk-free.
We believe a key priority from a policy perspective will be encouraging investment in battery and energy storage. The acceleration in electric vehicles (EVs), robotics and artificial intelligence (AI) will all be founded on improvements in power, with battery storage and energy efficiency businesses likely to be the beneficiaries.
At the same time, we need to acknowledge commodities will remain integral in driving our economic response to climate change – many of the changes we are likely to see simply will not happen without a continued investment in key raw materials. To take the batteries example, manufacturers will continue to require lithium, cobalt, graphite and nickel as the building blocks to produce energy efficient battery solutions.
A pick-up in Chinese construction’s Belt and Road initiative, production constraints, fiscal expansion, downside pressure on the US dollar, and a sector valuation standing at an historic low all make the sector look attractive. The asset types tend to perform well in inflationary environments and, with quantitative easing become less effective, governments are finally considering infrastructure projects to support consumption.
In the short-term there has been a clear advantage for those businesses that operate platforms that can meet consumer demand from the comfort of their home. If we didn’t appreciate the benefit of technology in our lives before Covid, I’m sure most do now, and it’s only likely to play a bigger role ahead. New developments in data analytics, automation and artificial intelligence are disrupting the industrials space. Electronic payments, blockchain and virtual currencies are transforming how financial companies and retailers do business. In healthcare, the use of robotics is allowing surgeons to perform complex procedures with more precision, while sequencing technologies have broken barriers in the area of personalised medicine.
We are of the view technology and society are co-dependent and co-influence each other; a synergistic relationship, which reaches into all aspects of our lives.
By limiting our focus to companies that primarily develop, manufacture or provide technology services, opportunities can be missed. These opportunities could benefit companies that harness technology to automate more repetitive tasks, make smarter business decisions, improve the customer experience, improve collaboration and gain insight to improve the decision-making process.
This can mean investors missing out on the most efficient oil extraction company, the best platform for selling homes, or the best healthcare business which can tailor its medication to specific DNA makeup. Missing these opportunities can mean you forgo having a well-diversified technology portfolio.
Companies that integrate technologies into their fabric are likely to enjoy a period of sustained growth opportunities that better optimise resources and outcomes.
With governments looking to kick start their economies, fiscal expansion now seems the likely path with money printing playing a supporting role. With interest rates at near all-time lows, it should be supportive of infrastructure funding costs, creating a flatter yield curve that makes raising longer-term debt more appealing.
Companies considered to be infrastructure-focused are also likely to be monopolies that are less dependent on the economic cycle, which provides inflation protection through pricing power. They are normally disciplined in their capital management and take a responsible approach to stakeholders/shareholders.
Prior to Covid-19 dominating markets and our normal way of life, there were infrastructure projects already underway including China’s Belt and Road initiative which aims to speed the transportation of goods between China, Asia and Europe. Meanwhile in the US, the government approved a $200bn federally funded investment to leverage at least $1.5 trillion in infrastructure investment.
Our recommended collective investments
Polar Capital Healthcare Opportunities fund is actively managed by Daniel Mahony and Gareth Powell, both of whom have extensive knowledge of healthcare from an industry level and a stock selection/portfolio management level. The team comprises of five sector specialists with over 120 years of combined industry experience. By investing in a globally-diversified portfolio of companies within the healthcare industry, the managers aim to preserve capital and achieve long-term capital growth
BlackRock World Mining Investment Trust provides a diversified exposure to the global commodity market. The largest investments in key commodity companies include Rio Tinto, BHP Billiton, Anglo American, Newmont Mining and Vale. The London listed mining companies constitute a large portion of the trust and the top ten holdings make up around 62.3% of assets. In these troubled times the exposure to gold, which has been increased over the last year to 26.2% of total assets, has been of benefit.
Smith & Williamson Artificial Intelligence fund not only invests in those business that globally benefit from AI, but employs the uses of AI in the investment process to enhance the efficiency to identify companies offering the best exposure to AI.
First State Global Listed Infrastructure focuses on companies involved in infrastructure which can self-fund the expansion of their asset base, generate stable revenue and pay a growing dividend. The actively managed mix of defensive and growth holdings has allowed strong performance against its benchmark index and global equities, whilst also providing investors with a defensive income.
RARE Global Infrastructure Income seeks to generate high sustainable yield from an asset class with secular growth and manages through changing sentiment environments by rotating between regions and sectors. Currently about 15% of the portfolio is invested in the emerging market with an option to invest up to 20%.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.