Thematic investing takes advantage of correctly predicting future trends, and the significant capital flows they can subsequently generate. For example, if you correctly anticipated the coming growth in the electric vehicle market, you could have monetised long-term trends across the EV supply chain, including battery minerals.
If you correctly identify the structural trend, you may be able to leverage it by picking a quality company for exposure. EVs, cannabis, and cryptocurrencies were a few of the biggest trends in emerging companies last year. To get a handle on these themes, and if there may be others coming through now, we asked three experts for their views. Responses from Oscar Oberg, Tim Hannon and Harley Grosser.
The biggest theme for 2018 is mining
Oscar Oberg, Wilson Asset Management
Looking ahead, mining and resources will be one of the biggest investment themes for 2018. The continued strength of the industry is underpinned by China’s economic strength, as well as supply-side reforms and government infrastructure investment which continues to put upward pressure on commodity prices.
Lithium battery minerals
A year ago the market was sceptical of this theme, but sentiment has turned. With major car manufacturers trying to lock-in supply of the key minerals for lithium batteries, we believe this is poised to be a long-term investment theme as electric vehicles become more mainstream over coming decades.
Despite being legalised in November 2016, the industry is highly regulated. Few doctors have been authorised to prescribe cannabis and, so far, a limited number of companies have harvested a commercial crop.
Indicative of the regulatory hurdles facing the sector and the challenges in monetising the concept, to date less than 200 Australians have been administered medicinal cannabis, according to Cannacord research.
Recent reports of moves to clamp down on cryptocurrency trading in South Korea has led to sharp price falls, demonstrating cryptocurrencies’ exposure to regulatory risks.
While the future of cryptocurrencies remains uncertain, we believe the underlying blockchain technology used by cryptocurrencies has many applications and is being successfully utilised by many new and varied businesses.
Take time to identify the few winners in the pack
Tim Hannon, Newgate Capital
The difficulty of investing in emerging themes is discerning the few winners from the many losers.
Any company leading with an innovation or new technology faces the challenge of building and sustaining a competitive advantage. Yes, emerging industries with high growth and high societal impact can be exciting, but do the companies within them possess any sort of competitive edge, and how enduring is it likely to be?
History shows us the early stage of new industries sees an enormous number of entrants. Then over time, the many losers exit the industry. To highlight, the number of US car manufacturers in 1914 was 248, now there are less than a handful. The number of internet search engines in 1999 was 42, now there are just two that count.
We can relate this to the exciting growth industries of today. Right now, there are 1,384 cryptocurrencies in existence, over 200 medicinal cannabis companies and 216 lithium companies. From this group, there will only be a few winners. They will be very difficult to pick from the losers, especially so early in an industry life cycle. It is often prudent to delay investment in an industry until you can identify the winners with some probability.
Beware of the buzzwords
Harley Grosser, Capital H management
For lithium and medicinal cannabis the themes are very real and there are going to be some big winners. No one is denying the EV revolution and anyone with a family member experiencing chronic pain knows there is enormous value in anything that can help.
But as with any hot trend the market has gotten carried away - and there will be many losers.
The stock answer for cryptocurrencies is:
“I believe in the blockchain technology, but there is a lot of risk in cryptocurrencies.”
I think that broadly translates to:
“I have no idea what is going on in cryptocurrencies.”
So my honest answer is that 1) there is probably going to be a lot of pain for 99% of people buying these ‘alt coins’ and 2) there may be value in blockchain technology, but - you would have to ask someone much smarter than I am!
There is one small ASX listed company that seems intent on investing in all the thematic buzzwords at the same time. Despite no signs of cash flow or a sustainable model, it has risen almost 5 fold since the news flow ramped up.
And this is not a one-off, there are many more listed companies following the exact same model. If you are trading this space… make the most of it while it lasts.
Some of last year's winners
Below are some top-performing stocks in the battery minerals, cryptocurrency, and medicinal cannabis sectors, mostly in the >$100mil market cap range, along with their 12mth performance (as of 30/1/18).
Most of the popular 'concept stocks' today are mainly attractive because of their enormous share price momentum.
Sorting the flyers from the flameouts
Click here to hear the processes used by our contributors to sift through concept stocks to help identify the future flyers from the flameouts.
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