The world we live in, is the world that we invest in

THE sun is setting for investors who are looking to invest in a particular market such as the US or China, even as the dawn has broken for thematic investing. It is not just a nice name to repackage old ideas.

Thematic investing is about future proofing portfolios with ideas that are actionable, secular and long-lasting. Timing plays a role in this and we try to avoid the initial "hype cycle", where booms and busts can occur too quickly for an average investor to react. (Remember the initial 3D printing craze in 2012?) Focusing after the "peak of inflated expectations" helps us sift the themes that will likely stand the test of time.

Today, we focus on the two hottest thematics that are likely to have long-lasting effects, not just for investors' portfolios, but for our personal lives: cryptocurrencies and responsible investing.

In the past 18 months in particular, the focus on responsible investing has taken a great leap forward. Another acronym that is commonly related to this megatrend is ESG (environment, social and governance). Our observation is that responsible investing is driven by two massive forces: purpose and regulation.

The pandemic (clearly becoming endemic) has accelerated this megatrend. Along with the ubiquity of technology, social media and heightened awareness of our fast-deteriorating environment, social responsibility has permanently grown.

This paradigm shift has translated into investors' decisions to seek investment performance with a purpose. Catching up with this global paradigm shift, lawmakers are accelerating regulations and guidelines that are pushing companies to be more responsible in their actions for a sustainable outcome. Common-good goals like the United Nation's Sustainable Development Goals (SDGs), will be key pillars for companies to align their actions with.

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The real test is whether responsible investing pays off. The short answer is yes.

When investors take into account ESG, they are integrating measures that help them understand the risks and opportunities of that investment. This long-lasting ESG trend means that responsible actions taken today will shape the results later. For example, is there an increasing trend of accountability and transparency to both shareholders and stakeholders like employees? Companies that formulate such practices into their culture will help them perform better in the long term as they can adjust in an agile manner. A responsible company culture also reduces the risks of scandals that will affect morale, reputation and performance. In summary, investors can bucket ESG in 3Cs (an analogy to the Singaporean 5Cs) to integrate into their investment process: Climate (cleaner/circular are better), Care (more diversity and inclusion) and Conduct (transparency and "walking the talk").

The second thematic would be digital assets with cryptocurrencies as a key focus. This world of digital assets has created so many opportunities. We will briefly highlight non-fungible tokens (NFTs), the potential of a fast blockchain and how digital assets are reinventing finance.

• An NFT is unique and cannot be replaced with something else. For example, a Bitcoin or a $10 note is fungible - you can swap one for another Bitcoin/note and we get the same thing.

Those "unique" trading cards you see kids haggling over, however, are non-fungible. NBA's Top Shot has sold US$626 million in collector's items with more than 411,000 traders and more than seven million transactions as at the writing of this commentary. Think about all the wonderful content created by individuals but are slaves to megatech platforms to monetise them. NFTs are going to shift the power to the creator community - from these monopolistic megatech platforms back to individuals.

• Ethereum is currently a slow blockchain with 10 to 15 transactions per second (tps), but this is expected to move to 100,000 tps with its upgrade to its network called "proof of stake" (POS). This will surpass even Visa's 60,000 tps. The implications for a fast blockchain are almost limitless, ranging from almost instant identity and credit verification (applying for a credit card) to daily payments.
• Decentralised finance (DeFi) is another "crypto only" phenomenon. It is an umbrella term for applications and projects that are built on the public blockchain space. As an example of being a major disruptive force in the banking space, yields on "stable" crypto assets (stablecoins) that are pegged to the value of the US dollar can give annual yields of up to 6 per cent, massively beating what most banks can give for deposits.

Of course, there are risks like hard regulatory crackdowns, scam protocols and the environmental issues of Bitcoin mining. The concern of its use for illicit activity is valid but overblown. Estimates have shown that total volume of illicit activity in crypto assets has grown in absolute terms, but today, accounts for less than 1 per cent of all transactions. (In 2012, this was 35 per cent.) Finally, there are estimates that today, about 150 million people possess some form of cryptocurrency and with a current world population of 7.9 billion, there is tremendous potential for the uptake of this new form of asset (even if we exclude harsh regulators in certain large countries).

To round it all up, responsible investing pays off for both the shareholder and stakeholder in the long term, though there may be short-term fits and starts as companies adjust their culture. It is not just a theme for investment but a shift in paradigm of a consciousness to create a better outcome.

Digital assets are rising fast as technology has enabled an accelerated shift. A part of this will be cryptocurrencies which will likely coexist with "legal tender" currencies, as privacy continues to remain top of mind for many countries. Regulatory harshness will be the main obstacle for cryptos to navigate, but it would be foolhardy to suppress technological advancements like this. As it is often said, if you regulate the future, the future will move elsewhere.

• The writer is deputy head of research, Asia-Pacific at Julius Baer.

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