Security is the new watchword
#Market Strategy — 24.05.2022

Security is the New Watchword

Investment Themes 2022 [May Update]

THEME 1

l

The global shocks of the past two years have triggered a shift in economic megatrends across the globe. New long-term structural trends have been set into motion, or at least given a huge boost. Structural deflation in prices of commodities and strategic technology supplies has been replaced by a focus on strategic assets – the need to secure production and the supply of critical materials, goods and services - namely foodstuffs, energy, semiconductors and internet communications.

  • Renewed focus on energy security
  • Focus on food and water security
  • Securing communication and the internet via cybersecurity
  • Securing strategic technologies such as semiconductor production

OUR RECOMMENDATIONS

Investable sub-themes according to this new strategic assets mega theme include:

1. Energy security: energy efficiency, renewable/biomass energy generation, battery metals and energy storage, hydrogen power, oil & gas infrastructure,  oil & gas exploration & production, uranium/nuclear power.

2. Food security: funds that invest in solutions to combat malnutrition, via more effective water irrigation, fertilisers and technologies to boost crop yields, better food transport to avoid waste on the road to market and to the consumer, companies that combat food waste.

3. Metals and mining companies: companies in secure jurisdictions that produce the essential industrial and battery metals required to accelerate the low carbon/energy transition, including producers and recyclers of copper, tin, aluminium, nickel, silver and lithium.

4. Technology security: semiconductor and cybersecurity companies, satellite technology and networks.

KEY RISKS

- A global recession could drive severe demand destruction for energy and raw materials demand, driving commodity prices lower and thus hurting the profits of commodity-producing companies.

- An unexpectedly fast decline in inflation rates to 2% or lower could invalidate this investment theme, as this would imply a decline in energy, raw materials and goods prices to pre-COVID levels. This could be potentially triggered by large inventory rebuilds eventually resulting in widespread price discounting, as supply overwhelms demand.

 

Lowflation is now a thing of the past

The low inflation rates observed in the US and Europe since 2008 have been replaced by surging inflation, something not seen since the 1970s. This inflation has resulted from surging commodity prices and higher goods prices emanating from global supply chain disruptions. After a long period of energy, food and metals price deflation from 2011 until 2020, we are now confronted with a new commodity bull market, extending from energy to industrial metals and to foodstuffs.

All about energy, food, and raw materials security 

Europe is a prime example of the shift in priorities, away from securing relatively cheap Russian natural gas supplies towards the pressing need today to unearth alternative sources of natural gas and other energy supplies as quickly as possible, so as to guarantee energy security within the European Union.

As regards food security, the developed world had enjoyed a productivity boom in agriculture and farming, allowing food prices to decline steadily from 1980 to 2003, and again from 2011 to 2020. The falling real (after-inflation) cost of food globally has been replaced by a sharp increase in food prices since late 2020, which is leading to civil unrest in certain developing economies.

Huge investment is required to expand the supply/production of energy, food and other raw materials to ease these price hikes. But this will take time. For the foreseeable future, these elevated commodity prices look to be here to stay, until and unless we see heavy demand destruction as people react to these high prices by changing their behaviour.

Technology security: chip production, cybersecurity

We are similarly likely to see sharply increased investment in particular areas of technology, notably semiconductor production and also cybersecurity. Up until now, the key foundation of today’s technology, semiconductor chips for processing, memory, storage and sensors, have been largely produced in the Far East (e.g. South Korea, Taiwan). This new emphasis on national security is likely to trigger the construction of new semiconductor chip production in the US and Europe, so as to secure supply in this strategic industry.

Reversing long-term underinvestment

The era of underinvesting in the US and Europe by increasingly outsourcing goods production (and even many services) to cheaper labour countries, like China and India, has largely ended on the back of COVID-19-induced supply chain disruptions. Companies now understand the need for robust supply chains, and are in many cases re-localising production of key components and assemblies in order to reinforce their supply chains. To this end, we expect companies to invest heavily in new plant and equipment closer to their home markets, avoiding geopolitically sensitive regions in favour of more politically stable locations. This should boost investment in industrial automation, given the sharply rising wage costs.

Equally, the underinvestment in global commodity production in the aftermath of the 2011 bust in commodity prices will be slowly reversed, considering today’s record-low warehouse inventories and record-high prices for energy, base metals and foodstuffs. This higher capital goods investment should benefit both mining and agriculture equipment suppliers.

Read about the other themes in our Investment Themes Update [May 2022]