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May 2021

Sustainable Thematic Opportunities in a Post-COVID World

Over a year into the COVID-19 pandemic, it is clear that a strong, vaccine-driven recovery is now unfolding around the world. It is also evident that the pandemic has permanently altered many facets of our society, ranging from health and lifestyle, to the economy. As sustainable thematic investors, the pandemic holds long-term implications for how we at J. Safra Sarasin Sustainable Asset Management invest, as we aim to identify the disruptors and growth companies that will emerge as “winners” over the next decades.
COVID-19 has demonstrated the resilient nature of societies, including consumers and businesses alike. Being able to anticipate the behaviour of consumers as lockdown restrictions ease, will be vital in identifying attractive opportunities within our sustainable thematic process. This is especially true when looking at the “Evolving Consumption” theme within our investment strategy, which involves studying consumer behaviour and spending habits. With record levels of savings accumulated during the lockdown, we expect spending to bounce back strongly as economies reopen.

The way we consume is changing

As the name of our theme suggests, consumption patterns are constantly evolving. Over time, the groups with the biggest spending power, and what they choose to spend on, will change. In less than a decade, more than two-thirds of the world population will be considered “middle income” . Most of this will be driven by emerging markets, as well as higher income growth among females. This is expected to boost sales for travel and luxury goods, which regularly feature as some of the most-coveted goods among this group. While COVID-19 has temporarily dampened demand for such items, this could rebound strongly once lockdown measures ease again.
Another area that has demonstrated above-average growth in recent years is the experience economy, supported by growing wealth across regions as well as inter-generationally. Increasingly, consumers prefer “experiences” to “objects”, as disposable income grows and discretionary spending increases. The pandemic may have also helped to solidify this preference, as locked-down populations yearn for the experiences that they have missed during the pandemic. From a psychological perspective, studies have also shown that experiences tend to provide greater and longer-lasting utility as compared to objects.

Walt Disney – a true thematic leader

A good example of a company that offers “experiences”, while being quick to adapt to a post-COVID world, is Walt Disney. Initially founded in 1923, the company was originally a cartoon studio. Yet today, thanks to its unrivalled intellectual property, Walt Disney operates across different areas, such as theme parks, cable networks, and streaming, each benefitting from relatively inelastic demand.
Content has always been at the core of Disney’s business and its success hinges on its ability to create several revenue streams for each piece of content, such as Star Wars or Marvel. Since the opening of the first Disneyland in 1955, the company’s growing theme park business has played a crucial role in its storytelling capabilities, and continues to contribute a significant portion of earnings. In 2019, theme parks accounted for about one-third of both its revenues and profits.
However, as COVID-19 started to spread globally in early 2020, the company’s theme parks were forced to close. Together with the shutdown of cinemas worldwide, a number of Disney’s core businesses suffered. This was reflected in its share price, which hit record lows not seen since 2014.
As the pandemic took hold, stress tests were conducted on Disney to assess the health of its balance sheet in a scenario of lower earnings and negative operating leverage over a sustained period of time.  Our evaluation gave us confidence that the company would not only withstand the pandemic, but is likely to receive a boost from rebounding demand as economies reopen, and untapped opportunities in the streaming business. Furthermore, the stress test exercise helped us to identify that its shares were undervalued in March and April 2020, which gave us conviction to build positions where appropriate.

Identifying sustainable thematic opportunities for the future

Investors are right in questioning the viability of their portfolios in a post-COVID world. Our sustainable thematic approach can continue providing an optimal framework for weathering the storm. It is underpinned by five overarching themes: evolving consumption, ageing, automation, climate change and digitalisation. Unconstrained by traditional geographic and sector definitions, our forward-looking framework enables us to identify powerful, sustainable global companies that offer meaningful exposure to these themes.

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