Greg BrightThe turnaround in both the market and consumer sentiment over the past three months has been nothing short of remarkable. Talk has gone from the new Great Depression to the Great Recession to the Great Recovery. Most institutional investors were slow to rebalance after last year’s falls and when the markets dived again in January/February it appeared that that was the right decision. Since then, however, the bounce is looking increasingly sustainable and funds are starting to invest their bulging cash balances.

But, whether or not investors believe in the recovery theme, there are still several other themes embedded in the overall macro trend. This is a good environment for thematic investors, who get to make only infrequent but very large decisions with their portfolios. Oliver Kratz, who runs Deutsche Asset Management’s Global Equity Thematic Fund from New York, says that despite the dramatic shift in equity markets of the past few months and growing confidence in the recovery, risks remain to the optimistic view.

But other themes are in play. In a recent note to clients (the Deutsche Global Equity Thematic Fund has about $1.5 billion invested from Australian clients) Kratz lists six themes which are currently at the fore: . Emerging markets, which will eventually turn into a bubble, the manager believes . Supply chain dominance, whereby the gap between the best and worst companies in a sector is historically large . Disequilibria, whereby astute companies are looking to take advantage of their positions through M&A activity .

Global agribusiness, whereby supply and demand will at some stage push the world towards another food crisis . Personalised medicine, whereby technological advances mean that prediction and prevention will be emphasised over identification and cure, and . The Indian Ocean, which is Deutsche’s newest theme, whereby the geopolitics of that region will shift as China and India solidify their positions in the agricultural and energy supply routes of the region.

With emerging markets, Kratz believes investors should not be excessively concerned right now, because the markets have “several hundred per cent” to run before investors should start to be worried. But when it does come the emerging markets bubble will be bigger than either the technology bubble of the late 1990s or the housing bubble which followed. Kratz says: “The base of the pyramid – the bottom four billion – had hardly entered into valuations of firms operating in emerging markets.

We are seeing some powerful drivers – from microfinance to consumer goods and services – that will change the lives of more people on our planet in a shorter time period than ever before.” With the ‘supply chain dominance’ theme, Deutsche believes that the best companies in a given sector have an historic opportunity to finish off their second-class competitors. This is because the historical costof- debt advantage of good companies over bad companies is about 50bps.

Right now, the advantage may be as much as 500bps for some sectors. Which leads to the ‘disequilibria’ theme. “Sub-scale asset management companies are for sale,” Kratz says. “Pharmaceutical companies can save by merging and collapsing two expensive sales forces into one. Utilities with contiguous geographic footprints know their deal-play books. Global leisure companies should carry out balance sheet-induced mergers.

The best companies with the best people will identify good companies with too many people and will draw up plans to create value.” While some thematic funds have just one or two themes running at any given time, the most popular with investors seem to be the multi-theme funds, such as Deutsche’s or the Zurich Global Thematic fund, which has also attracted a fair share of investment from Australia. Zurich recently sponsored a booklet published by Financial Standard on the different types of thematic investing.

Patrick Noble, a senior investment specialist at Zurich, points out that every economic cycle is different and investors looking for opportunities in the aftermath of the GFC will not find them by looking at events of the past. “Yet a common starting point for many investment decisions does just that,” he says. “Markets, by their nature, are typically forward looking and those choosing to reference their decision making to a benchmark that typically draws from historical events may find themselves poorly equipped to deal with the emergence of a new economic cycle.”

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