Investors should no longer view the world solely through geographic or sectoral lenses because themes are driving markets more than ever, according to Jamie Mills O’Brien, manager of the Aberdeen Future Supply Chains UCITS ETF.
“We can see that in the data through the widening gap between thematic winners and losers across sectors,” he said.
One example is the recent sell-off in perceived AI winners and losers. Companies across sectors and geographies have been hit hard if viewed as being left behind in the new era of AI, while those with tangible links to the new technology have been rewarded.
Whereas major market moves were once caused by data such as PMIs and unemployment, nowadays the release of a new AI model or of a new drug can be equally seismic.
His Aberdeen Future Supply Chains strategy was created to tackle the theme of global supply chains – something that became part of the global narrative after Covid. As the world returned to normal, demand ramped up but supply was slow to match it.
More recently, the war in Iran, which led to the closure of the Strait of Hormuz (a significant stretch of water through which a fifth of the world’s oil passes through) has once again brought the issue of supply chains into the fore.
“Energy security and energy resilience have accelerated in recent months. That’s a theme we identified a while ago and we think sits at the core of what’s driving markets today,” said Mills O’Brien.
“The war has highlighted that there will be new ways of transport needed. There will be new systems of doing things in certain areas, especially problem areas like this.”
While German and US infrastructure projects are off the ground and recognised by markets, there are “parts of the world where you would expect significant opportunities that perhaps are going under the radar at the moment”.
O’Brien noted that Iran has been targeting refineries, which can take years to fix. As a result, he expects more investment in the region, as well as in those most affected, such as in Asia, where most of the oil transported through the strait is headed for.
But the opportunity set is far wider than just oil. He highlighted that reshoring has become a big supply chain theme in recent years, as geopolitical tensions have risen and governments have moved to bring manufacturing closer to home.
“If you look at earnings upgrades, companies exposed to reshoring have far outpaced the rest of the market. We’re seeing that not just in narrative, but in fundamentals, as earnings are stronger,” he said.
“In many ways, today resembles a pre‑1990s backdrop where countries had their own domestic demand cycles, lots of trade restrictions and policy cycles moved in their own directions both from a fiscal and monetary point of view. We could be returning back to that kind of environment but this time it’s overlaid and exacerbated by competition for resources, technology, talent and climate pressures.”
This is particularly prevalent in the US, where president Donald Trump has used tariffs as a way to incentivise companies to build manufacturing plants in America.
“US reindustrialisation is probably going to get even more momentum here,” he said, suggesting that the long-term theme to replace globalisation will be ‘spheres of influence’, with the US and China leading their areas of the world while Europe works in its own bloc.
However, the US will not be able to do things on its own and could look to its allies to “bridge the gap with China”. “In areas like higher ship building and defence, we think that we're going to see a lot more investment funnelled into Japan and Korea,” the manager said.
This also leans into the national security theme, with governments prioritising domestic technology development and bringing high‑quality technology labour onshore.
There had been concerns that defence spending might start to tail off from next year, but the manager said the need for missile and drone defence is vast, highlighting companies such as Lockheed and BAE Systems as potential winners from additional spending.
While these themes are relatively new in some cases, O’Brien said that it is part of a “period of rapid change” where he expects a “reordering” of defence spending, energy security and alliances.
The Aberdeen Future Supply Chains portfolio reflects his view by investing in companies most tied into the themes above, using quantitative overlays to optimise positions.
He highlighted stocks in a range of areas, including railway company Canadian Pacific and defence stock L3 Harris as companies that fit into the different themes (reshoring and defence spending respectively).
“At the heart of the fund is the view that we think this [supply chains] is the most important theme shaping markets today,” he said. “We think it’s a theme that is going to persist over the next decade, if not decades.”