Every portfolio needs an element of future proofing. In a world that has become so fast-paced and where disruption is pervasive, it is essential to seek safeguards to protect against, or profit from, a constantly evolving market backdrop.
With the recent narrative so dominated by the roll out of AI, it would be understandable for investors to see this theme as having the single most significant impact on the potential for future returns. However, there are a range of structural forces in the global economy every bit as powerful as AI that may not yet be on the radar of investors.
Today’s investment landscape is increasingly governed by structural rather than cyclical forces. These forces are persistent, global and interlinked. They will include AI but are not limited to it.
Thematic investing has become a by-word for identifying these forces and unearthing companies that are set to benefit from them. While sceptics may view thematics as an attempt to tap into the fad of the day, we believe it represents multi-decade investment opportunities that span a huge range of long-term trends in transportation and technology, energy evolution, plus health, wealth and demographics.
Supply chains
For example, one area of significant change lies in global supply chains. For 30 years, companies sought to source products wherever supply was cheapest. This led to often long and complex supply chains. These relied on a world where international relationships were stable and unchanging.
That model has proved to be unsustainable. Today’s CEOs are asking not where supply is cheapest, but where it is safest. This is the result of a multitude of factors – protectionism, fragile geopolitics, the disruption caused by the Covid pandemic and the need to reinforce critical infrastructure.
Covid exposed the fragility of global supply chains. The protectionism that started under Trump 1.0 has significantly gathered pace under Trump 2.0. There has been the ‘China plus One’ strategy that has seen companies diversify away from China on geopolitical grounds, providing a boost to more ‘West-friendly’ countries such as Indonesia and Vietnam.
Overall, there has been a drive to bring supply closer to demand. That has meant huge investment in automation as companies seek to remain competitive.
Industry leaders simply cannot ignore geopolitical risk when considering their supply considerations. Trading blocs are shifting and old alliances are being disrupted. At the same time, there is increasing competition for scarce natural resources.
As these tensions deepen, we’re seeing countries build domestic capabilities in key industries, particularly semiconductors, while ensuring their supplies of critical minerals are sound.
There is also a demand for energy resilience. The Ukraine and Iran wars have been a wake-up call on how fragile the supply of fossil fuels can be, how significant the impact can be when they are disrupted and the need to invest in other, renewable sources of energy to keep the lights on and industry running.
Energy has become a strategic liability and potentially a swing factor in the development of other power hungry technologies such as AI.
This creates a significant opportunity across multiple industries. The abrdn Future Supply Chains ETF holds companies which we believe are likely to be beneficiaries of onshore production, such as liquefied natural gas (LNG) infrastructure group Gaztransport et Techniga (GTT), the market leader in LNG containment technology that holds a range of infrastructure assets in Mexico and emerging markets, alongside automation leaders such as Fanuc in Japan.
Raw materials
At the heart of every major global theme is a reliance on raw materials. AI cannot operate effectively without the critical mineral needed for semiconductors. The global electrification trend can’t happen without certain key metals such as copper.
Beyond copper, there is a bucket of specialty metals including aluminium, nickel, lithium, rare earths and uranium that sit behind some of the most important developments in the global economy.
The abrdn Future Raw Materials ETF focuses on companies involved in the exploration, mining and distribution of these metals. Copper, for example, is widely used both in energy generation – wind turbines and solar panels – and in transmission – getting electricity to where it needs to be. It is also used for electric vehicle charging stations and in the cars themselves.
As geopolitical risks intensify, it reinforces the case for ensuring lasting access to these materials. Energy security is becoming a priority for governments and the development of energy independence, through renewable power or nuclear, for example, requires these raw materials.
If anything, we believe the scale is underappreciated. Electricity grids need to transform, while AI, robotics and data centres are also helping to drive demand for energy.
These multi-decade themes, along with growing resource nationalism as countries seek to protect their access, have been driving demand for the metals. At the same time, supply is constrained.
The time it takes to bring on new supply is increasing, as mines grow more mature and extraction more complex. We believe that raw material companies are likely to benefit not just in the near term, but over many years as these themes evolve.
Real estate
Real estate is seldom seen as a forward-facing sector, yet all these long-term themes rely on it. Real estate investors cannot ignore future trends. The example of Blockbuster video and its arch-nemesis Netflix shows how structural changes can fundamentally alter the demand for real estate from high street bricks and mortar to the data centres that house the technology required for a life online.
The type of buildings tenants need is changing all the time. Ten years ago, no one wanted to talk about logistics. It was a boring backwater for the real estate market.
E-commerce changed that completely and last mile delivery became essential. As supply chains shifted, it brought the need for supply to be closer to demand and real estate plays an important part of facilitating this shift.
Other secular trends are also having an impact. The growth of the defence sector since the full-scale invasion of Ukraine, for example, requires modern, state of the art logistics.
Demographics are also reshaping real estate. In the UK, there are now 12.7m people over 65, yet a modern care home industry does not exist. AI also requires real estate – Nvidia chips end up in data centres.
Within the abrdn Future Real Estate ETF, we aim to take exposure to the themes of tomorrow, including data centres, complex industrial networks, senior housing, investing in not just one building, but in platforms and in operators that have scale.
Ross McSkimming is head of equities investment specialists at Aberdeen Investments. The views expressed above should not be taken as investment advice.