Should you opt for thematic equity investing?

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The economic slowdown in the past year was a major reminder to keep one’s finances in control and expand the investment horizon. A variety of investment trends have been introduced in the market recently. As a result of the vast impact of Covid-19 pandemic, investors have been quick in reviewing their portfolio and allocating capital basis a new strategy called thematic investing. The idea behind thematic investing, as the name suggests, is to invest in a theme.

Concept of thematic investing

“If, for example, metals as a sector is expected to do well – then anything connected to metals which could benefit from the boom is considered a thematic play on this specific theme. Similarly, a longer-term thematic play is electric vehicles. It’s just not the electric vehicles manufacturers, it could very well be auto ancillaries, producers of key raw materials such as Lithium, Charging Infrastructure Providers, etc.,” said market veteran Ambareesh Baliga.

Structural vs cyclic themes

Investors are eyeing a thematic approach to investing due to significant macro-level trends and their eventual impact on the returns. But it’s equally important to differentiate between two fundamentally different types of themes one can choose from.

Cyclical Themes – As the name indicates, cyclic theme occurs at nearly regular intervals (short or medium-term), depending on the potential changes in the business cycle. Over a long period of time, cyclical trends tend to converge to an average level.

Structural Themes – The one-off shifts that change the current paradigm follow structural themes. They are longer in duration and driven by powerful factors like variable demographics and consumer behaviour.

“A structural theme is when there is a paradigm shift and the change is permanent. Typically one plays the structural theme from a long term perspective. In the above example, the electric vehicle is a structural theme. Whereas the play on metals could be a cyclical theme though many are talking about a super-cycle in metals. However, history has shown that more often than not, such moves have been cyclical. So any commodity themes are generally cyclical whereas themes like IT, Pharma, Telecom etc we have seen in the last couple of decades has been structural,” Baliga explained.

Should you follow an investment strategy?

An investment strategy primarily guides you to make informed investment decisions for profitable yields. One should always pick the strategy basis their financial goals. Firstly, set your goals and then analyse the risk factors associated with a particular investment strategy.

“Even while playing a theme, it’s always prudent to pick the leaders though they may not give a huge alpha, but it’s safer especially if the theme doesn’t play out as expected or it peaks out earlier than expected. Retail investors normally look at the bottom of the pyramid which I think should be avoided. Also one can do SIPs especially in a structural theme so that you participate as the theme builds up,” Baliga concluded.