Three big investments themes you should be watching now

By Anil Jugmohan

If you are not already scanning the investments universe for winners in the space of big data and AI, Next-gen Healthcare and suppressed interest rates, then you should be.

This is according to Fund Manager Andrew Headley, who has managed the Nedgroup Investments Global Equity Fund for over a decade.

Headley presented at the annual Nedgroup Investments Global Investments Summit and shared his views on the three biggest investment themes playing out in the portfolio. Here is what you need to know:

Theme 1: Big Data & AI
Structured and unstructured data is growing at an unprecedented pace globally and there will be more data produced in the next three years than was produced in the past thirty years.

This data is all stored in databases and servers, and in order to successfully analyse this data and generate usable information, it has become crucial to appropriate processing power to this cause. As such, there is a huge focus on CPU & GPU processing power which is evolving to facilitate this and detect and utilise patterns in this huge data source.

“This will become hugely useful as it can be used as a signalling device across a wide variety of use cases and enable better decision-making and product or service development for companies in future,” says Headley.

Examples range for the very simplistic models like fraud detection, to highly sophisticated case such as autonomous vehicles - both of which rely on AI to be effective. The winners here are going to be companies that have access to big data, as well as engineering talent that can use this data.

“That’s why we think Google is extremely well placed to be at the forefront of this revolution, especially given the number of professors they have hired. They have also been developing intensive GPUs and have their own deep-learning framework. Other companies in the portfolio that also fit into this category are Microsoft and Facebook, although it is less central to their strategy than it is for Google,” he says.

According to Headley, there are two other types of companies that can benefit from this AI and big data theme. Those are the tools providers - such as semi-conductor producers and chip designers, and CAD CAM companies - and companies that can build proprietary AI into their business models, thereby improving results. We think there is huge opportunity to do this in aerospace as well as healthcare, which we believe, will be one of the earliest winners.

Theme 2: Next generation healthcare
Next generation healthcare, such as human genome sequencing is becoming significantly more economic to be able to do, thanks to the advancement of technology.

“This ability to sequence the human genome has led to an expansion in genomic work and there has been an explosion in work to understand the genomic drivers of disease and the treatments that work dependant on the genomic mutations that people have,” says Headley.

The delivery of personalised medicine is now becoming a reality by combining the technological advancements in genomic information with big data and AI. This is also leading to better diagnostics, and the early identification of disease such as oncology. Early diagnosis leads to much better survival outcomes.

“Companies operating in this space present a potentially huge market with exciting possibilities and this is an area we are watching closely. The second area of next-gen healthcare that we think has huge opportunity is preventative medicine.”

Preventative medicine uses big data and AI to diagnose incidence of disease earlier, and then to treat them earlier to increase their chances of survival.

In terms of winners and losers here, Headley’s team thinks that the sequencing technology and tools companies are huge winners. Those companies that can manufacture gene-therapy and diagnostic companies are also well-placed.

“The final set of companies that will be winners are biotech companies. We don’t have exposure to this last group because of the high risk-reward payoff of these endeavours,” he says.

Theme 3: Fragility
The third theme Headley is watching is a macro-economic them of suppressed interest rates which we think has led to a huge expansion in the valuations of all asset classes.

The continued high pricing of assets now rests on the ability of policy makers to keep interest rates at extremely low levels. The CAPE ratio is now exceptionally high along with the Operating PE for the S&P500.

“We believe this warrants caution and the need to be highly selective when picking stocks at this point in the cycle.”

Headley says the biggest beneficiaries have typically been growth stocks due to their longer duration earnings, but many of them have valuations that are now way too high. This means that if/when rates do rise, these high valuation companies will be impacted the most.

“Rates can’t go much lower which puts a cap on valuations. In terms of winners, we think the winners in a relative sense are those companies that have more sensible valuations.

A very good way to play this is via quality companies that are growing moderately fast. There are a number of interesting opportunities in the portfolio that are in line with this theme such as Fiserv, UnitedHealth, CVS and BAE. These companies should substantially outperform in the scenario that rates rise and valuations compress,” he says.