Valerio Baselli: Hello and welcome to Morningstar. Megatrends are the forces shaping the economy of tomorrow, and for investors, these aren’t just headlines; they’re opportunities that can drive long-term returns. To understand how to navigate this space, today I’m joined by Pierre Debru, head of research Europe at WisdomTree.
So, Pierre, when we refer to megatrends, we indicate a list of very different fields. From technological innovation to demographic shifts, from consumer behavior to genomics, and so on. What makes a theme powerful enough to qualify as a megatrend rather than just a short-term fad?
How to Tell a Megatrend From a Market Fad
Pierre Debru: So, the key I think is a long-term growth potential of that megatrend. It’s very, very much about, is it going to change the world? Is is going to change how we live or are we interacting with technology, over the long term? Now, how do you decide? What’s really interesting is that very often, by trying to put together a portfolio that would invest in that theme, it is possible to assess the viability of the theme in some way. If you are able to create a portfolio of good quality companies with high growth potential, but which at the same time is very different from the Nasdaq or very different from the MSCI World, then it means that the theme has a real long-term potential for investment.
WisdomTree’s Top 3 Megatrends to Watch
Baselli: Looking across the market today, if you had to name just three megatrends that, according to your research, will shape the next five years, what would they be and why?
Debru: Yeah, so three is hard, but let’s try three. So first one, I think there is no question, has to be artificial intelligence. Now we could almost argue, is it a theme or is it almost a mega theme? Because when we say AI there are so many things, you could argue that there is the infrastructure of AI with semiconductors, data center, then there is the software of AI. And that’s going to include cloud and cybersecurity, which are now very much, including AI outdriven by AI as well. You could argue as well, there is physical AI, robotics. And you could almost extend to energy. There’s so much extra energy demand that comes from those data centers from AI, that, this is almost part of this energy addition is almost part of this AI thing. So, AI for sure is number one.
The second one, interestingly enough, I don’t think is technological, is geopolitical. It’s very much what we call a rise of tension, which is a theme that really took center stage when the war in Ukraine started and now it’s continuing to gain in importance as the Trump administration is trying to reshape political and different alliances around the world. And one of those aspects this year that has really captured the imagination of a lot of investors is European defense. So, the rise of tension is a key one as well.
And the third one, to us, is quantum computing. And, interestingly enough, in the last few days we got the Nobel Prize for physics for 2025 that was given to a team of physicists that in fact worked on quantum circuits, which are very much the academic base of what could be a quantum computer in the future. So, to me, that’s the three: AI with all its components, rise of tension with the defense component, of course. And then and then quantum computing.
How to Turn Megatrends Into Successful Thematic Investments
Baselli: Very interesting. When it comes to megatrends, or thematic investing in general, of course picking the right trend is not enough: you need the companies you are investing into well positioned to profit from the growth of that trend, and to deliver attractive stock returns, eventually. So, once you’ve identified a megatrend, how do you translate that into an investable portfolio?
Debru: So, I think that’s a very important question, because really, not all thematic strategies are created equal. And in fact, if you look at nuclear energy, it’s a theme that is pretty in focus right now. But if you look at nuclear energy, and you look at the performance of different funds over the last 12 months, what you see is that the best strategy over the last 12 months returned 76%, when the weakest strategy still in the nuclear energy theme only gained 28%. So that’s almost 50% spread in a year? So how do you look at those strategies?
At WisdomTree, we think there are five key pillars that can be used to build successful thematic strategies. And that’s really how we look at them. So, what are those key pillars? The first is the alignment to the theme. Is the investment process of the strategy really focusing on the companies that are going to benefit the most from the development of the theme? So, are you investing in that part of the value chain of the theme that are going to accrue the most value? So that’s one thing. The second thing is the domain expertise. You need to understand the force driving the theme. From the underlying technology to the geopolitical environment. And so, the question is, where do you get this theme expertise? And so, at WisdomTree, what we tend to do is combine strong in-house research but also with partnership with industry experts. Third pillar is purity exposure. Are you really getting exposure to the most innovative company in the theme?
Fourth one is differentiation. When you turn to thematic strategies it is to really get that exposure to those megatrends, to this long-term potential, it’s not to get a broad tech exposure. You can get the broad tech exposure cheaper as well. So, it’s really about, a differentiated high growth potential. And finally, the fifth pillar is transparency and discipline. It is very easy to just chase the hottest names of the day in thematics. Because there is no benchmark. So, one of the key questions when we look at thematic strategies is, is there a clear investment process? And is the strategy going to stay true to the theme over the long term?
Key Takeaways for Investors Exploring Megatrend Opportunities
Baselli: Very clear. To conclude, what is the most important thing investors need to keep in mind when deciding to invest in megatrends, in your opinion?
Debru: I think it’s that they need to look under the bonnet. They need to understand what the investment process is. Is a portfolio delivering the most innovative company in the theme? So that’s the first question. Is the strategy really aligned to the theme? Is it just a close index that follows the Nasdaq? Is there a true investment process with clearly defined guidelines, or is it just chasing the hottest names of the day? So really the key is the strategy design and understanding how the portfolio is put together.
Baselli: Pierre, thank you so much for your time. For Morningstar, I’m Valerio Baselli. Thanks for watching.
