Hangover cure: Tapping into global growth with thematic equities

Equity markets offer exciting opportunities to participate in the innovation and demographic themes reshaping our world. The recent Janus Henderson ‘Global Investment Summit’ provided a timely mid-year update on the key investment themes likely to drive markets. Here we summarise takeaways from a thematic equities perspective.

Healthcare: A cycle of rapid innovation

“When we think about innovation in healthcare, it always comes down to new medicines, new treatments, and new modalities of treating human disease,” Portfolio Manager Andy Acker explained in his update on the healthcare sector.

Innovative companies create their own growth, with the healthcare sector bringing a record number of new drugs to the market in 2023 in the face of significant headwinds caused by the COVID-19 hangover. Society’s collective understanding of human disease, based on the genetic code, is nearing an inflection point, with our ability to sequence the genome in hours not years, and for a fraction of the cost. This new reality is fuelling an increase in the productivity of science, leading to new forms of treating disease, including gene therapies, cell therapies, and targeted antibody drug conjugates (ADCs) that can deliver chemotherapy directly to cancer cells.

Obesity is big business

We have seen major progress in treating obesity, as evidenced by innovative new Gastric inhibitory polypeptide (GIP) and Glucagon-like Peptide-1 (GLP-1) incretin therapies. These therapies reported over US$30 billion in sales in 2023, but the market for these treatments has significant room to grow.

Obesity and its associated complications are considered major public health problems worldwide.  Forty-two percent of American adults aged 20 and older suffer with obesity based on data collected by the Centers for Disease Control and Prevention (CDC)¹. A new target for the treatment of obesity is the incretin system, which consists of hormones that seem to contribute to weight loss².

“In the US, there are over 100 million people who are obese, and we are still treating only in the mid-single digits as a percentage of those,” said Andy, noting that globally, approximately 800 million people are classed as clinically obese³. “Companies are also making tremendous progress in addressing other high unmet medical needs, which is really what we focus on as investors in the healthcare space.”

Property: A turning point for REITs?

“We are hitting an inflection point in underlying commercial real estate markets, where you will see people rebuilding their allocations as it becomes clearer that underlying real estate markets have bottomed” was the view of Guy Barnard, Co-Head of Global Property Equities.

The commercial real estate sector has faced significant negativity over the past 24 months, driven by rising interest rates as central banks seek to curb inflation. However, a stabilisation in interest rates, with the potential for cuts to come, should be good news for Real Estate Investment Trusts (REITs), which may be entering the early innings of a potentially significant recovery. Cost and access to capital, particularly debt financing, should increasingly play a part in differentiating companies and investors in this space.

Real estate drivers are changing

The real estate market continues to evolve rapidly due to the growth in ecommerce, which has created significant headwinds in retail, while a shift to working from home is creating challenges in the office sector.

“We are trying to tap into those areas of structural demand from tenants, rather than trying to ride an economic cycle,” said Guy. “We see the growth of digitisation as a great tailwind for tech real estate, including areas like data centres and cell towers.”

Further, the demographic shift whereby Baby Boomers are retiring will drive significant demand, not only for new medicines and therapies within the healthcare market, but also for underlying senior housing accommodation.

“It is really about being selective, trying to find the structural drivers of tenant demand. In those markets, we see very strong occupational levels, strong rental growth,” concluded Barnard.

Technology: Gasoline on the fire

US-based chipmaker Nvidia has seen its shares hit record highs in 2024, with the company’s market capitalisation inching ever-closer to overtaking Apple (c.US$3 trillion) – Wall Street’s second-most valuable stock after Microsoft.

While the value of the chipmaker is clear, according to Denny Fish, Portfolio Manager on the Global Technology and Innovation Team, it operates in arguably the most underappreciated sector within the tech space.

“We have been on this journey where capital intensity per wafer has actually been going up year after year because it’s just been harder and harder to advance Moore’s Law,” explained Denny. “This has created natural tailwinds for vendors in the supply chain, with the advent of AI capable of supercharging already-favourable market conditions.”

Further, demand on this small network of vendors looks set to soar with a broadening out of the types of companies looking to design and produce semiconductor chips for their own purposes occurring among sectors, including hyperscalers, aerospace, defence, and automakers, among others.

“The market dynamics of the semiconductor supply chain make it probably the most underappreciated, well-structured industry on the planet. AI just throws gasoline on the fire in terms of secular dynamics associated with these supply chain vendors,” Denny argued.

Sustainability: Upsetting the balance of power

Consultancy firm McKinsey estimates that AI may deliver an additional economic output of around US$13 trillion by 2030, increasing global GDP by about 1.2% annually⁴. The energy implications of delivering on that growth are significant, however, at a time when a major secular trend is the increase in electrification (replacing technologies or processes that use fossil fuels, with electrically powered equivalents).

To put this into context, despite a sevenfold growth in global data centre capacity between 2010-2019, this expansion was well-managed from an energy perspective – but this equilibrium is set to end.

“The growth in energy demand from AI is so great that that this balance will be broken now,” noted Hamish Chamberlayne, Head of Global Sustainable Equities, adding that forecast energy demand from data centres in the US and Europe is set to more than double over the next few years.

This year, the combined capex allocated for data centres by Amazon, Meta, Google, and Microsoft is approximately US$200 billion, a rise of 34% on 2023⁵. In March, Microsoft and OpenAI announced plans for a data centre project that could cost as much as US$100 billion and include an AI supercomputer called “Stargate” set to launch in 2028. The growth opportunity underlying all this is electrification and the investment required to reduce electrical grid bottlenecks⁶.

Hamish concluded: “We see growth in demand for electricity from utilities, as well as all the infrastructure that relates to that… whether that be high-voltage cables, transformers, connecting renewables to the grid – there is a lot of investment required in the electrification sector.”