Three investment themes to look out for in 2025
By Boring Money
18 Dec, 2024
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What are investment themes?
Investment themes are like a roadmap for smart investing, helping people spot potential opportunities before they become obvious. They're about understanding changes happening in the world, like how artificial intelligence is changing technology, how critical metals are fuelling energy transition, or how shifting demographics are influencing the healthcare industry. Think of them as stories that show how new ideas or changes in society could create value and transform entire industries.
These themes aren't just wild guesses; They're carefully researched ideas based on real data and detailed analysis. Investors can use them to build smarter investment strategies, looking for promising opportunities before everyone else catches on. By understanding promising or upcoming investment themes, you can make more informed decisions about where to put your money, trying to stay ahead of major economic shifts and potential growth areas. It is important to recognise that even carefully researched themes carry the risk of capital loss, as market conditions, unforeseen events, or shifts in investor sentiment can lead to unexpected declines in value.
Some examples of prominent investment themes might include technological innovation in artificial intelligence, transformative developments in healthcare like cutting-edge medical devices, or shifts in commodities related to renewable energy. For investors interested in capitalising on these themes, exchange-traded funds (ETFs) offer a potential solution, providing access to a diversified range of assets centred around a specific theme, all within a single product easily traded on stock exchanges. Regardless of the investment type, including ETFs, the value of your investments and any income generated can fluctuate, meaning they may rise or fall. There is no guarantee that you will recover the amount you initially invested.
Thematic funds can allow investors to make targeted bets while aligning their portfolios with their interests and preferences (like ESG). When replacing a single stock bet in a portfolio, a thematic fund can diversify away stock-specific risk while retaining desirable exposure to the target theme.
Investing in technology
Technology has been a widely-discussed theme in the investment world in recent years. The COVID-19 pandemic accelerated the adoption of technologies like cloud computing, online shopping, and remote work tools, boosting the performance of many tech firms in the process. Meanwhile, technology stocks are known to be often more volatile than other sectors, with rapid price swings due to changing market sentiment or industry developments.
The rise of easy-to-use investment platforms and tech-focused funds, although highly volatile, provided more people with access to this theme. The growing flows of investments into the tech scene have created a positive cycle, where startups can innovate faster and big tech companies continue to grow. Nevertheless, equity market risks persist, meaning there is a possibility of capital loss due to specific economic conditions or unexpected declines in value.
Semiconductor-themed stocks, in particular, have become a key area of interest for investors, as these companies are crucial to the global supply chain and the broader technology landscape. Semiconductors have been fundamental to driving technological innovation, playing a pivotal role in areas like AI and data infrastructure. This essential importance has driven positive investor sentiment. Regardless, semiconductor stocks will still remain susceptible to fluctuations in their valuations and the general state of semiconductor companies, the performance of which can be influenced by regulatory challenges. Yet, investing in tech remains relevant and optimism around the potential of AI and its utility continues to drive interest in technology as an investment theme.
Investing in healthcare
Healthcare remains a relevant investment theme, underpinned by innovation and growth potential. Its appeal lies in its universal necessity - people require medical care regardless of economic cycles, making healthcare stocks a relatively defensive choice during market downturns.
Moreover, the sector responds to important demographic trends, such as ageing populations in developed countries and growing middle-class incomes in emerging markets, by addressing the increasing need for improved healthcare services and technologies. Add to this the increasing prevalence of chronic diseases and the global focus on healthcare access, and thus, the case for investing in healthcare has become relevant. However, risks such as regulatory changes or shifting market sentiments can lead to declines in healthcare stock prices, regardless of the companies’ performance.
Prominent healthcare stocks span diverse sub-sectors, from gene sequencing and e-healthcare, to vaccine development and pharmaceuticals, to bionics and other innovative medical technologies. Companies like Johnson & Johnson, a leader in pharmaceuticals and medical devices, or Pfizer, known for its blockbuster drugs and vaccines, represent stalwarts in the space. Biotech firms such as Moderna and Regeneron Pharmaceuticals have captured investor attention due to their cutting-edge research and innovative treatments, particularly during the COVID-19 pandemic. Yet, these stocks are still exposed to risks linked to the broader securities market, including overall economic or political conditions and sudden, unpredictable declines in value, which can result in financial losses.
Investing in healthcare, thanks to its appeal and many facets, also carries opportunities for diversification. ETFs focusing on healthcare offer a way to access a diverse range of stocks in this sector through a single fund, eliminating the need to sift through extensive research to build a balanced portfolio.
The research group Economist Intelligence Unit forecasts, “in 2025, healthcare spending will rise by nearly 6%”, indicating that the healthcare theme remains a promising opportunity for investors keen to get involved in the continued utilisation and development of this ever-evolving sector.[2]
Investing in commodities
The commodities sector is another area which provides an opportunity to diversify a portfolio and potentially hedge against market turbulence. Commodities derive their value from the demand for physical goods. This makes them a tool for investors looking to protect their wealth against fluctuations in the value of fiat (traditional) currency.
Aside from this characteristic, as global economies evolve and infrastructure projects grow, commodities like oil, natural gas, copper, and iron ore grow integral to economic development. There is currently widespread talk of a revival in nuclear energy, fuelled by tech giants Microsoft, Google and Amazon all announcing investments in the sector, while nations around the world look for alternative energy sources to curb their carbon emissions.[3] Meanwhile, the advancement in AI and the technology that underpins it has contributed to a spike in demand for raw materials such as silicon.
Investing in commodities stocks - for example, through a commodities-driven ETF - provides investors with a potential gateway to benefit from this sector without directly trading in physical commodities or using futures contracts. Companies involved in extracting, processing, or distributing raw materials can play an important role in a portfolio with commodities exposure. For example, ExxonMobil and Chevron are leading stocks in the oil and gas sector, offering exposure to energy markets. Similarly, BHP and Rio Tinto dominate in iron ore and coal, vital for global construction and manufacturing.
Yet, investments in natural resources and related companies are heavily influenced by supply, demand, and pricing, as well as factors like political events, trade restrictions, inflation, natural disasters, and industry-specific challenges - thus, the risk of capital loss remains. For instance, oil prices may surge due to tensions in major producing regions, or agricultural goods may face supply chain disruptions caused by extreme weather. Currently, there is still widespread apprehension around the uptake of nuclear energy, and ongoing conflict in the Middle East continues to loom over oil markets. However, investors who include commodities stocks as part of a diversified portfolio may potentially benefit from the sector's long-term growth potential, while balancing risks through diversification.
Please note that past performance is not a guide to future performance and should not be the sole factor of consideration when selecting an investment.
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[1] Morningstar, September 2024
