Before drawing back the curtain on some stocks to play the megatrends identified during this three-part series, let’s recap the first two instalments.
In part one, the four fundie contributors defined megatrends and named their favourite multi-decade structural themes. And in part two, we turned the first question on its head and asked them each to identify a theme they believe markets are incorrectly backing as megatrends, in many cases pricing them way too high.
And in the final instalment below, they each pick at least one portfolio holding they believe encapsulates a megatrend.
Nick Griffin, chief investment officer, Munro Partners
There are a few obvious trades when you look at decarbonisation generally, such as electric vehicle manufacturer Tesla or manufacturers of wind turbines and solar panels. But there are also some less obvious names. In the shorter term, this might include some of the commodities I talked about in the previous answer (where I referred to copper and lithium), but over the long term, the one we flag is Trane Technologies. This is one of the world's largest suppliers of heating, ventilation and cooling (HVAC) equipment.
Every office and house inhabitant in the world will, ultimately, need to address the way they heat themselves if they want to get to zero carbon. Heating is the largest emitter of energy for buildings globally, and buildings are a quarter of all emissions globally. Making up the same proportion of total emissions as transportation, it's just as big a problem to solve.
Most companies around the world are trying to get to zero carbon and to do that, they all need to switch to electric heating. They also need to add sensors throughout their buildings to manage emissions, and this really plays to the strengths of a company like Trane, which supplies this equipment, including the software, to big buildings the companies that manage them.
We see a multi-decade renovation or retrofit cycle ahead, as it works its way through what we think is a $350 billion opportunity. Trane currently sits at a $40 billion market cap, so we see a very long runway of growth ahead, with good margins and then software to go on top of that at some point in the future, as these buildings become smarter over time.
Stephen Cabot, investment consultant and director, Credit Suisse
One of the individual securities in the Anxious Societies super trend within our Global Thematic Portfolio is Sweden-based company Assa Abloy, which is focused on doors and locks, in line with the physical security solutions sub-theme. Like many of these stocks, it’s already had a decent run, but it’s an important part of that trend.
And on the cybersecurity side, there’s Palo Alto Networks, which is the US-based Nasdaq traded security. Within that trend, we also have Affordability, which picks up on some of the inequalities that have become more prevalent in recent times and have possibly been further exacerbated by COVID. This includes names such as US-based fund manager BlackRock, which provides financial services at a very cost-effective price.
We also hold Schneider Electric (a French multinational in energy and automation solutions) and United Health Group (a US-based multinational managed healthcare and health insurance company).
Christopher Demasi, portfolio manager, Montaka Global Investments
Infrastructure and platform as a service - the cloud computing market - is already a massive $100 billion market, but its addressable market size is closer to $1 trillion. So, when you see AWS (Amazon Web Services) growing at more than 30%, Microsoft Azure growing at 50% and Google Cloud at 40%, that's not finished at the end of this year. And I think you've got to look at them together – Amazon, Microsoft, and Google – in the Western markets.
In the cloud infrastructure side, Amazon owns half of that market ahead of Microsoft. On the platform side, Microsoft dominates, Amazon is number two, and Google is third across both of those markets. And then there's a lot of daylight to the next player.
When I say we own three, I mean there’s only three – there’s no more than that in this cloud space, where they've already cemented their positions. It's a similar case in China, where it's only two: Alibaba and Tencent. But it's fascinating that their cloud franchises are underappreciated by the market. You wouldn't think that given the companies themselves are household names, but I think their cloud franchises are not being valued as they should be. A lot of the growth potential of AWS, Microsoft Azure and Google Cloud flies under the radar.
These companies are going to be truly long term winners - I think it's clear by their market positions and the assets they hold today that they have solidified their position there. They're completely dominant and they benefit from scale economics, so generate high cash flows.
On top of this, they're still deploying a lot of capital into building out data centres, expanding their capabilities and increasing their research and development budgets. That continues to expand their lead and their moats over anybody else.
No one else has the scale, capability and reach to compete with them. It's truly a global phenomenon – each of these companies has distribution networks and customer bases in every region of the world.
Kanish Chugh, ETF Securities
Our ROBO Global Robotics and Automation ETF (ASX: ROBO) captures the “transformative technology” megatrend bucket we’ve identified. This is built on an index licensed from advisory and research firm ROBO Global, the company behind Amazon Robotics (which built the orange “picker” robots that zip around its fulfilment centres).
ROBO Global, which started in 2013, defines the universe actively and then we passively track that universe, which is updated quarterly. It looks at these companies around the world and identifies which will have competitive advantages over their peers. There are about 90 names in that portfolio – it defines the universe actively, and then passively, rules are applied on that universe. They then give us an index that we track.
Within this ETF, we want to find the companies that are dominating in the automation side, with British supermarket Ocado as one example. It does warehouse and logistical automation and signed a deal with Coles in 2019, to run the Australian supermarket chain’s warehouse automation.
Another company in the index is Deere & Company, an NYSE-listed firm that manufactures John Deere tractors, the majority of which now have some form of AI technology within them. That’s the way you want to play the theme.
The above responses, to me anyway, felt like a closing of the circuit in my understanding of megatrends, thematics, super trends or whatever you want to call them. It’s fascinating to see how each of the three fund managers start with such a broad, global theme and drill all the way down to one or more stocks - sometimes quite obscure, far-flung companies - with which to play that.
For example, Munro Partners’ Griffin singled out what his team regards as the best pure-play HVAC company in the world, from the top-down starting point of the groundswell of global environmental concern. And for Montaka’s Demasi, finding his trio of stocks involved thinking in a new way about a few of the world’s gargantuan tech firms. Credit Suisse founds its named stocks from the starting point of the big macro themes globalisation and populism. It was also instructive to see how ETF Securities pairs the deep active research insights of a firm like ROBO Global to compile its own passively-managed portfolio.
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