Inok
Water scarcity and the “Space” economy made UBS’ list of its five current favorite longer-term investment themes, with its monthly report highlighting broad ideas influenced by technological advancements, resource shortages and societal changes.
Water scarcity, Diversity and equality, Space, Food revolution, and Consumer experience – in that order – are “the most “compelling investment opportunities now,” Alexander Stiehler, head of Longer-Term Investment (LTI) Themes, said Friday. UBS looked at valuation and momentum indicators that drive its LTI themes and identified those that are particularly timely.
The report arrived at a time when investors appear locked into the AI investment trend that’s helped push the S&P 500 (SP500)(SPY)(VOO) up 12% YTD, although AI plays a role in UBS’ Space theme.
UBS in this report discussed sectors without specifying single stocks or investment vehicles:
Water scarcity
The estimated + $655B theme size is expected to grow at a mid-single-digit annual rate on average over the next few years. Biggest category is wastewater treatment, or water utilities, followed by equipment suppliers for water exploration, distribution, and treatment. The UBS strategy team prefers the U.S. industrials sector (XLI). The balance between defensive water utilities and cyclical characteristics through industrials makes the theme a good investment across cycles, UBS said.
Diversity and equality
The theme is “well-diversified across sectors with a good style mix of defensive, value, and growth,” UBS said. “Several studies show that improving diversity could close the wealth gap within societies, which, if true, should boost GDP over the next decade,” it said. Companies promoting diversity and equality throughout their value chains and processes can deliver outperformance in the long-run, but short-term risks include legal challenges to affirmative action in some U.S. states.
Space economy
Momentum is strong and aligns well with UBS’ preference for the industrials (XLI) sector, particularly aerospace and defense. “Space-based assets and defense technologies are increasingly front and center for governments, as rising geopolitical tensions underline the relationship between the space economy and security,” the LTI team said.
“In addition, the rapid rise of AI opens new opportunities for tapping into space-based infrastructure, with the ability to synthesize vast amounts of satellite data.” Many end markets are “still nascent” and risks are material.
Food revolution
Climate change and other factors challenge access to high-quality, affordable food, requiring a supply chain transformation. It sees “big winners” as digital services, online platforms, and then automation. “This theme seeks to profit from the potential for new investment while combining the somewhat defensive characteristics of consumer staples (XLP) and technology (XLK),” UBS said. Investors can also consider venture capital, impact, and sustainable investing strategies.
Consumer experience
Technology and society are the main structural drivers. Key opportunities are in traditional areas, such as travel and leisure, in combination with emerging virtual segments including the metaverse and online events. “The theme screens well on the quality metrics, thanks to companies with strong balance sheets and high ROIC, but it comes with a relatively high valuation,” UBS said.
- ETFs focused on industrials include: (VIS), (IYJ), and (PPA) and (FIDU)
- Space ETFs: (ARKX), (XAR), (SPRX) and (UFO)
- Among Water ETFs: (AQWA), (FIW) and (PHO)
- Consumer Staples ETFs include: (FSTA), (FXG) and (PBJ).
