Crunch time is coming for Brexit, and as I write this US lawmakers are grappling with how to agree the next stimulus bill for the world’s largest economy. As we navigate these two transformative political events, what does this mean for your finances? What investment trends could you benefit from that have the potential to improve your wealth?
This is part one of a two-part series, featuring 4 future facing investment ETFs based in the UK that have the potential to make you serious money. For the US/Canada article please click here.
The Index Hasn’t Moved
In general, for 75-80% of your investments, we advise taking a passive approach and putting your savings or retirement funds to work through a model portfolio. Many of these can be accessed on the internet and they are featured here, and here.
Covid-19 has up-ended that dynamic. When you look at the composition of the FTSE 100 and FTSE 250 in the United Kingdom, what you see is a tale of two cities. Companies in the airline, house building and hospitality sectors have been hit hard. This includes housebuilders like Barratt Developments, Redrow, Taylor Wimpey; property website Rightmove; manufacturers like Rolls Royce, airlines British Airways and Jet2 (Dart Group); the list goes on.
At the same time the index has stalwarts that have benefitted from Covid-19. This includes testing company Novacyt PLC, software specialist Boku, and food suppliers like Ocado have seen enormous top-line growth. What you cannot easily do, just by buying the index, is get direct access to the “winners”. By buying the index you get the lot (good and bad!)
The index itself hasn’t really moved the last month and it is actually still 18.2% below the peak reached on 20th February 2020:
Look Beyond Covid-19 to the Future
The media is obsessed with Covid-19 and the impact that coronavirus is having on our society. That’s understandable and when you think about it: this is a generational, once in a lifetime event, that has completely up-ended our way of life.
That being said you need to look completely past this. If we get a vaccine, and spend a year dishing out that vaccine, what happens after? If we get to 2021 or 2022 and beat the virus, then what sort of world will we be left with and how should you be invested for that environment?
The Obvious Trends & Four Investing Themes
There are several obvious trends and areas where the shrewd investor can put their money to work. Many thousands of analysts and portfolio managers have poured over these topics, so what we are going to do here is focus instead on the investments and how they align to and address these four areas.
1. Working from Home
The veil has been pulled back and now more of us than ever are going to be working from home. Even if you manage to get 85-90% of the working population back to factories, offices, call centres, rec centres, government offices and every other place you are still left with 10-15% of the workforce working from home, who previously were not.
The investment that we align to this is the iShares Digitalisation UCITS ETF (Ticker: DGIT.L)
With 67% of assets currently sitting in US companies, this ETF gives British investors broad diversification and access to new, upcoming businesses that benefit from the increased movement towards digital work. They include music and communication giant Spotify, new age financial services and mobile payment company Square, and digital document signature leader DocuSign.
2. Green & Clean Energy Revolution
The UK government projects that as much as half of all electricity will come by renewable sources by 2025. There is a lot left to do and actually the government may miss their targets by as much as 20% by 2023-2032, but the point is there are serious and factual commitments to becoming greener and phasing out dirty energy like coal power.
In fact this summer there were several days where the UK went without firing up a single coal power plant for a day. It’s a start and clearly the direction of travel is towards safer, cleaner energy.
The investment that we align to this is the iShares Global Clean Energy UCITS ETF (Ticker: INRG.L)
Again about 40% of the assets sit in the US and 10% in China; there is a rich vein of renewable energy companies here that feature widely across the solar, wind (both on-shore and off-shore), and consulting or technology spaces. Sunrun Inc is the largest holding and this business installs, monitors, maintains and manages solar panels on homeowner’s roofs in order to supply electricity. Vestas Wind Systems is a global energy partner with over 650 GW of installed wind farm generation capacity and they continue to grow at a considerable clip.
3. Aging Population – Medical Care
Across the globe the highest growing population demographic is – you guessed it! Those aged 65 and older. Remember all of that talk about Baby Boomers, well, now they are aging and they have a lot of pent up capital to spend. By 2050 one in six people (19%) will be over the age of 65 and that could be more like 25%, or one in four, for places like the US and Europe.
There are cutting edge technologies that are going to creep into our way of life after Covid-19 subsides.
The investment that we align to this is the iShares Aging Population UCITS ETF (Ticker: AGES.L)
The ETF has a fairly standard world-wide focus with 47% of assets in the US, followed by the Eurozone, Japan and Asian Emerging Markets. Unsurprisingly it is focused on healthcare companies and includes pre-eminent gene based therapy company CRISPR Therapeutics, MicroPort which is a global medical device supply business, and synthetic DNA biotechnology firm Inovio Pharmaceuticals.
There are individual companies like Smith & Nephew that could warrant looking at in the UK, but for broader based exposure we think the iShares Aging Population ETF is worth considering.
4. Automation
Depending on what way you look at it, whether a good or bad thing, Covid-19 and the public health crisis has accelerated firms plans for automating tasks. Within a manufacturing environment it is critical that a business has ‘resilience’ and if you follow what Mohamed El Erian this will feature again and again in the years ahead. To compete businesses will need to reduce costs and find ways to produce things in a more standard and efficient way here (in the UK) instead of always turning to looking abroad at lower cost bases.
The result is obvious: those businesses that build, design, implement and deliver automation solutions are going to be major beneficiaries of this trend.
The investment that we align to this is the iShares Automation & Robotics UCITS ETF (Ticker: RBTX.L)
A good chunk of the assets sit in the US (52%) and Japan (21%), which are the resident ‘automators in chief’ through their controlling share of technology companies operating in this space. Chip company AMD is a household name. Nidec Corp is a lesser known manufacturer of disk drives, and in particularly the global leader in providing the tech inside hard drives, but also electric motors and other components. Intuitive Surgical is a brilliant company that basically owns the da Vinci robotic surgical operating system that is used widely in hospitals.
Conclusions
It is really important that these funds are considered as part of a balanced portfolio. If you find yourself as a UK-based investor with perhaps too much exposure to your home market, the UK, and mainland Europe you could look to introduce world-wide exposure to faster growing segments of the market through these funds.
Additionally, if you want to find ways to be sustainable and profit from future trends, we believe that the simple message here is you might have a chance to ‘buy the dips’ and get into these ETFs at reasonable prices over the coming weeks.
