Targeted investment themes for 2021

9 mins. to read
Targeted investment themes for 2021

There are a few sectors and themes that will be hot during 2021 and that promise some good returns, writes Filipe R. Costa.

Three… two… one… and its over! There’s a big reason to celebrate and that’s not the arrival of a New Year but rather the end of 2020. Finally, pestilential 2020 is gone forever and we can readopt our 2019 standards. Can we? At least, we hope and expect to eventually. But the challenges in the new year won’t be easy to overcome. We still need to acquire herd immunity against Covid-19 and to avoid a global depression. While this happens, we should get used to a new administration in the US and to the end of the European Single Market for the UK. At least financial markets seem optimistic about the future. In my view, there are reasons to be optimistic, but broad market valuations are already high. However, there are a few sectors and themes that will be hot during 2021 and that promise some good returns. Healthcare, renewable energy and the digitisation of the economy are some of the themes I expect to dominate the year and there is one ETF provider offering some very good options on these fronts – Global X.

Bad for health, good for stocks

Having taken the lives of around two million people, the Covid-19 virus turned our lives upside down and marked 2020 as one of the strangest years in living memory. Back in March everyone was caught off guard with the quick spread of the virus and governments around the world had to adopt strict lockdown measures to fight it. Investors were scared to death and the resulting panic selling drove stock indexes down into bear market territory. The S&P 500 dropped 34% from its peak on 19 February to its trough on 23 March. However, one month later, sentiment started to improve, and despite some ups and downs the index closed 15% higher in 2021, an impressive rise of 68% since its trough in March. While the world has not eradicated the virus, several factors helped the recovery. One key point concerns the fact that measures taken later in the year by governments to fight the virus were lighter than those taken in March, leading to a milder impact on economic activity. Another important point was the end of all uncertainty surrounding the US election, which culminated in November with the election of Joe Biden. Later in the year, an even more positive turn occurred when Pfizer announced a Covid-19 vaccine with a 95% success rate. All these factors helped boost stocks, with tech stocks outperforming in a big way. 

In Europe, the picture for financial markets was less rosy. The Dax ended the year with a small gain of 3.4%, the French CAC declined 5.0% and the FTSE 100 doubled that loss to 10.0%. UK stocks have been among the worst performers of the year, as the country was severely hit by a high number of Covid-19 cases and resulting restrictive lockdowns. The Brexit process has further contributed to derail the market as the end of the transition period comes at the worst time possible.

A light at the end of the tunnel

In 2021, Covid-19 will continue to dominate the news, as there is a major campaign to vaccinate the global population. Even though the vaccine has been developed in record time, it seems safe and effective against the virus. Over time, the global population will gain herd immunity and death rates and hospitalisations are expected to decline, which will help economies to reopen completely and life to return to normal. However, much of this normality is already discounted by major stock indexes and the potential for negative surprises seems greater than the potential for positive surprises. No matter what happens, healthcare stocks will continue to be in the spotlight. Big pharma stocks like AbbVie, Bristol-Myers Squibb, Merck & Co, Pfizer, Johnson & Johnson, UnitedHealth Group, Novartis, Abbot Laboratories, Eli Lilly, Medtronic and Novo Nordisk will certainly be in high demand, as the world turns to the healthcare industry looking for answers to the pandemic and its indirect effects. I expect governments to increase their spending in healthcare in the near future and the demand from consumers will also play to the upside. This favours a portfolio tilt towards the sector.

The tough dispute that culminated with Joe Biden’s victory over Donald Trump brings some investment themes into the spotlight. I believe Biden to be more favourable to the healthcare industry than Trump and I expect him to lead the US government to increase its spending in the sector. Biden will also shorten the path towards a cleaner and greener future. He made it clear that he aims to reduce US reliance on coal and other fossil fuels and promised he would re-enter the Paris agreement ditched by Trump. This will likely favour renewable energy production and hurt fossil fuels production. The trend for renewables started a few years ago but was severely dented by the pandemic and the policy uncertainty surrounding the US election. With the uncertainty now resolved, investment in renewable energy should expand in 2021. Top companies like NextEra Energy, Brookfield Renewable Partners, First Solar, Renewables Infrastructure Group and Duke Energy should benefit from the trend. The move towards cleaner technologies is here to stay and will help the industry outpace the broad market in terms of growth.

The Biden-Harris presidency will eventually turn less favourable to broad technology. The high-flying tech sector is poised to face more regulation, which may undermine its current growth projections. Most of these stocks are already trading on very high valuations, and when combined with a less flexible legal framework, this makes it a good candidate for reduced exposure.

Selecting some targeted ETFs

With the above ideas in mind, I am looking at a few highly targeted ETFs that I think can generate good returns in 2021. Instead of looking into whole sectors or industries, I’m seeking out highly targeted themes. Specifically, I’m looking at the product offer from Global X, a New-York ETF issuer founded in 2008, widely known for its thematic product suite. Investors looking for a broader exposure to a sector should look at iShares, Vanguard or SPDR instead.

