Thematic Investing in the Time of Coronavirus

Thematic Investing In the Time of Coronavirus

MASH0321E/S-1544658-1/7 Summary

The Coronavirus pandemic has ushered in countless changes in the way we live our daily lives. From an investment perspective, we seek to Adam Ryan generate performance for our clients by gaining targeted exposure to Portfolio Manager and Head of these changes by looking beyond traditional asset class and sector Diversified Strategies, Multi-Asset Strategies & Solutions lenses. We often do this by constructing “baskets” of securities which we have selected to benefit from a particular theme.

We see opportunities to capitalise on macroeconomic and microeconomic dislocations through thematic investing over both tactical and strategic time horizons.

Capital at risk: The value of investments and the income from them Yasmin Meissner can fall as well as rise and are not guaranteed. Co-Head of Sustainable Investing, Multi Asset Strategies & Solutions Tactical The back-and-forth between lockdown measures taken by governments to reduce the spread of the virus and the easing of those restrictions have been rightly qualified as waves. Such cycles create opportunities for tactical and dynamic investment strategies:

• Example 1. New behaviours predominantly observed as a product Arjun Kapur of the first wave of lockdowns Investment Strategist, BlackRock Investment Institute • Example 2. Bounce-back effects resulting from the reopening of economies as vaccines are rolled out

Strategic Beyond these short-term cycles, we note that there are longer-term macroeconomic impacts associated with the pandemic, and posit that key trends exacerbated by the pandemic are here to stay.

Helene Procoudine-Gorsky We point specifically to a growing consciousness of risk associated Researcher, Multi Asset Strategies & Solutions with climate change and an environment in which fiscal policy plays a determinant role in shaping the recovery and the green transition— both of which reinforce pre-existing ESG momentum. BlackRock’s Multi-Asset Strategies & Solutions (MASS) team is the We elaborate upon two thematic case studies expressible in strategic investment group at the heart of portfolios: BlackRock's portfolio construction, asset allocation, and active • Example 3. Preserving the planet, high on the political agenda with management ecosystem. MASS draws an acceleration of actions taken since the beginning of the crisis on the full toolkit of BlackRock's index, factor, and alpha-seeking investment • Example 4. Digital payments & cybersecurity increasingly needed capabilities to deliver precise as reliance on digital and technological tools intensifies investment outcomes and cutting-edge alpha insights. MASS constructs active asset allocation strategies and whole portfolio solutions across a wide spectrum of commingled funds, separate accounts, model portfolios, and outsourcing solutions in the wealth and institutional channels.

2 Thematic Investing in the Time of Coronavirus

MASH0321E/S-1544658-2/7 Tactical targets

The global threat posed by Covid-19 and Bounce Back basket government policies enacted to control the While the New Behaviours basket was focused spread of the virus have had immediate impacts on companies positioned to benefit from on observed behaviours. While damaging restrictions, there is another set of companies economies, lockdowns and social distancing that stand to benefit from positive news around measures also created pockets of tactical vaccination roll-outs and the continued investment opportunities as individuals and reopening of economies in 2021. We believe the businesses have had to quickly adjust to new potential for the market to underestimate how safety measures. quickly this bounce back could materialize coupled with the challenge of identifying New Behaviours basket specific investments that will benefit creates Covid-related restrictions have created pockets of tactical opportunities. favourable conditions for select business Among the drivers of outperformance, we see models, like those benefiting from people businesses’ sensitivity to vaccine developments, spending more time in their homes. As the continuing fiscal policy support from lockdowns were first enacted in much of the governments aimed at consumers and specific world in the first quarter of 2020, we positioned industries, and the yield curve dynamics tactically towards the entertainment industry, resulting from the interaction of fiscal and with exposures to music and streaming monetary policy actions. platforms, together with electronic and food delivery businesses. Now, however, we believe While there are limitations around the extent to that this positive impact has been priced in by which social distancing measures can be relaxed the market. In addition, we have seen even as the share of vaccinated populations consumption habits gradually and partially increases, a sharper pickup in activity than revert to more normal levels, as illustrated in currently anticipated may portend significant Figure 1. The temporary outperformance of this alpha opportunities for investors—especially in basket exemplifies the more tactical nature of sectors most impacted by mobility restrictions. market opportunities that the Covid crisis has presented for investors.

