Energy Transition: the new thematic investing movement
2022 has been one of the most turbulent years global markets have ever seen. It seems clear to us that policymakers are solely focused on containing inflation, and they are willing to sacrifice growth to do so. Thus, major uncertainties hanging over financial markets have strongly impacted markets, and more specifically the thematic investing movement.
Before this year’s market upheaval, the thematic investing movement experienced massive, if not excessive, inflows. Retrospectively, we could argue certain areas of thematic investing have experienced several characteristics of a financial bubble. These includes amongst others: high valuations history, record fund raising activities (IPOs and SPACs), “buzz word” investing, new valuation metrics such as EV/Sales or even EV/Total Addressable Market, rising bond yields, significant market turnover and skewed valuation of growth versus value. The correlation between thematic investment products has been very strong due to overlap in holdings, where companies can be a part of many different themes, such as semiconductor companies for example. We have always adopted a skeptical and cautious approach when considering thematic investments, many of them being essentially marketing products aiming at taking advantage of a popular and legitimate demand from investors. Furthermore, many of these products were not “pure-plays”.
New interesting investment opportunities
Although the thematic investing bubble is deflating rapidly, some interesting investment opportunities are emerging. Some significant dispersion should favor an active investment approach as opposed to a passive one. We are favoring both active long-only and long-short approaches, especially in the technology and the energy transition sectors. As Bill McDemott, CEO of ServiceNow, said, “Software is the only deflationary force that exists in the world today… There is no other way to fight inflation.”. We also believe that every decade has a theme that captures the zeitgeist and turns it into an investment mania. We believe that in the 2020s the energy transition theme will prevail, for legitimate rather than just trendy reasons. We anticipate some dispersion, suited to a long-short approach. For instance, cleantech alternatives are dis-inflationary (and create jobs) in the long run and are more efficient.
To summarize, while excesses have surrounded the thematic investing space, the current market correction should provide investors with interesting opportunities and attractive entry points. Companies will start to focus more on profitability as opposed to “growth at any cost” and thus we should expect an improvement in quality metrics to such an extent that the thematic landscape should become investable again. Our recommendation is for investors to follow an active approach, using a combination of directional and non-directional approaches to take advantage of the strong dispersion between winners and losers in these thematic.
Julie Attanucci, Analyst, Investment Group