Inflation, a tightening Fed, and geopolitical tensions have placed the stock market on edge in the early days of 2022. Targeted buying of investment themes with strong growth potential may help.
The pace of investment and innovation that traditionally propels the growth of thematic funds remains strong—and could surpass inflation.
Among the top themes worth following in 2022:
Green energy and clean technology
Smart factories and automation
Genomics and biotech
The Case for Thematic Opportunities
The U.S. economy appears on solid ground, but the market’s recent pullback highlights key risks. Rising interest rates could put downward pressure on valuations for the S&P 500 and other broad-based stock market indexes in 2022. Stubborn supply chain challenges, the unwinding of the Fed’s balance sheet, and, of course, the myriad problems arising from the global pandemic may present investors with formidable challenges. Given this backdrop, the ability to identify specific themes or assets with growth potential as an enhancement to a diversified investment portfolio becomes even more appealing.
So, why might investors want to consider a thematic approach in the current environment?
Innovation can outpace inflation.
Even though inflation is near a 40-year high, today’s most innovative, growth-oriented companies may be well-positioned to deliver continued fundamental performance through rapid revenue expansion.
Inflation could catalyze revenue expansion for thematic companies and technologies that help others manage their margins, which have come under pressure as producer prices rose faster than consumer prices. This could remain true even if, as expected, the Federal Reserve starts raising rates to rein in inflation.
Valuations across a variety of thematic opportunities are potentially attractive.
Even after the market’s recent pullback, some themes may still offer more attractive opportunities than the broad market indexes.
While many technology and growth themes pulled back in 2021, some areas saw strong revenue growth. Among those: alternative energy and e-sports gaming.
Inconsistencies between broad market returns and corporate fundamentals among thematic growth companies could create buying opportunities.
The pace of investment and innovation that propelled thematic growth remains strong.
Private investment as a percent of GDP has increased every decade since the 1950s.
Many companies are competing to stay on the leading edge by increasing research and development spending to create new technologies, businesses and industries.
Investing in innovation has become a necessity—not a luxury.
Source: Bureau of Economic Analysis, data from 3/31/1947‒ 9/30/2021.
The Bottom Line: Focusing on innovative growth themes at reasonable valuations may provide investors with an attractive alternative to buying into the broad market.
Thematic Opportunities to Focus On
Renewable/Green Energy and Clean Technology
Green energy refers to companies involved in sourcing power from technologies like wind, solar and geothermal, as well as storage technologies that are growing more efficient and cost effective.
What’s the Opportunity? Efficient energy production has long been an innovation hotbed, and numerous climate change studies have highlighted the importance of cleaner energy. There have been recent technological breakthroughs in solar energy cooling systems, silicon solar cells and even nuclear fusion. Continued alternative and clean energy development is critical to meet announced climate goals across the globe.
Why Invest Now? Inflation and economic reopening have increased fossil-fuel prices, and alternative and clean energy returns typically rise in parallel with increasing oil costs. Clean energy was also a priority in the initial $2.2 billion White House infrastructure proposal, and policy tailwinds for increased spending remain.
Smart Factory and Automation
Smart factory and automation technology involves the integration of manufacturing assets with digital capabilities to improve production and logistics efficiency.
What’s the Opportunity? Even as the cost of integrating robots declines and their capabilities grow, the use of robots in production and distribution is still in the early stages. The cost of installing a robot has declined approximately 50% since 1990, while labor costs have risen. Meanwhile, advances in machine vision and algorithms mean robots can do more complicated tasks and have potential applications in previously untapped settings like meat-packing and recycling.
Why Invest Now? Inflation is pushing labor and input costs higher, with producer prices rising faster than consumer prices. Companies will have to find ways of containing costs to maintain margins, and using robots could be key. Potential policy changes and investment incentives to onshore production in industries like semiconductors could also drive demand for smart factories, particularly since U.S. labor costs are higher than in China and elsewhere.
Online retail is still early in penetrating the overall U.S. retail market, making up about 13% of sales in the third quarter of 2021.
What’s the Opportunity? Developing and employing leading-edge technologies in logistics, delivery and machine learning have been critical to e-commerce success. Advances like virtual fitting rooms and drone delivery could help bolster growth and profitability over time. In addition, digital native retailers should find the transition to web 3.0—the next generation of online services such as virtual and augmented reality—straightforward compared to legacy competitors still developing their online presence.
Why Invest Now? With increasing inflation and less price stability, online retailers employing flexible models capable of adjusting prices in real time may be better able to maintain margins and pass on cost savings to customers. The recent market selloff, however, may offer an appealing entry point for investors in 2022. E-commerce stocks are more than 40% below their 24-month peak valuation, as measured by forward P/E ratios, and have consensus year-over-year earnings growth for 2022 of 14%. This could indicate a good time to invest.