Figure 1. Google Trends scores by activity types 20

10 Labour market stress

5 Stay-at-home consumption 0

Google Trends Trends Googlescore Social consumption -5 Big ticket items

-10 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Source: BlackRock and Google, as of July 2020. Big ticket items include high-priced items such as automobile purchases and repairs. Social consumption includes activities such as dining out.

MASH0321E/S-1544658-3/7 Trends with staying power

The pandemic accelerated pre-existing trends by conditions to access grants from the European strengthening awareness around health and the Recovery Fund, member states must undertake environment, reinforcing a desire for flexibility, ESG-relevant reforms, and 30% of the €750bn and reemphasizing the fragility of global supply package is to be dedicated to green projects chains. We see these as drivers of a more (source: European Commission) and climate persistent evolution in behaviours across change mitigation. Elsewhere, sustainability is governments, businesses, and people. central to U.S. President Biden’s policy platform The relevance of sustainable investing has only and the Chinese government’s policy agenda. grown during the Covid crisis with the reduction Alongside the policy shift and growing in barriers to greater fiscal spending coupled consciousness around sustainability, there is an with greater consumer demand for sustainable increasing drive to find new solutions to meet energy infrastructure accelerating the ESG some of the very real challenges our planet momentum. The pandemic has also exacerbated faces. Mitigating climate change will require a long-standing ESG risks that have increased major shift in our energy mix. Figure 2 illustrates public calls for sustainable solutions, such as Bloomberg’s estimates that renewable energy ensuring access to clean water, limiting carbon will increase from contributing 20% of global emissions to halt global warming, and enhancing energy consumption to approximately 69% in food security—all of which are crucial to 2050. Moreover, the UN projects the global preventing the spread of infectious diseases. population will increase by 2 billion people from We express this theme in multiple ways, focusing today’s 7.7 billion by 2050, meaning the need for on both environmental and social aspects. resource efficiency, from food and water security to effective waste management, will only grow. Preserving the Planet basket We see investment in the companies that will While actions needed to preserve the planet in lead and contribute to those changes as a long- light of climate change and overutilization of term structural opportunity, supporting the case resources have been part of the international for active investment and stock selection. To dialogue for decades, we have seen a clear that end, we constructed a basket of companies acceleration of measures taken since the onset that seek to solve some of these environmental of the Covid crisis. challenges. For example, we have identified companies that are successfully increasing Sustainability was elevated as a priority by the resource efficiency through recycling and waste EU after the virus outbreak exposed the bloc’s management as well as innovative agricultural vulnerability to global supply chains, in techniques. We also favour companies helping particular bottlenecks and barriers relating to to mitigate climate change by elevating energy food and medical supplies. As part of the efficiency and renewable energy.

Figure 2. Global power generation mix

Historical mix Outlook 100% Other Hydro Solar 80% Nuclear Wind 69% renewables 60% Oil Gas 40%

20% 24% fossil fuels Coal by 2050 0% 1970 2020 2050 Source: BlackRock using data from IEA, Bloomberg New Energy Outlook 2020. Any opinions or forecasts represent an assessment of the market environment at a specific time and are not intended to be a forecast of future events or a guarantee of future results. There is no guarantee that any forecasts made will come to pass.