Global X Telemedecine & Digital Health ETF (NASDAQ:EDOC)

The digitisation of the economy is a long-term reality that has been accelerated due to the pandemic. This trend will likely continue. To directly benefit from it, Global X created this ETF in June 2020, which invests in companies that are positioned to benefit from advances in the field of telemedicine and digital health. The ETF includes companies directly involved in telemedicine and also in health care analytics, connected health care devices and administrative digitisation. The fund invests globally, even though its assets are concentrated in the US (83%). Its top holdings include M3, Nuance Communications, NeoGenomics, Illumina and Agilent Technologies. The Global X Telemedicine ETF is up 25% since its inception, which compares with a rise of 18% for the S&P in the same period. I expect a good performance this year, as the companies involved in this theme will continue to face very favourable conditions.

Global X Autonomous & Electric Vehicles ETF (NASDAQ:DRIV)

The trends leading to the ultimate replacement of fossil fuel vehicles are going to accelerate post-pandemic. Global X offers a very good option for investors to take part in the trend. The Autonomous & Electric Vehicles ETF invests in companies involved in the development of autonomous vehicle technology, electric vehicles and electric vehicle components and materials. The fund was created in April 2018 and has been a success in terms of returns so far. Last year, DRIV rose 62%. The fund invests globally with 60% of its assets being concentrated in the US. Its holdings include 76 companies with the top being Tesla, Qualcomm, Apple, Nio and Nvidia.

Global X Genomics & Biotechnology ETF (NASDA:GNOM)

In a world where technology is thriving and concerns around health issues are on the rise, investors will no doubt want to invest in companies involved in the field of genomic science. The Genomics & Biotechnology ETF offers exposure to companies involved in gene editing, genomic sequencing, genetic medicine and therapy, computational genomics and biotechnology. Created in April 2019, the fund has also been a success so far and largely outpaced the broad market last year, with a rise above 50%. GNOM currently invests in 40 companies, 85% from the US, and 98% from the healthcare industry. Its top holdings include Crispr Therapeutics, Editas Medicine, Ultragenyx Pharmaceutical, Natera, and Pacific Biosciences of California. 

Global X YieldCo & Renewable Energy Income ETF (NASDAQ:YLCO)

The YieldCo & Renewable Energy Income ETF is different from other funds targeting the renewable energy theme, as it provides exposure to income-generating assets, known as YieldCos. Investors looking for an exposure to renewable energy but concerned with income can satisfy both needs with this ETF, as YLCO only invests in renewable energy stocks with a minimum dividend yield. This is a defensive, bond-like investment, constituted 90% of utilities. It invests in 35 different stocks across the globe and it’s not particularly concentrated in any single country. Top holdings are spread over Canada (16.9%), New Zealand (15.2%), US (14.7%), Chile (10.1%) and Bermuda (7.4%) and include Meridian Energy, Brookfield Renewable Partners, EDP, Algonquin Power & Utilities and Enel Americas.

Global X CleanTech ETF (NASDAQ:CTEC) 

The CleanTech ETF is the latest addition to Global X portfolio with its inception in October 2020. The idea behind the fund is to invest in companies that may benefit from the adoption of technologies that inhibit or reduce negative environmental impacts. The fund includes companies involved in renewable energy production, energy storage, smart grid implementation, residential and commercial energy efficiency and production and provision of pollution-reducing products and solutions. In summary, this fund plays a hot theme, which will likely benefit from Biden’s presidency, from the end of the pandemic and from a rising trend. This fund invests globally, with top holdings spread over the US (34%), the UK (13%) and China (12%).

Global X Cannabis ETF (NASDAQ:POTX)

When Canada legalised recreational cannabis at the end of 2018, cannabis stocks came into the spotlight. Unfortunately, these stocks proved a poor investment as the companies involved in the industry have been facing rising operating losses, lower-than-expected demand and weakening liquidity positions. The legal framework for cannabis is currently unfavourable and there have been delays in the expected legalisation. The black market continues to thrive and legal companies are starved of cash to fund their growth. The Cannabis ETF is down 58% since its inception in September 2019. However, interest in cannabis stocks has been renewed due to sales surging amid the pandemic. At this point, the industry needs more US states to legalise recreational cannabis, which is more likely under the Biden-Kamala Administration.

Final Comments

I expect the first half of 2021 to be rough and abnormal, more or less like 2020. While stock markets can see the light, the real economy is still in the shade. However, with time and patience, our lives should return to normal and we will overcome this dark period of our history. In the meantime, some opportunities arise to invest. The broad market seems mainly overvalued. But themes like healthcare, renewable energy and cleaner technologies are expected to enjoy a high growth potential in the near future. At the same time, the President-elect is expected to bring some favourable conditions to the development of cleaner energies and even to the legalisation of recreational cannabis.

Happy New Year!

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