A thematic approach to investing in a slowing global economy

THE world is changing at an ever-accelerating rate, becoming more complex and less structured as the digital economy enables the creation of new companies and business models that disrupt traditional industries.

Where there is disruption there is opportunity. Investors typically underappreciate the changing shifts in competitive advantage as new companies emerge, the weak disappear and the strong adapt. Bank J. Safra Sarasin's differentiated approach of incorporating thematic and sustainable investing delivers holistic and specific analysis, harnessing long-term structural growth opportunities and reducing risks related to natural, human and social capital. By viewing the world thematically, we are also able to identify and avoid negative trends.

PROBLEM: SLOWING GLOBAL GROWTH

The most negative trend facing investors is slowing growth. The investment landscape of 2019 was unique. Despite central banks' efforts, there were few signs of persistent inflation and growth. The International Monetary Fund now estimates that global growth fell to 2.9 per cent in 2019 and will only rise to 3.3 per cent this year and 3.4 per cent in 2021 (see chart above: "Thematic growth forecasts surpass GDP growth"). We believe this sluggish growth is the new normal.

As a result, we expect that 28 per cent of companies will experience shrinking profits, compared to just 17 per cent since 1970. With fewer profitable companies, investment opportunities shrink. The validity of passive investing in such instruments as ETFs, which merely track a benchmark's performance, becomes questionable. Investors can take an active, focused approach through thematic investing.

DEMOGRAPHICS, DEBT AND CARBON

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There are three main reasons why growth will slow. First, the working age population is shrinking globally. Even in China, it has begun to decline, much as it did in Japan and Europe. Labour force growth, a key economic driver, is slowing.

Second, the global financial system is overleveraged. US corporate debt is at a multi-decade peak at 46 per cent of GDP. In China, state-owned enterprises have debt-to-asset ratios above 60 per cent. Household debt-to-GDP is above 50 per cent in France, Japan and Germany, and over 80 per cent in the UK. As indebtedness rises, interest payments could balloon, stifling growth. Unless incomes rise dramatically above interest costs, growth will stagnate.

Finally, natural resources are being depleted. To meet the Paris Agreement pledge, carbon emissions must be substantially reduced. The impact of deforestation, the real cost of air pollution, as well as the depletion of mineral and fossil fuels, are not captured in GDP data. If they were, growth forecasts would be even lower.

At the same time, rising populism and nationalism threaten to upend globalisation and free trade. We have already seen negative impacts from a trade war. Further escalation of trade tensions will also adversely affect global economic growth.

SOLUTION: SUSTAINABLE AND THEMATIC INVESTING

Against this backdrop, we believe that investors can benefit from our combination of sustainable and thematic investing. Unconstrained by traditional geographic and sector definitions, Bank J. Safra Sarasin's forward-looking framework identifies powerful, sustainable global themes shaping the investment landscape and targets companies that offer meaningful exposure to these themes.

We also apply sustainability analysis that is value adding and risk mitigating. We seek to leverage growth through themes such as digitalisation, automation and ageing, evolving consumption, and climate change (see table above: "Thematic Growth").