Swiss wealth and asset manager, Lombard Odier, has just released a publication entitled “rethink investments”, sharing its thematic approach to equity investments. The publication expands on the six high-conviction investment themes identified by Lombard Odier that are generating opportunities for investors, enabling targeted exposure across regions, sectors, and styles.

Lombard Odier believes that transitions in the global economy warrant a re-evaluation of longer-term investment opportunities.

The six high-conviction investment themes that Lombard Odier has identified are based on research of structural trends and proprietary bottom-up analysis. They articulate changes in 1) longevity, 2) demographics, 3) technology, the transition to a 4) net-zero and 5) nature-positive economy, and 6) infrastructure. 

These changes are rewiring the systems and value chains, shifting profit pools, and generating new investment opportunities. Lombard Odier highlighted that 2023 was the worst year for stock picking in two decades: only 29 per cent of companies in the S&P 500 managed to outperform the index compared with an average of 47 per cent. Those fortunate enough to have built exposures to the Magnificent Seven – Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Tesla – were the winners, while the others were better off with passive market exposures. The firm believes that rethinking its investments framework has added a thematic angle to multi asset portfolios which allows it to take targeted exposure across regions, sectors, and styles around secular transformations.

Longevity, demographics and new generation
Lombard Odier sees opportunities from a demographic shift towards healthy ageing, and private funding of longer lives and quality lifestyles. The key for investors is selectivity. This is relevant given the range of companies affected, and the breadth of revenue sources for large-cap pharma, consumer, and financial firms. 

The firm sees demand for life insurance, savings, and retirement solutions rising in developed and emerging markets. The risks associated with ageing and pension shortfalls will require new insurance solutions. The number of retirees is estimated to almost double by 2050, increasing the burden for company pension schemes. Insurers are better placed than corporates to take on these risks. Pension risk transfer allows companies to sell on to insurers defined benefit pension liabilities – which guarantee a specific income throughout retirement – discharging them from their own balance sheets. Longevity risk protection also allows insurers to sell risks on to reinsurers, which accept fixed premiums from a pension fund and pay out variable claims, the firm added. 

In the UK, the average annual growth of the private health cover market, for example, was 6.1 per cent between 2020 and 2022 compared with 1.7 per cent between 2008 and 2019. In India, the health insurance market has grown by more than 20 per cent annually in recent years, according to research cited by Forbes, and even faster during the pandemic, the firm said.

A populous New Generation (New Gen) is also coming of age and reaching a tipping point in global spending power, reshaping the fortunes of listed companies in the consumer, technology, and healthcare sectors, the firm continued. 

The lifestyles, spending preferences, healthcare challenges, and outlook of the New Gen are distinct from those of earlier generations. They are digitally native. Having grown up with the internet has given them a more connected global outlook, with a preference for digital interactions and social media that is affecting all sectors. The climate crisis is more immediate for them, increasing demand for sustainable solutions.  

The rise of the New Gen is most noticeable in emerging markets, the firm added. Societal changes here will be powerful, driven by a combination of growing urbanisation and the spending power of new middle classes. Income growth is lifting urban households into the upper middle class and above. China and India are the standout countries, the firm said.

Technology
The increasingly digital world was already dependent on two critical technologies: Big Data and cloud computing. Big Data has become a reality driven by large volumes, speed, and the variety of data created, while the Cloud has shifted the storage of data from individual devices to centralised data centres. Lombard Odier believes that these trends continue to alter the way we connect, interact, and solve problems by streamlining operations, improving productivity, reducing costs, and fostering innovation.  

However, artificial intelligence (AI) is now accelerating every digitalisation trend, the firm continued. These technologies have multiple original applications, ranging from improved responses to unpredictable events, such as natural disasters, to financial fraud detection, healthcare system.  

Lombard Odier highlighted how the adoption of AI across economic activities is creating an AI value chain. This ranges from the semiconductor industry to its multiple applications, while also reinforcing existing trends of data creation, computation, and warehousing. Semiconductors are important to a wide range of electronic systems, from tech-related end-markets such as data centres, computers, or smartphones, to automotive applications, or industrial equipment (in renewable energy and factory automation), and healthcare. As an equity investment opportunity, the semiconductor sector is intrinsically cyclical, with demand highly correlated to global gross domestic product (GDP), although demand from digitalisation and decarbonisation is generating structural tailwinds. 

High-performance power semiconductors, for example, make it possible to operate large-scale wind farms and photovoltaic facilities, or to enable electro-mobility supporting the decarbonisation of transport. shift towards electric vehicles therefore offers opportunities for some semiconductor companies

The firm also expects infrastructure-related spending to filter down into devices (smartphones and desktop computers) that access networks, and where most data is generated.

