Thematic investing outlook for 2022 & beyond

This article is part of Thematic Investing series.

Netting around $100 billion in inflows in 2021, Thematic ETFs have grown to become one of the go-to investment vehicles to gain exposure to themes, trends and megatrends shaping our future. In this article, we'll recap the hot themes of 2021 and the themes to ponder for 2022 and beyond.

2021 Thematic overview

As of December 31st, 2021, 10 themes or sub-themes have lured in half of the year’s total net inflows of Thematic ETFs:

1. China Digitalization: $9.13 billion
2. Clean Energy: $8.15 billion
3. Cryptocurrency: $7.22 billion
4. Digital Infrastructure & Connectivity/ Disruptive Technology: $4.98 billion
5. Cybersecurity: $4.86 billion
6. North America Infrastructure: $4.86 billion
7. Battery Value-Chain: $4.50 billion
8. China Disruptive Technology: $4.35 billion
9. Carbon Transition: $3.79 billion
10. Future Mobility: $3.61 billion

Here's a snapshot of what piqued investors' interests in 2021:

1 & 8 - China Digitalization & Disruptive Technology

For decades, China has built its economic fortunes by building things for others and became the go-to manufacturing hub for developed nations. However, the tides have changed, and the Red Dragon is flashing its technological prowess through innovation and digitalization, domestically and across continents. Global investors are realizing there might be a new sheriff in town and they're jumping aboard.

2, 7 & 9 - Clean Energy / Battery Value-Chain / Carbon Transition

As nations and companies speed up the carbon and green transition, Clean Energy is shaping into a long-lasting investment theme that will be on investors’ playbooks for decades to come. With electrification in its pathway, the battery-value chain will play a key role in supporting the transition — by creating the energy storage medium we need.

3 - Cryptocurrency

Cryptocurrencies were the FOMO investment of the year — attracting both institutional and retail investors who are looking to spice up their portfolios with a risky touch. Providing a simpler and safer way to access digital assets, Cryptocurrency ETFs proliferated in numbers, offerings, and assets as regulators gave greener light.

4 - Digital Infrastructure & Connectivity / Disruptive Technology

A battle is raging for 5G and tech supremacy. Fiber optics are raiding our territories and satellites are crowding our skies. The bases are now data centers, commanded by robots in a cloud. We're in the era of quantum computing, artificial intelligence, big data and so much more. Investors know this investment theme is dynamic and will constantly change as we explore unchartered territories. To capture it all, ETFs have been the way to go.

5 - Cybersecurity

Investors realize that an expanding digital infrastructure requires the tools to protect it. With the stakes being so high, Cybersecurity plays a major role in fending off all kinds of cyber threats. The undisputed investment thesis attracted $4.86 billion into Cybersecurity ETFs.

6 - North America Infrastructure

To reinvigorate the U.S. economy, President Joe Biden and the U.S. Congress passed a $1.2 trillion bipartisan infrastructure bill meant to rebuild the nation's infrastructure and create employment after the pandemic hit in 2020. The passage of the bill would mean that billions of dollars will be invested in roads, bridges, water systems, transit, and broadband in the coming years. To reap the benefits, investors injected $4.86 billion in North America Infrastructure ETFs.

10 - Future Mobility

The way we move from point A to point B is drastically changing. Cleaner, safer, and more autonomous vehicles are flooding the markets. Investors have seen it already in the boom in electric vehicle (EV) sales over the past few years. Nations are prepping the infrastructure and giving out incentives for both sides of the trade. We've seen tons of money poured into shares of new EV companies and the supporting cast, even the ones with no actual sales. Future mobility has arrived today, and the belief in it taking over traditional methods is stronger than ever.

Thematic outlook 2022 and beyond

With 2021 in the rear-view mirror, investors are gazing at the crystal ball — looking for the next big thing on the Thematic Investing scene in 2022 and beyond. As one of the leaders in Thematic Investing, Legal & General Investment Management (LGIM) has shared its thoughts on what could lie ahead for thematic investors.