4 Thematic Investing in the Time of Coronavirus

MASH0321E/S-1544658-4/7 Digital Payments and Cybersecurity basket • Second, as governments recognize the The restrictions imposed on in-person structural shift in work underway, they will interactions as a result of coronavirus has made increasingly look at instituting measures online activity more widespread than ever designed to protect individual privacy, such as before. In this “new normal” of working, the General Data Protection Regulation shopping, and socializing from home, the digital (GDPR) in Europe, which will require infrastructure undergirding online workstreams, companies to invest significant sums into video conferencing, and cloud-based platforms cybersecurity services, lest they fall subject to has created a significant opportunity for the heavy fines. technology sector to continue its decades-long • Third, the changing consumer landscape outperformance over broad global equity offers opportunity for retailers to double down markets. We see reasons why this moment is ripe on existing efforts to transact sales via digital for more technological innovation to drive payment platforms. Companies driving digital sustained investment returns: payments solutions have their eyes on • First, as companies adjust to this shift from promising regional expansions, too, office to home, we expect they will seek to cut particularly in East Asia where regulatory costs associated with office spaces, including roadblocks are easing. For example, the rent and facilities maintenance. Some of these “Phase One” trade agreement reached cost savings will need to be redeployed to between China and the U.S. last January digital infrastructure needed to operate included provisions for U.S. electronic effectively moving forward. payment providers to access the Chinese market. A generational gap in consumer preferences appears to be narrowing as well, “In this ‘new normal’ of working, with older consumers who were previously not shopping, and socializing from home, expected to embrace online shopping and the digital infrastructure undergirding digital payments now doing so out of necessity. Growing comfort with digital online workstreams, video platforms may render this generational conferencing, and cloud-based change as structural. platforms has created a significant • Fourth and finally, as digital activity opportunity for the technology sector increases, so too will streams of data, from to continue its decades-long which companies focused on artificial outperformance over broad global intelligence and machine learning may equity markets.” benefit.

MASH0321E/S-1544658-5/7 Conclusion

The Coronavirus crisis has forced people and businesses around the world to adjust to the closing and reopening of their economies, and has accelerated pre-existing themes including preserving the planet, digital payments, and cybersecurity. While we had previously expected these themes to occur over a decades-long horizon, we now believe they will materialize within a matter of months and years. We see the case for active investing increasing with the need to manage exposures more flexibly and according to different time horizons depending on their tactical or strategic nature.

We draw from a wide variety of inputs and techniques to express thematic ideas, incorporating both systematic sources and qualitative insights to drive security selection. Having a top-down view, thinking carefully about portfolio construction, recognising the far-reaching consequences of this crisis, and moving beyond a traditional asset class or sector lens underpins the importance of a multi-asset investment approach and the ability to deliver outcomes with more precision.

6 Thematic Investing in the Time of Coronavirus

MASH0321E/S-1544658-6/7 Capital at risk: The value of investments and the income from them can fall as well as rise and are not guaranteed. The investor may not get back the amount originally invested. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time. This material is provided for informational purposes only and does not constitute a solicitation in any jurisdiction in which such solicitation is unlawful or to any person to whom it is unlawful. Moreover, it neither constitutes an offer to enter into an investment agreement with the recipient of this document nor an invitation to respond to it by making an offer to enter into an investment agreement. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Opinions and estimates offered herein constitute the judgment of BlackRock and are subject to change. All opinions and estimates are based on assumptions, all of which are difficult to predict and many of which are beyond the control of BlackRock. In addition, any calculations used to generate the estimates were not prepared with a view towards public disclosure or compliance with any published guidelines. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a guarantee of future results. Indexes are unmanaged, are used for illustrative purposes only and are not intended to be indicative of any fund’s performance. It is not possible to invest directly in an index. Investment involves risk, including a risk of total loss. Asset allocation and diversification strategies do not guarantee profit and may not protect against loss. Until 31 December 2020, issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. From 1 January 2021, in the event the United Kingdom and the European Union do not enter into an arrangement which permits United Kingdom firms to offer and provide financial services into the European Economic Area, the issuer of this material is: (i) BlackRock Investment Management (UK) Limited for all outside of the European Economic Area; and (ii) BlackRock (Netherlands) B.V. for in the European Economic Area, BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20-549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded. ©2021 BlackRock, Inc. All Rights Reserved. BlackRock is a registered trademark of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

MASH0321E/S-1544658-7/7