VettaFi editor-in-chief Lara Crigger appeared on “The Money Show” as part of a virtual expo with BlackRock’s Jay Jacob titled “Fireside Chat With Jay Jacobs: Things to Watch Amid the Uncertain Economic Outlook.”
2022 has been a challenging landscape for investors. Volatility is persisting throughout the equity markets, especially in the thematic space. “There have been some pockets of the market that have seen more resilience than others,” Crigger said.
Jacobs pointed to what he called “mega trends” as huge drivers of disruption and innovation. These trends are breakthrough technology, changing demographics and social trends, rising emerging wealth, climate change and resource scarcity, and urbanization. “If we look at the last three or four years in the ETF industry, we’ve seen a rapid rise in thematic ETFs, ETFs that are designed to get exposure to these rising thematic trends.” Despite tremendous success in the past few years, lots of technology-based thematics have experienced a performance dip.
Asked by Crigger where the bright spots are, Jacobs said, “One bright spot has been looking outside of technology.” Rising interest rates have put tech under pressure, but there are themes in other sectors of the economy that have found some tailwinds. Jacobs said that many investors have conflated technology and thematic investing, given the success of tech-centered thematic products. “The reality is thematic investing is much bigger than that.” This year, infrastructure has benefited from government policy. Construction companies, mining companies, utilities, and industrials have done well.
Queried on what’s being overlooked, Jacobs said, “One area we’re excited about is ag tech and the future of food.” He noted that food prices have raised 10%–15%. Ag tech companies could be the solution to high food prices. Precision watering and autonomous tractors — which can run 24/7 — are examples of technologies that could greatly reduce food costs. However, not many investors are talking about ag tech, which means investors have an opportunity to get in early, especially as geopolitical tensions and disrupted supply chains continue to buoy inflation.
“There’s a lot of opportunity there,” Crigger noted.
Jacobs concurred and discussed how although tech has performed well for the past five years, broad-based exposure just won’t cut it anymore. “Really, you need to look for what is the growth driver for this tech.”
Pivoting back to inflation, Crigger said, “According to some of the data, we may have passed peak inflation, but it’s still persistently high.” Crigger asked, “How should investors be positioning their portfolios in this environment?”
Jacobs agreed that inflation is likely to remain ongoing even if it continues to come off its highs. “The underlying causes of this inflation haven’t been addressed. It’s those supply chain issues that are making it hard to get goods and scale goods across the world to meet demand.”
With demand remaining high and supply squeezed, inflation is likely to continue. Jacobs said, “Going back to infrastructure, we see this as a theme that can really thrive in inflation as well.” Supply enhancements in infrastructure and increased production on the local side could provide a bit of a growth story that could alleviate inflation. Jacobs noted that lots of companies that play in the infrastructure space have the power to increase their rates based off CPI, making them more protected from inflation than many other companies. Other businesses can’t pass inflation costs off to the customer as easily.
The Impact of Politics
After appearing dead in the water, the Inflation Reduction Act was recently signed into law. Jacobs observed that policy can help move products along the adoption curve. A product might start off expensive or niche and slowly gain more acceptance by becoming cheaper or more widely available. “At some point in the future, they won’t call them electric vehicles — they’ll just call them vehicles,” Jacobs said.
Crigger asked what the impact of midterms might be. Jacobs said that he sees these themes as standing on their own without further policy backing, though he thinks that policy can certainly help as an accelerant. Clean energy tends to be cheaper and more efficient, and he noted that EVs were gaining popularity even before tax credits.
Where Do Thematics Sit in a Portfolio?
Jacobs saw thematics as good core satellite products, allowing for diversification and providing long-term growth as a buy-and-hold play. Thematics tend to not be limited to sectors or geographic location. “You can get a lot of sectors and a lot of different country exposures just within this one thematic ETF. That can be a challenge because a lot of people build their portfolios based off of sector and geographic classification.”
He believes thematics can be used in two ways. They can be used as a core satellite long-term buy-and-hold to provide long-term growth. The other option is sector replacement. For example, healthcare can be swapped out for genomics.
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