Robotics and Automation

Robotics and Automation will keep transforming our lives and disrupting many industries for years to come. LGIM believes a particular area of expansion will be automation in warehousing and logistics. In 2021, record-high demand, coupled with supply bottlenecks and labor shortages, has put global supply chains under pressure, highlighting the need for warehouses to become “smarter” and let automation facilitate tasks and improve safety. They expect “cobots” (collaborative robots), for example, to play a more active part in helping us humans in both industrial and home applications. LGIM expects the installed base of industrial robots to exceed 3.7 million units by the end of 2022, which would still represent less than 1% of the number of manufacturing workers around the world. It is fair to state this trend has only just begun.

E-Commerce Logistics

According to Transport Intelligence, the global eCommerce logistics market grew by over +27% in 2020 and is expected to grow at a CAGR of +8.6% between 2020 and 2025. Demand has broadly started to normalize towards historic, pre-pandemic levels and as economic activity keeps recovering, supply chain issues have also started to normalize. However, certain habits we have picked up over 2020/21 have now become ingrained in our behavior. These include our preference for online shopping, our need for instant gratification, and our expectations of fast deliveries, which are all elements that will reward companies that focus on delivering innovation and efficiency.

Artificial Intelligence

Artificial intelligence is well-positioned to benefit from further growth, given advances in digitization and the potential of having more personalized online experiences and applications enabled by evolutions in machine learning and natural language processing. LGIM expects the AI market to more than quintuple in size from $22 billion in 2019 to $127 billion in 2025, equivalent to a +34% CAGR. More recently, the concept of the metaverse has gained more traction and no doubt we will soon see developments in virtual reality and immersive experiences that will change and hopefully improve the way we live our lives.

Digital Payments

The digital payment theme continues to be underpinned by strong growth drivers such as the secular, ongoing shift away from cash transactions. According to a PwC 2021 study on the future of payments, global cashless transaction volumes will more than double by 2030. We expect applications such as digital wallets and blockchain technology to shape the world of digital payments in the next few years. Payments Cards & Mobile predicts that between 35% and 45% of all consumer transactions will involve a digital wallet by 2030.

Cybersecurity

In 2022 and beyond, Cybersecurity will continue to be a major area of investment across all industries. Cybersecurity Ventures expects worldwide spending to exceed $1.75 trillion from 2021 to 2025. From securing digital transactions to protecting patients’ data in healthcare environments and the vast information network that supports logistics activities and cloud-based applications, cybersecurity is of paramount importance to any business. With IT systems becoming more complex and threats more sophisticated, better prevention technology and more automation and planning processes need to be put in place.

Biotech & Genomic / Tomorrow's treatments / Healthcare Technology & Innovation 

With the outbreak of the pandemic, we have not only become more conscious of the importance of our health but also aware of the pressure that hospitals and healthcare staff are facing. This has accelerated the need to deploy healthcare technology that can improve efficiency, reduce costs and make healthcare more available and affordable to all.

According to LGIM, 2022 could be an inflection year for spatial biology, a discipline that could take gene sequencing to the next level, thanks to a deeper, cell-level understanding of diseases and their treatments. This breakthrough innovation could drastically reduce the time needed to research diseases and approve drugs and allow for the development of more personalized diagnostic and therapeutic solutions.

We expect positive developments on the orphan drugs front as well, with the drug development process being boosted by economic and commercial drivers, such as tax credits and premium pricing. EvaluatePharma predicts worldwide orphan drug sales to be worth $242 billion by 2024, increasing at double the CAGR of the overall drug market.

Clean Energy / Battery Value-Chain / Hydrogen Economy / Energy Infrastructure

The current narrative on sustainability and climate change, as highlighted at COP26, keeps being supportive of clean energy and resources stocks and we believe this will persist in 2022 and onwards, as countries around the world tirelessly work to achieve net-zero emissions by 2050.

By 2050, between $1.6 trillion and $3.8 trillion in new climate investment is required for the supply side of the global energy system according to the Intergovernmental Panel on Climate Change (IPCC). As well as the transition to renewable energy, energy storage and efficiency will continue to attract increasing attention, as ultimately it is medium and long-term energy storage solutions, such as batteries and green hydrogen, and access to electricity grids, that will make renewable energy more attractive and reliable and enable its use across homes and entire industries globally.

KEEP READING:

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