Thematic Investing: More Thoughts

Yesterday the FT linked over to an article by Leo Kolivakis, who has some good cred, about several aspects of investing including themes.

To Leo's themes:

• Inflation/ deflation
• Alternative energy (solar, wind, nuclear)
• Chindia (China and India)
• Demographics (healthcare, biotech, etc.)
• New technologies (nanotech, etc.)

The inflation/deflation theme is not so simple. Clearly the world is enduring (or should we put that in the past tense?) an asset deflation. From 2007 forward the price of just about everything has dropped, except for US treasuries, including commodities. So we have enjoyed lower prices at the gas pump and for home heating, whatever you use. At the same time healthcare costs (I can vouch for insurance) have kept going up at what I hope turns out to be an unsustainable pace.

For inflation you know to buy TIPS and commodities. Deflation is trickier. Mish has made the case before for gold as a deflation play. A true and widespread deflation I would take as having a lower probability than inflation. If we really do have deflation, then I would think that would be an utter sinkhole for stocks and, depending on how it played out, I expect to have very little US equity exposure and hopefully there would be some foreign equity markets that would be attractive.

Alternative energy seems to be a no-brainer conceptually, but I can see where the road to actually getting there will be very lumpy. The things the White House are talking about notwithstanding, the next time oil goes to $120 or some other scary number there will be an outcry for someone to do something and all of the alternative energy stocks will go up. Think about that sentence: What will happen to oil stocks if oil goes to $120? The stocks will go up. They will go up with the alternative energy names. The correlations tend to be high but the alternative energy names tend to be more volatile. It is easy to believe in alternative energy (more like root for it to become mainstream), but for now it has a high correlation to fossil fuel stocks, but with more volatility.

Some readers may know I favor China over India. I get the feeling that China is more committed to improving the quality of life on the ground than India is and it seems like there are many more ways to invest in China than India. A reader left a comment about corruption in India being relatively bad and the investment restrictions in India strike me as being more onerous.

The demographics play is a big one and one I have mentioned before. To this end I own one of the medical device makers for clients (human replacement parts) and there there is an iShares ETF for this space (IHI), not sure if there are any other device ETFs. I also think generic drugs work here as a proxy. We will collectively take more pills to stay healthier longer and the generics seem to be obvious here. While certain US sectors will become less attractive to invest in, I think healthcare will be an exception. I also think the manner in which retirement communities are evolving away from the nursing homes that most people dread will become an investable theme at some point.

New technology is tough because I think it requires individual stock exposure which many folks may not want to do. The reason I say that is that in many very narrow areas there is competition between a couple or several companies. Often one company wins at the expense of its competition (I thought this was a big problem for the Healthshares ETF that were shut down). I don't know much about nanotechnology but can every company in the PowerShares Nano ETF (PXN) be a winner? Maybe a better question is, can every company survive?

I might favor a couple of different themes than Leo. I think infrastructure is important along with certain commodities and certain countries. To my way of thinking these are easier to understand and so, then, easier to build into a portfolio.