Transition to net zero and nature positive economy
Limiting climate change requires the transition to a net-zero economy, Lombard Odier continued. This investment theme builds on the transformation of the most greenhouse gas emissions (GHG)-heavy economic activities: energy generation, transportation, use of materials and construction as well as food systems. Each has global social and economic imperatives.  

By the end of this decade, electric vehicles (EVs) are expected to represent around half of all new vehicle sales, a four- to five-fold increase from today’s numbers. China has by far the strongest electric vehicle supply chain globally. Global production of different types of EV is rising, while China’s vehicle use will likely be closer to the pace in more developed markets, with positive implications for EV’s, the firm added.  

Food
The food value chain is also responsible for almost one-fifth of GHG emissions. This makes it one of the keys to achieving the economic transition away from carbon, through the way we farm and fertilise crops, consume food and manage food cooling, distribution chains, and waste. While promising avenues to de carbonise the food system exist all along the value chain, listed equity investors still have only limited ways to benefit from this trend, in contrast to private asset investors, as markets are still at an early stage, or fragmented, Lombard Odier said. 

At the beginning of the food value chain, smart agriculture and green fertilisers offer opportunities to de-carbonise food production and Lombard Odier expects such equipment producers (for example drones, or precision farm machinery), as well as alternative fertiliser companies, to gain over time. The firm calculates that the precision agriculture market will grow by 24 per cent between 2021 and 2030 to represent more than one quarter of the overall agriculture equipment market, compared with less than 6 per cent in 2021. Meanwhile, alternatives to chemical inputs represent another development area with green fertilisers, for example, produced using clean ammonia.  

To make the transition to a more sustainable and eventually regenerative – yet resilient and affordable – food system, Lombard Odier thinks that three more elements are likely to evolve and provide investment opportunities. First, alternative (laboratory-grown) and plant-based proteins as well as alternative animal feed, based for example on insects, are likely to see increasing demand as consumer and producer preferences shift, the firm said.  However, after initial enthusiasm for such solutions, some jurisdictions have expressed health concerns over the highly processed nature of plant-based food.

The decarbonisation of the food value chain offers solutions to global ambitions, but few have already reached the tipping point towards mass-market availability. For now, Lombard Odier believes the best way to invest for a real impact remains through private markets.  

Regenerative coffee production is one example at scale, on which we focus within private assets. Other examples include the conversion of former coal mining land in the US state of West Virginia into lavender fields. Most cases involve degraded land assets, purchased at low cost and reinvested in so as to boost production using an integrated value chain. Other investment managers are also positive on investing in regenerative agriculture and forestry. See more commentary here.

Forestry
The broadest set of listed equity investment opportunities in value-creating land restoration is in regenerative forestry and timber, Lombard Odier added.  While deforestation continues globally, several countries are now rapidly expanding their re-forested areas. China tops the list with 425,000 km2 (roughly the size of Sweden) of forested area restored between 2001 and 2021, a growth rate of 24 per cent, according to the World Bank. Sustainably managed forests supply goods and services that meet present and future needs while protecting ecosystems. 

Globally, forest ownership is a mix of public and private, with private sustainably managed forests accessible to listed equity investors. Lombard Odier expects the transition beyond a no-harm (net zero) economy to a nature positive economy to create increasing investment opportunities across private and listed assets. In equities, it focuses on companies that use the regenerative power of nature, support nature preservation through pollution control and waste management, and provide sustainable natural resource management benefitting from new market mechanisms, regulation, and innovative technologies that assign economic value to nature assets. Over time, the firm anticipates the investment opportunity to grow as private companies seek access to public markets.

Infrastructure
The transition to a low-carbon, nature-positive, technology-embedded economy, accelerated by demographic and geopolitical shifts, calls for an overhaul of the world’s infrastructure. While governments and institutions play a role in catalysing infrastructure projects, the scale of the overhaul coupled with public finance limitations leaves an important part for the private sector to play in the re-setting of power, transport, water, and communication infrastructures around the world, the firm said. Companies that take part in this infrastructure boom are experiencing strong growth. 

The demands of decarbonising economies are placing new requirements on electricity grids to transmit more power, over longer distances and from intermittent sources. Electric vehicles are also expected to account for up to half of new car sales by 2030, and that requires massive changes in the availability of a charging network.

Given the large regulatory support from governments worldwide, Lombard Odier said that infrastructure is shaping up as a multi-year investment theme.  Infrastructure investments can take many forms and involve a range of risks. In listed equities, Lombard Odier aims to capture attractive growth opportunities in industrial, utilities, and  energy companies that are participating directly in the infrastructure boom.