Investment Strategy Monthly Insights, December 2022

After a tumultuous year for markets, 2022 ends with lower geopolitical risks, a weaker US dollar and lower commodity prices. In 2023, investors are looking at a different macroeconomic landscape. A slowdown in the global economy, excluding the US dollar and a possible recovery in China. This month, we review key trends in this year’s theme and explore investment opportunities for next year as the market may return to some degree of normalcy.

2022 Thematic ETF Market Roundup: Climate Trends Turn Up

The broadest layer of Global X’s thematic taxonomy system, categories, contains three fundamental factors of disruption. Exponential advances in technology (disruptive technologies), changing consumer habits and demographics (people and demographics), and evolving physical landscapes (physical environment).

By November 30, 2022, there were 126 thematic UCITS ETFs with total assets under management (AUM) of approximately US$33 billion, down 19% from US$41 billion in December 2021. His AUM for physical environment category themes increased by 32%, followed by a 31% decrease in disruptive technology and a 52% decrease in people and demographics.¹

Net inflows into UCITS thematic ETFs totaled USD 1.23 billion and net outflows from US thematic ETFs totaled USD 3.83 billion. The top two mega-themes for global net inflows in 2022 were climate change-related themes ($977 million) and big data ($278 million).²

Climate change (USD 1.53 billion), big data (USD 714 million) and infrastructure development (USD 87 million) dominated net inflows into thematic UCITS ETFs this year. Health ($327 million), Robotics ($291 million), and New Consumer ($201 million) posted the largest net outflows. In contrast, the largest net outflows from US thematic ETFs were robotics ($1 billion), mobility ($791 million) and climate change ($556 million), followed by disruption. Thematic ETFs had the lowest net outflows (US). $60 million).³

Growth stocks struggle

2022 was a year in which inflation rose sharply in all regions due to a rapid recovery from the COVID-19 pandemic and high commodity prices resulting from Russia’s invasion of Ukraine. Central banks around the world, led by the US Federal Reserve (Fed), have responded to inflation by aggressively raising interest rates, thus challenging rate-sensitive growth stocks for much of the year. Largest net outflow was in tech-centric themes, led by Robotics & Automation at USD 1.23 billion, followed by Autonomous & Electric Vehicles (USD 643 million) and Healthcare Innovation (USD 630 million) It was from^Four

This trend was not the case for cybersecurity, which saw net inflows of US$1.67 billion across both UCITS and US thematic ETFs. The increased global risk of cyberattacks amid the conflict between Russia and Ukraine has heightened the need to protect data and critical infrastructure in 2022.^Five

Proliferation of climate-related themes

The European energy crisis following cuts in Russia’s gas supply via Nord Stream 1 has led to a strong shift in sentiment towards the theme of climate change as an economic and security priority in the region. Promoting energy independence has attracted significant interest from European investors, as reflected in strong net inflows (US$1.17 billion) to cleantech and renewable energy producers.⁶

An unprecedented global commitment to decarbonisation was another key energy development for 2022. In May, the European Union launched his RePowerEU programme. This includes a €300 billion investment package to streamline and accelerate the transition to renewable energy and further invest in cleantech.⁷ In August, the United States announced a US$370 billion investment package as part of the Inflation Reduction Act (IRA) and additional incentives in the form of investment tax credits for renewable project developers.⁸ At the annual COP27 meeting in November, developed countries pledged to provide about US$100 billion annually to help finance developing countries’ transition to clean energy starting in 2023. I promised to do it.⁹

Investment Outlook 2023: Markets can embrace the return to the economy

After a year of significantly higher geopolitical risk, 2023 could see a return to a more normal market driven by the economy rather than geopolitics. Global inflation could fall sharply as the base effect weakens from falling oil and commodity prices as the global economy slows. As a result, we expect a gradual return to rotation in growth stocks, supported by slower policy tightening in developed markets. Heavy public spending on infrastructure, technology and clean energy. Attractive ratings in specific areas of technology. and a weaker dollar.

With global economic growth and inflation expected to slow in 2023, investors may consider a more nuanced approach to equities. For example, covered call strategies benefit from slow rising or range bound trading markets. The potential income from covered call writing is particularly attractive for adding dividend yield as interest rates rise.

shining precious metal

Commodity assets, especially precious metals, look attractive in this environment as investors seek to reduce currency risk in their portfolios. A weaker dollar and a global macroeconomic slowdown mean that precious metals are likely to outperform other major assets in the near term. The gold-to-silver ratio has dropped from 95 in September to 79 as of December 6th. This means that it takes 79 ounces of silver to buy 1 ounce of gold, well above the long-term average of 68.^Ten Based on historical trends, if precious metals enter a bull market, this ratio could tighten significantly, sending silver higher than gold.

