As The Tri Polar World Turns: Investing Thematically February 2021

SUMMARY

The big picture remains constructive and relatively untouched by the latest market pothole. The interest spike roiling markets is a tempest in a teapot which serves to eradicate overbought positions & inoculate investors against the coming transitory bout of inflation. Higher US rates are a good thing signaling recognition of better days ahead for vaccinations, growth, earnings, confidence etc.

The Covid speed model: global intellectual & financial capital focused on a single task is creating a new investment paradigm across climate, cyber, health, fintech/crypto etc. A paradigm that I believe is best captured by investing thematically.

Regime change across global economics (best boom in 50 years), politics (US pivot from 40 years of Govt is bad) and markets (first bond bear market in 40 years) reinforces this thesis. In a nutshell, activist Govts lead to policy-driven markets which present thematic investment opportunities. This Monthly will focus on investing thematically in this new era.

HEALTH

We add a new component to our Covid speed lexicon: Speed of the Fall - best illustrated by the 72% collapse in US hospitalizations over the past month. Covid concerns shifting from vaccine supply to demand for shots - a much better problem to face.

ECONOMICS

Global PMIs across manufacturing and to a lesser extent services continue to power forward. Intra Asian trade remains robust. US and Chinese consumers both consuming - a good sign for the global economy. Inflation is unlikely to become troublesome beyond a mechanical pickup as year ago data falls out. See Brazil Journal piece for more.

POLITICS

Biden Admin continues to go BIG and FAST - popular Rescue Plan likely to enjoy House approval by the time you read this. Climate/Infrastructure Plan to follow. Win vs Covid could be visible in coming months. Draghi’s ascent to the top of Italian politics coupled with the integration aspects of the Green Deal/JRF rollout could herald a new day for Europe’s place in the Tri Polar World.

POLICY

Melding of fiscal and climate policy becoming visible across the regions, first in Europe, now in the US and perhaps in China as we await the unveiling of the 14th 5 Year Plan in coming weeks. The varied issues surrounding tech and climate serve to accelerate and reinforce the TPW tendencies: be it semiconductor or battery supply concerns, fears of social media deplatforming, all reinforce an each for his own mentality.

MARKETS

No changes across the asset allocation space; I am in the JPM camp that says the only bubble is in “FEAR” as expressed by the record wide spread between realized and implied equity volatility. History suggests higher equity prices ahead.

Thematic investing has the potential to change the investment process, adding a sleeve to the asset, region/country, style/factor process we all know so well. From the rise of ESG to TSLA, Bitcoin and ARK’s Cathy Wood, it's clear that a new game is in town.

Thus, the surge in IPO and SPAC activity does not constitute a bubble but rather capital markets acting as they should to allow public market investors early access to the Innovation Curve, formerly the province of VCs and Pension Funds (who might want to boost their public market, thematic based investments).

A less generous beta future, cheap money and regime changes across the main spheres of economics, politics and markets coupled with the Covid speed model plain for all to see suggests investing thematically could offer a differentiated approach to alpha generation.

We are in an age of innovation and disruption, leaving behind the age of domination as expressed in global financial markets over the past decade - domination of US equity, of tech, of large cap growth etc. Access to these regime shifts will be easiest through the thematic space as the opportunities cut across the traditional investment lines.

This in turn suggests upside in terms of differentiated thinking and alpha generating opportunity at a time when such is at a premium given the struggles of quant, risk parity, 60-40 funds etc. ETFs offer a ready made vehicle while the quantamental approach may be worth considering as one wrestles with the challenges around theme selection, sizing and positioning within a global multi asset portfolio.

Recent volatility and the interplay between old and new vehicles ( XLE and ICLN or XLF and ARKF) suggest many different ways to combine/incorporate thematic investing in one’s portfolio - a process so new that even thematic focused conferences barely feature it.