Thematic investing acceleration in 2021

Some of the proposed policies of President-Elect Joe Biden would mark a clean break from the environmental and infrastructure priorities in the United States over the previous four years. This could have important consequences for investors.¹

Reentering the Paris Agreement, for example, would serve as a statement of intent, both for a U.S. return to global politics in a more traditional way, but also a return to progressive environmental policies aimed at mitigating the effects of climate change. In his election campaign, Joe Biden put forth aggressive plans for the environment, including 100% zero carbon electricity by 2035 and a strong shift toward overall emissions reduction.

Of course, membership in the Paris Agreement only embodies political willingness to address climate change. Even under President Trump, U.S. CO₂ emissions were at a lower level in 2019 than in 2016. This empirical observation underlines the fact that the trend toward lower emissions is a tectonic shift, with economics being the main catalyst. For instance, the cost of producing wind-based or solar-based energy has been on the decline for years and is already cheaper in some cases than coal-produced energy.

For investors, it’s important to note that a shift toward a greener future implies risks as well as opportunities. Subsidies and favorable legislation could shift away from fossil fuel-based energy exploration and infrastructure toward greener options. What’s more, as Joe Biden’s election proposal notes, polluting companies could be held to a more substantive standard of climate-related financial disclosure.

In terms of opportunities, greener legislation could help speed the adoption of electric vehicles, for example, which would benefit from greater economies of scale. Subsidies would lower production prices, making these products viable competitors to gas-powered vehicles. These developments could limit upside in companies associated with traditional forms of energy production while increasing the already strong tailwinds for a variety of stocks, including supply chain plays, broadly identified with clean energy.

On November 12, U.S. Federal Reserve Chair Jerome Powell said during a discussion at the European Central Bank’s Forum on Central Banking that "We're recovering, but to a different economy." Noting how the pandemic has accelerated existing trends in the economy and society, including the increasing use of technology, telework, and automation, Chair Powell’s comments shouldn’t be taken lightly. Adaptation strategies centered on virtual technologies could have lasting effects on how people live and work.

The current deployment of effective vaccines implies that remote work could soon lose some measure of its appeal. But it has been embraced by many, and we expect a healthy dose of remote working will continue to play a larger role in corporate environments in the near future. Microsoft and Dropbox, with their Azure-based solutions and collaborative tools, respectively, have provided widely implemented solutions in the current environment and will continue to facilitate work-from-home arrangements in 2021.  

Likewise, while transactions in physical stores will likely increase on the other side of the current global surge and gradual inoculation progress, we expect cashless payments to remain standard. This should benefit a variety of players in the fintech industries and should support digital, robotics, and cybersecurity themes and trends. While we expect a gradual normalization, we agree with Chair Powell’s assessment that we will arrive at a new equilibrium with structurally higher demand for technology and automation, especially in supply chains, telework, and payment systems.

Finally, the speedy development of various vaccines in the current pandemic has shed light on the importance of funding biotechnology companies that perform the fundamental research. A German biotech firm helped create one of the first vaccines against COVID-19 and was dependent on massive government funding to develop its unique messenger RNA technology. Arriving at a vaccine that’s safe for mass deployment and scaling production to over a billion doses in 2021 will continue to require huge amounts of capital.

It’s no surprise, then, that investors are likely to examine biotech companies with greater fervor than ever before. These companies have demonstrated their global value in providing life-changing solutions, not to mention helping heal the rift caused by a tail risk event as socially and economically destructive as a global pandemic.

Optimism is in the air, and for good reason. Better treatments are now being deployed in the fight against COVID-19, and effective vaccines are already being deployed. This improves the prospects for a recovery in the global economy and corporate profits. These developments notwithstanding, it will take time to return to prepandemic normality. In our view, 2021 will see the start of the transition.

Given U.S. policy changes on the horizon, we believe investors should expect the environment to become a greater priority in 2021—fueling growth in sectors such as clean energy. Across the globe, green investment will form a key part of fiscal stimulus packages, feeding into a strong and synchronized economic recovery. At the same time, critical investment themes such as virtual tech and biotechnology will continue to drive growth opportunities, particularly as the transition to normality unfolds, but also beyond this recovery period as long-term investment themes.

1 “9 key elements of Joe Biden’s plan for a clean energy revolution,” joebiden.com, as of 12/11/20.