Equity Markets: Which Themes Should be Favored?

Marketing communication for professional investors only

Karen Kharmandarian, Which Themes Have Performed Best Since the Beginning of 2024?

Since the start of the year, all the things that have a bias and a tilt towards technological innovation have benefited the most. That's where the excitement around Artificial Intelligence, and specifically Generative AI, has attracted the most interest, capturing the imagination of investors, consumers, and companies alike.

We see huge flows of investment going into the development of the technological infrastructure that runs the large language models and AI algorithms. This benefits those who are exposed to the infrastructure build-out: silicon manufacturing, semiconductor companies, all the wafer equipment makers and providers of the machines in the wafer fabric equipment.

All these companies are benefiting quite significantly from that trend. The theme of «AI and robotics» is the one that has benefited the most because it’s most exposed to the theme itself. But this is also the case for the theme of «safety», especially in the context of patent uncertainty and geopolitical tensions, where cybersecurity and other security considerations are becoming top of mind for governments, companies, and consumers.

We see the build-out of infrastructure in the US with initiatives such as the Inflation Reduction Act, but there are also big infrastructure spending plans in Europe too, in terms of water infrastructure, which is obviously benefiting themes that invest in water.

Why Is «Safety» Such a Compelling Theme in Particular?

Safety is a compelling theme because first of all it's the primary need on the Maslow pyramid of basic human needs. But Safety is also driven by a lot of regulation, so it's not discretionary in nature. More and stricter regulations mean that we need to invest in safety features, irrespective of the specific engagement.

More and more safety features are embedded into products and services that we can buy every day. This is also very compelling because you rarely can opt out of these elements. Indeed, most of the time, you buy safety as an embedded component of a product or a service.

Therefore, you can have an attractive growth as a provider of these products and services because they are embedded into other products and services themselves. This theme exists within different sectors across the global economy, through the digital world and the cybersecurity world.

We have increasing complexity to protect networks and devices and the digital world is increasing in size and becoming increasingly complex to protect, so we need new technologies – we need to keep up with the increasing threats. It's also in the real world, whether it's in transportation, food safety, water safety, or diagnostics.

It can be in the work environment and many other areas of the economy. It results in a diversity of companies in terms of behaviour, and investment styles, some of which are defensive, some are cyclical. You can build your portfolio depending on where you stand in the economic cycle and the different phases of the market.

And in terms of performance, our safety theme has been a very strong performer relative to peers, whether they are actively managed or some of the more niche strategies targeting cybersecurity specifically, for instance. When cybersecurity does well, safety can do also very well because they are exposed to cybersecurity.

But where you can have some sources of underperformance in the cybersecurity space because valuations are extended, there are other opportunities that our fund can play in other parts of the investable universe. This is more difficult to do when you are only targeting cybersecurity and where you can suffer quite significant underperformance.

Managing a safety fund that is diversified across the value chain can be really critical when you think longer term.

Interview conducted on 4 June 2024

Marketing Communication. For professional investors only. Past performance is not indicative of future results. All investments involve risk, including the risk of capital loss. The provision of this material and/or reference to specific securities, sectors, or markets within this material does not constitute investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of services. Investors should consider the investment objectives, risks and expenses of any investment carefully before investing. The analyses, opinions, and certain of the investment themes and processes referenced herein represent the views of the portfolio manager(s) as of the date indicated. These, as well as the portfolio holdings and characteristics shown, are subject to change. There can be no assurance that developments will transpire as may be forecasted in this material. In Switzerland: This material is provided by Natixis Investment Managers, Switzerland Sàrl, Rue du Vieux Collège 10, 1204 Geneva, Switzerland or its representative office in Zurich, Schweizergasse 6, 8001 Zürich.

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