Genomics and Biotech
Genomics and biotechnology companies develop treatments using leading-edge medical science, such as manipulation of genetics and microorganisms, to address a wide array of health issues.
What’s the Opportunity? Genomics and biotech, which boomed during the early part of the COVID-19 pandemic in 2020, saw valuations compress and price-to-earnings ratios well off two-year highs despite significant future potential. Few areas are seeing new discoveries move as quickly. This past year alone, researchers increased the density of genetically coded data a hundredfold, implanted a genetically modified kidney, and developed living robots called xenobots.
Why Invest Now? The pandemic and the rapid rollout of COVID-19 vaccines may have supercharged the development of mRNA treatments for a range of conditions. Ordinarily, newly developed drug technologies can remain in testing for more than a decade, but mRNA and nanolipid innovations reduced the development of COVID-19 vaccines to less than a year. Looking forward, there are promising indications surrounding many new biotech treatments.
The 2022 backdrop is noisy and complex, but the economy remains strong, and investment in innovation is creating new opportunities. Long-term growth may prove more important than excess liquidity going forward. Growth themes may offer an appealing way for investors to position themselves in 2022 to take potential advantage of long-term secular trends in innovation.
2 Bureau of Labor Statistics as of 12/31/2021; U.S. News and World Report, “Fed Survey Finds Supply-Chain Shortages Boosting Inflation,” December 2021
3 Alternative energy is defined as companies in the S&P Kensho Clean Power Index; e-sports is gaming defined as companies in the Solactive Video Games & Esports Index
4 Bloomberg as of 12/31/2021
5 Fast Company, “This remarkable cooling system runs on sunlight and saltwater no electricity required,” November 2021; SciTechDaily, “Fusion Breakthrough: At the Brink of Fusion Ignition at National Ignition Facility,” November 2021
6 International Energy Agency, “World Energy Outlook 2021,” 2021
7 Bloomberg as of 12/31/2021
8 McKinsey & Company, “Industrial robotics: Insights into the sector’s future growth dynamics,” July 2019
9 Wall Street Journal, “Tyson Turns to Robot Butchers, Spurred by Coronavirus Outbreaks,” July 2020; Forbes, “Rise of The Recycling Robots,” November 2020; Investor’s Business Daily, Industrial Automation, Robotics Market Is ‘In Full Swing’ Post-Covid,” Investor’s Business Daily, May 2021; ZDNet, “Robots in 2022: Six robotics predictions from industry-leading humans,” November 2021
10 Bloomberg as of 12/31/2021
11 The Washington Post, “Countries lavish subsidies and perks on semiconductor manufacturers as a global chip war heats up,” June 2021; Harvard Business Review, “Robots Are Starting to Make Offshoring Less Attractive,” May 2014; U.S. Bureau of Labor Statistics, “Occupational Employment and Wage Statistics,” May 2020; Statista, “Average annual wages in China from 2010 to 2020,” May 2021
12 U.S. Census Bureau, Quarterly Retail E-commerce Sales, November 2021
13 The New York Post, “Amazon’s California clothing store will use algorithm to recommend styles,” January 2022; Forbes, “Meet Rokt: The Netflix Of Ecommerce That Is Personalizing The Purchase Process And Taking The Noise Out Of Online Shopping,” January 2022; BNP Paribas, “E-Commerce and Logistics: how is technology changing the sector?” August, 2018
14 Forbes, “Virtual Dressing Rooms: A Guide For Fashion Retailers,” September 2021; MarketWatch “Walmart customers in Arkansas can now place orders for drone delivery,” November 2021
15 P/E ratio is calculated by dividing the market value price per share by the company’s earnings per share.
16 Bloomberg as of 12/31/2021. E-commerce stocks are defined as the ProShares Online Retail Index
17 Genomic stocks defined as the Solactive Genomics Index and biotech stocks defined as the Nasdaq Biotechnology Index
18 NYU Langone Health Newshub, “NYU Langone Health Performs Second Successful Xenotransplantation Surgery,” December 2021; ScienceNews, “Tiny living machines called xenobots can create copies of themselves,” December 2021; BBC, “Scientists claim big advance in using DNA to store data,” December 2021
19 JACC: Basic to Translation Science, “Drugs, Devices, and the FDA: Part 1: An Overview of Approval Processes for Drugs,” April 2016; Medical News Today, “How did we develop a COVID-19 vaccine so quickly?” November, 2021
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