Three underrated global equity thematics with exciting long-term potential

Artificial Intelligence has driven markets to new highs, but three other underrated thematics could offer equivalent long-term opportunities says Jens Peers, CIO of Mirova US*.

AI has been the driving force behind the majority of returns for large cap global indices this year. However, there are other long-term investment thematics which have not received as much attention from investors, so are trading at lower valuations and could hold just as much long-term investment potential according to Jens Peers, CIO and Portfolio Manager for Mirova’s Global Sustainable Equity Strategy*. Mirova is an affiliate of Natixis Investment Managers.

Q. AI is an incredibly popular investment thematic, what are your thoughts on its long-term potential?

Jens Peers (JP): AI will cause a huge change in all of our lives, but we are in the very early stages. Everything we use in the future will be connected to everything else and AI will be the core of that future infrastructure. There is obviously intense demand right now for things related to AI, like Nvidia’s GPU chips, and this creates a short-term risk where companies may over-order and then growth will pause. Thus we are quite cautious on the shorter-term outlook for AI companies, and think investors should be careful of their positioning, but we are very positive on the long-term outlook.

Q. What other long-term investment thematics are you currently most excited about?

JP: One is around global supply chains. As a result of Covid and the war in Ukraine there were many supply chain issues and companies had difficulty getting the products they needed to the right place at the right time. Since that time companies have been rethinking their global supply chains and outsourcing more to companies that are located in countries that are friendlier and closer to their main markets. We call that friendshoring and nearshoring and this trend has continued with the increased geopolitical uncertainty between the US and China, and Russia and the Middle East. There are a lot of opportunities in this thematic related to manufacturing and transportation with significant costs involved, as companies relocate parts of their production to other countries. For some companies it’s a risk and for others it's an opportunity.

Another exciting opportunity we see is in health care. We've already seen big opportunities related to obesity in the last couple of years, and we think that's going to continue. But we also see more and more positive evolutions with drugs getting through phase II and phase III in oncology, the battle against cancer, and we expect that to be a big driver of future returns for the pharmaceutical industry.

A third compelling opportunity is related to water treatment. Recently in the US a new regulation has been put in place that requires drinking water to be treated for permanent chemicals, such as Perfluoroalkyl and Polyfluoroalkyl Substances (PFAS). These permanent chemicals are used in the production of Teflon or waterproof clothing for example. Through rain, wear and tear etc. a lot of these chemicals ultimately get absorbed into our soil and water and these chemicals are very toxic for humans. That water now needs to be treated and it's a big opportunity for the handful of companies that have a solution right now. This could lead to a multi-billion dollar opportunity in the US and around the world.

Q. How do you view the future of sustainable investing?

JP: It's important to understand that the starting point in our investment process is not necessarily sustainability, but a thematic view. The world is changing in terms of demographics, technology, environment, culture and governance and we aim to identify companies that offer solutions for those changes and are therefore well-positioned for long-term secular growth. We think it’s equally important to integrate sustainability into our investment choices. As long-term investors we don’t see sustainability just as a choice, but also as a necessity for a company’s future success. Over time there is an increasing chance that poor sustainability practices will lead to an accident, or an act of fraud or some incident that will cause a company to underperform. Consequently, we think sustainability, as part of an integrated investment process will always be important and will help to limit downside risk over the long term.