SINGAPORE (Mar 20): Investment refers to anything which generates returns. We usually view investments as higher returns investment asset classes such as mutual funds, Exchange Traded Funds (ETFs), stocks, real estate and bonds. Even when a savings account generates a meagre 0.05% interest per annum, it is still considered a form of investment.
There are many reasons why people invest. One common reason is to fight inflation.
In 2019, Singapore saw an increase of 0.6% in Consumer Price Index (CPI) — a measure of inflation — and 1.0% in core inflation. Hence, if your investment is earning a lower return than inflation, the actual value of money you have is decreasing.
Another reason for investment is to plan for retirement. Although Singapore has the Central Provident Fund which allows Singaporeans to get payouts on a monthly basis after they reach retirement age, many might find their CPF funds insufficient to maintain their current lifestyle or desired lifestyle after working hard for many years.
Thus, investment in this instance seeks to grow funds and provide an additional stream of income such as dividend payouts to replace one’s salary in the event when work stops.
Why Invest in trends?
If understanding the reasons to start investing is the first step, the next is knowing what to invest in. After all, investing could lead to losses too. This article will focus on equities where you invest through common stock or ETFs.
One way to outperform the market is to identify sectors likely to be the main growth drivers of the economy. One such example is the IT sector that gained 49.45% in 2019 despite S&P500 gaining just 28.88%.
Looking ahead, the drivers of the economy could be trends such as cloud computing, IoT and AI with increasing computing power and data.
Identifying some of the trends are easy with numerous coverage in articles and news reports.
Technological breakthrough
One key trend is the technological breakthrough experienced globally. The technological sector includes businesses such as manufacturers for computing hardware, software or electronics, and technological service industry such as companies providing IT analytics and data processing.
The famous FAANG stocks, for example, is made up of Facebook, Apple, Amazon, Netflix and Alphabet (previously known as Google) along with Microsoft that made up for more than 25% of the total returns of the S&P500 from 2017 to 2019. The top five components in S&P500 also constitute more than 16% of the index at end 2019.
The technological sector is likely to remain as a dominating sector as the world gets increasingly interconnected digitally. This is especially so with many countries developing their 5G networks and IT infrastructure to benefit from the technological advancements.
Healthcare focus
Generally regarded as a “defensive sector”, the healthcare sector is primed to be a focus for the long term in view of the ageing population and rapid advances in biotechnology across the world. Even in the short term, disease outbreaks such as the current novel coronavirus crisis also makes the healthcare sector a recession-resistant sector with funds flowing into the sector to develop drugs and vaccines for the current situation and prepare for the future.
Given that the US healthcare sector has underperformed the broader index in 2019, it is more likely to outperform the index in 2020.
Climate change
Environmental, Social and Governance (ESG) investing is gaining traction in recent years due to the focus on climate changes and its impact and risks. Companies are increasingly coming under pressure to report their impact on the environment mainly through emissions. Climate solution market has also become a multi-trillion industry focusing on areas such as renewable energy and electric vehicles.
With many countries setting their own emissions standards and targets, companies will need to incorporate ESG factors and adapt to the changing requirements. For example, carbon taxes imposed by countries will impact traditional energy sector investments and funds allocation.
Similar to how hydrocarbon companies benefited from the increase in demand of crude oil across the world due to industrialisation, the new energy market will benefit from the increase in demand and injection of funds by companies and countries aiming to achieve their targets.
How to invest in these trends/themes
The hardest step would be making the move to invest. Some may skip this step due to the lack of investment knowledge. Apart from investing in individual companies, investors can invest in an entire sector through index investing via ETFs. After identifying the sector to invest in, investors could find an ETF which tracks that particular index. Similar to how STI ETF tracks The Straits Times Index, there are sector-based ETF such as REITs-only ETF.
Review the trends regularly
Investing in the trends are suited for investors with higher risk appetite to target higher returns as well as investors eyeing long term.
These trends might change over time and thus should be regularly reviewed.
In the age of digitalisation, many incumbents in various sectors face new competitors or disruptors with new technology or business models. Not only are sectors involved in the major trends in the world affected, all sectors that focus on climate or face impact of digitalisation have to change in varying degrees.
Regardless, take note of trends and do your research well before entering the market.
Teo Huan Zi is senior investment specialist at Phillip Investor Centre (Toa Payoh).