Silver, like gold, has a negative correlation of 0.50 to the US dollar, meaning it offers currency hedging properties. Silver is almost 2 beta gold, but has a 0.8 correlation with gold, so silver saves costs and is an alternative currency hedging strategy to gold. Silver miners exhibit similar characteristics as they have a correlation of 0.8 with silver and a negative correlation of 0.53 with the US dollar index (DXY). Silver has more industrial exposure than gold, but the US dollar and real interest rates drive the performance of both metals.¹¹

In addition, silver is an important raw material for photovoltaic (PV) cells and could benefit from structural tailwinds as solar cells play a major role in Europe’s clean energy transition and inflation reduction legislation. I have. We believe these factors may at least partially offset the upcoming slowdown in industrial production.

Chinese stocks gain support

A weaker dollar, coupled with easing COVID restrictions, a property bailout plan and hopes of policy easing by the People’s Bank of China, has pushed attractive value Chinese stocks back towards the end of 2022. About Emerging Markets (EM). The resumption of dialogue between China and the United States following the meeting between President Biden and President Xi Jinping at the G20 summit also helped improve sentiment.

Sectors that are likely to outperform over the next year include technology, industrials, automotive, electric vehicles, and e-commerce-led discretionary goods, where defense spending will rise. Also, the re-opening of China’s economy, coupled with massive public investment in clean energy transitions in the United States (Inflation Reduction Act) and Europe (RepowerEU), has resulted in uranium, lithium, cobalt, It could further support demand for commodities such as nickel. We expect these commodities to be largely unaffected by cyclical headwinds next year.

Spread of clean energy movement

The theme of the clean energy transition is likely to continue to attract investor interest in 2023 as Europe moves towards energy independence. We identify three key considerations when capturing the decarbonization trend. First, it is important to assess investment exposure across the clean transition value chain. The value chain includes disruptive materials (copper, lithium, zinc, etc.) and certain commodities (uranium, silver) required for cleantech production. The value chain also includes technologies for producing (solar panels), distributing (smart grids) and storing (lithium battery technology) renewable energy, as well as renewable energy producers capable of producing alternative energy.

Second, the investment scope of cleantech investments varies widely. Solar and wind power are currently the most mature cleantech markets, with minimal production costs, rapid deployment, and installation flexibility. Nuclear power has the potential to grow rapidly in the medium term, driven by the development of small modular reactors. These reactors are more flexible and quicker to install than conventional reactors, taking about three years instead of seven to be fully operational. Hydrogen is still in the innovator stage and has a longer investment profile.

Third, investments in these alternative energy sources are complementary. Solar and wind are variable energy sources and require expensive storage and local capabilities. Nuclear power and hydrogen could replace oil in the long term. Given the enormous power generation potential of nuclear power and the applicability of hydrogen fuel cells to decarbonize sectors such as transport, construction and manufacturing.

footnote

1. Bloomberg data as of December 30, 2022 were obtained from the Global X Bloomberg Terminal.
2. Ditto.
3. Ditto.
4. Ditto.
5. Ditto.
6. Ditto.
7. REPowerEU: Affordable, Safe and Sustainable. European Commission. website. REPowerEU: Affordable, Safe and Sustainable Energy for Europe
8. Pearson K. and such M. (September 23, 2022) Inflation Law and Renewable Energy Development: Its Advantages and Limitations Inflation Law and Renewable Energy Development: Its Advantages and Limitations
9. Magdy M. and Lacqua F. (October 26, 2022) COP27 hosts hope geopolitics doesn’t derail climate promises. https://www.bloomberg.com/news/articles/2022-10-26/cop27-host-is-hopeful-geopolitics-won-t-derail-climate-pledges?sref=11FjdUrF
10. Bloomberg data as of December 15, 2022 were retrieved from the Global X Bloomberg Terminal.
11. Ditto.

Disclaimer

Investing involves risk, including possible loss of principal. Targeted investments can be subject to high volatility.

Index returns are for illustrative purposes only and do not represent actual fund performance. The index is uncontrolled and does not include the effects of commissions, expenses, or sales charges. You cannot invest directly in an index. Past performance is no guarantee of future results.

This material represents an assessment of market conditions at a particular point in time and is not intended to predict future events or guarantee future results. This information is not intended as personal or personal investment or tax advice and should not be used for trading purposes. For more information regarding your investment and/or tax situation, please consult your financial advisor or tax professional.

Global X Management Company LLC is acting as an advisor to Global X Funds.

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Editor’s note: The summary bullet points for this article were chosen by the editors of Seeking Alpha.