Measuring the Market’s Megatrends

Paul Walsh, Michelle Weaver and Daniel Blake discuss how thematic mapping can help investors separate true beneficiaries from market hype and identify risks hiding beneath the surface.

Read more insights from Morgan Stanley.

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Paul Walsh: Welcome everyone to Thoughts on the Market. I'm Paul Walsh, Morgan Stanley's Head of Research in Europe.

Michelle Weaver: And I'm Michelle Weaver, U.S. Thematic and Equity Strategist.

Daniel Blake: And I'm Daniel Blake, Head of Asia Thematic Strategy.

Walsh: And today we're discussing why thematic investing may be entering a new phase – moving from simply identifying big ideas to systematically measuring them.

It's Tuesday, the 25th of August at 2pm in London.

Weaver: It's 9am in New York.

Blake: And it's 9pm in Singapore.

Walsh: Daniel, let's kick our discussion off today. Thematic investing has become one of the most important ways for investors to think about long-term opportunities. But your latest work suggests the framework itself is evolving. So, what's changing?

Blake: Well, if you look at where we've started. So thematic investing has been narrative-driven, focusing on identifying major structural trends for investors. So, at Morgan Stanley, we've identified core themes of artificial intelligence and tech diffusion, the future of energy, societal shifts, and the transition to a multipolar world.

So, what's changing is that investment approaches are becoming much, much faster. So, we're now seeing clients deploy agentic AI to drive trade recommendations. And sure, AI can read a new 100-page thematic report from Morgan Stanley faster than humans. But for the right conclusions, it's important to connect these models with high-quality data sets. And we think that's going to be helpful for human investors as well.

So, this is where the third phase of thematic investing comes in. The first phase was identifying secular trends that cut across markets and industries. The second phase was creating investable products around those themes. But this next phase is about measuring that exposure systematically in real time.

So, this allows investors and their AI agents to identify whether a theme's importance is broadening or fading and to track individual companies' exposure to that theme over time.

Walsh: So, the thematic investing is moving from narrative-driven to a higher velocity data-driven approach. And I guess that's where our thematic mapping exercise really comes in. So, Michelle, when investors hear the term thematic map, they may think it's just another screening tool. But it's much, much more than that, isn't it?

Weaver: Absolutely. The easiest way to think about it is it's a research framework that sits on top of traditional sector and regional analysis. Historically, investors organize portfolios by country, sector, or industry group, and those verticals are still very important.

But increasingly, the biggest investment forces cut horizontally across those boundaries. AI touches software companies, industrials names, healthcare, financials, and it's even had a huge impact on the utility sector.

Thematic mapping helps us identify where those exposures exist across thousands of stocks, and importantly, how significant those exposures are – all with the help of our analyst experts.

And the innovation isn't simply identifying if a company's exposed to AI, energy transition, or defense spending. It's determining whether that exposure is central to the investment thesis, just supportive or insignificant. And that's very different from traditional thematic baskets.

Walsh: So, we identify the exposure, but the idea of significance seems particularly important because investors constantly hear companies talking about themes on earnings calls for example and in their public communications.

But how do you separate genuine exposure from a more marketing-driven language around thematics, Daniel?

Blake: This we see as the most valuable and ultimately human-driven part of the framework. So, as an example, we know that many companies are outlining their AI initiatives, and not all of them will end up being AI beneficiaries. So, the key question is how a given theme will impact revenues, margins, competitive positioning, and valuations.

And this requires the deep knowledge of both the industry and the company, as well as where things are going. And so that's where our analysts come in. Across all countries, all sectors, mapping the materiality of their entire coverage, that's almost 4,000 companies, to every global theme in real time.

Sp. our job in the thematic strategy team is to coordinate the framework, help identify emerging themes, and draw out the insights and recommendations. But the core insights are really coming at the analyst level, company by company.

Walsh: And so, to your point, Daniel, it's about the analyst overlay in terms of significance that is really important. So, investors really shouldn't think of thematic exposure as a simple yes or no question…

Blake: Exactly. That's really the new innovation in this framework, and most companies will sit somewhere along that spectrum for a given theme. And there's value in tracking how that position is changing over time.

Walsh: Yeah, rate of change is clearly critical. And Michelle, one of the things I found particularly interesting is that the framework isn't just about identifying winners. It's also about identifying companies that may be challenged by structural change as well. Why don't you help our listeners understand why that's so important?

Weaver: Because every major theme, yes, creates a lot of opportunity, but it also creates disruption. And I think investors naturally focus on beneficiaries. Where are we looking on the long side? But in many cases, understanding who might be negatively exposed can be just as valuable.

If you think about AI, there are obvious beneficiaries, whether those are the big enablers or they're companies adopting the technology successfully. But there could also be companies facing pricing pressure, margin pressure, or broader disruption because of that same theme.

And that's equally true whether we're thinking about the future of energy, societal shifts and big demographic realignments, or the multipolar world. And a complete thematic framework should help investors understand both parts of that equation. And this is becoming increasingly important as markets move from broad thematic enthusiasm towards more selective stock picking.

Walsh: Absolutely. The ability of the thematic mapping to help us understand both sides the equation clearly incredibly important. Let’s bring it back to investors' portfolios. Daniel, how should investors think about thematic mapping as part of portfolio construction rather than simply stock selection?

Blake: If you're looking at that portfolio construction level, whether you're a retail investor or you're one of the largest asset owners of sovereign funds, one of the biggest benefits is for revealing and managing hidden exposures.

So, an investor might believe that their portfolio is diversified with positioning across many sectors and markets. But when you use the thematic map to underline, to explore the underlying thematic exposure, you might find that many of these holdings are tied to the same structural trend.

So, the thematic map allows investors to better diversify portfolios while retaining the best expressions of desired themes. And as you mentioned, it's not just a screening tool. But it's pretty useful as a screening tool as well if you want to take exposure to a given theme overlay with valuations and preferences. It’s very helpful for that reason as well.

Walsh: Yeah, understood Daniel. And Michelle, as we look stock markets right now, how are you seeing the opportunities via the thematic mapping work that we’ve done?

Weaver: Flagging potential rotations is another key part of what this analysis offers. And if we think about your question from a valuation perspective, AI adopters currently look relatively inexpensive, but they still offer strong expected earnings growth. And we're also seeing analyst sentiment beginning to improve.

You're seeing a growing number of companies having their earnings estimates revised higher. We're also seeing a similar opportunity across our societal shifts themes. Valuations here are well below their typical levels over the past decade. And at the same time, we're also seeing earnings expectations improve here.

Walsh: So, perhaps the biggest takeaways are that thematic investing is becoming more measurable, more transparent, and more integrated into portfolio management.

It's no longer just about spotting the next big idea. It's about understanding where that idea exists, how much it matters, and of course, how it's evolving.

Michelle, Daniel, thanks so much for taking the time to talk.

Weaver: Great speaking with you Paul.

Blake: Thanks for having us.

Walsh: Thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.