Christian Nolting, CIO of Deutsche Wealth Management, says we are in the late stage of the current economic cycle which is the perfect time to tap long-term secular trends.

Nolting and his team identified their first investment themes in 2017 – cyber security, millennials, global aging and infrastructure – and this year they added AI and smart mobility to their list.

‘The smart mobility theme focuses on technological advances in transport and its implications for car makers, batteries, powertrains, the development of charging infrastructure and even power generation. This is quite a big growth area,’ he says.

Nolting adds that electric car technology might lead to falling oil prices, but this is unlikely to happen in the immediate short term. ‘This is a very interesting long-term development, especially if you look at the changes in power generation,’ he says.

Self-driving cars are another facet of this bigger theme but Nolting says several recent accidents have proved the technology needs further work and investment.

Nevertheless, slow-burn themes like these are likely to be key drivers in many investment portfolios and many have entered the mainstream to the point of becoming staples, Nolting says.

The rise and rise of AI

Artificial intelligence is the second theme Nolting is monitoring closely, as he sees it impacting multiple sectors and industries.

‘AI promises to intelligently automate tasks and anticipate human action in a disciplined manner. It is most advanced in robotics, which doesn’t mean only physical robots but also applications such as software algorithms that take financial decisions.’

He adds that fintech and robo advisory are both sub-themes under the AI umbrella, which is an indication of how wide-reaching the scope of this megatrend truly is.

Smart mobility and AI are on many investors’ radars but every asset allocator approaches these themes differently. Nolting, for example, advises clients not go into single names. He says there is strong M&A activity in both markets and there is likely to be a build-up of global players in the near future.

‘In 10 years’ time we may well see one or two AI companies among the largest players by market cap. However, it’s difficult to identify them now and there could be management failures down the road, and that would mean you invested in the right sector but the wrong company,’ he says.

In order to tap megatrends Nolting and his team prefer to invest in a selection of start-up companies with more performance potential rather than betting on established players in the space.

‘At this stage of the market we would rather go into baskets of equities to gain exposure to a theme instead of taking on single-company risk.

‘One investment route could be via funds but dedicated baskets of equities converted into an index could also prove an effective way in.’

Given there are no big global players that specialise exclusively in AI, Nolting says it makes sense to look at companies in the start-up phase to see if they are going to be taken over and develop into major contenders.

‘Last year there were about 100 M&A events in the AI space, which is a much bigger number than in previous years. But when you look at the amount of transactions involved, the number is rather small but this is likely to increase massively, which is a normal development in a market with a growing revenue stream,’ he says.

Are there other ways to tap these megatrends? Nolting says it is relatively easy to access them through conventional routes such as theme-based ETFs or private equity investments related to selected themes.

‘We also have expertise in ESG-based investing which will be relevant to these areas. It is important to remember that such societal change is never painless: you need to look for risks to existing investments as well as identifying new opportunities,’ he says.