The next dominant theme of the decade

Those who twigged Web 2.0 would transform the world over the past decade are doubtless feeling pretty smug right now. And why not? 

The likes of Facebook, Amazon, Apple, Netflix, and Alphabet (Google) have returned a respective 762%, 1767%, 1041%, 1431% and 780% over the past 10 years (or since listing). Together, an almost (read: very) ridiculous 5781%. 

But the perennial questions burn as hot as ever: Who's next? And what will be the next dominant theme set to take markets by storm? 

In this thematic episode of Buy Hold Sell, Munro Partner's Nick Griffin and Loftus Peak's Alex Pollak point to the shift towards decarbonisation of the planet as the next major trend set to shape global markets. 

Nick and Alex join Livewire Market's Bella Kidman to share their insights on how investors can get on the right side of this trade and where, specifically, they see opportunities. 

Note: You can watch, listen or read an edited transcript below. This episode was filmed on 29 April 2021.

Edited Transcript

Bella Kidman: Welcome to this thematic discussion brought to you by Livewire Markets. My name is Bella Kidman and 10 years ago, the world was a very different place. The iPhone 4S had just been released to market with the brand new feature Siri, and Walmart was one of the biggest companies on Earth. But today, we're not looking back, we're looking forward and we're going to predict the next dominant theme of the decade. And to talk to me about this today, I'm joined by Alex Pollak from Loftus Peak and Nick Griffin from Munro Partners.

Nick, I'll start with you. If you had to make one prediction for the next 10 years, what is going to be the one theme that all investors need to embrace to be successful?

Nick Griffin: Yeah, so I think if you look back over my career over the last 20 years in funds management, it's really being able to get digitalization right that has really supported a lot of what we've done. I do think digitalization will continue for the next 10 to 20 years also. But on top of that, we now see this new theme emerging really around the decarbonization of the planet. And the reason why we bring it up, as probably one that is also just as dominant, because it's the biggest theme we've seen in some time that could potentially be as big as what digitalization was over the last 10 years. So that's why we think, really, as we go towards decarbonizing the planet, that is going to be a big thing that investors need to get their head around over the next 30 years.

Bella Kidman: Alex, do you agree? Is Green the New Black?

Alex Pollak: Oh, yes. Definitely. I mean, the issue is that the biggest energy companies in the world, Shell, Total, Exxon, BP, et cetera, are sitting on top of the largest melting ice cube in the form of oil reserves. What is happening is VW, as with Tesla, has announced it's pretty much going all battery. So the oil companies themselves are trying to understand what that means for oil demand over the next 10, 15 years. BP has already said net-zero by 2050. They are assembling portfolios of renewable assets so that they have essentially something to sell when the oil is worth nothing. By the way, Aramco out of Saudi Arabia was doing the same thing.

Bella Kidman: How much potential does this thematic have to change markets? I mean, obviously, it's going to be a big thing, but is it going to impact the whole of markets in every single sector?

Alex Pollak: Aramco, itself, is a $2 trillion company, US. And then if you add Shell, Total, BP, et cetera, that's another couple of trillion dollars, Exxon. And then if you think about all the car companies, a number of them already announced plans to go battery, and if you think about the value in that, which is another couple of trillion dollars. Energy as a technology not as a fuel, that's what this is about. It's big.

Bella Kidman: We've seen a lot of countries set their emissions targets. Everybody seems to be hopping on board this green train. How much potential do you think that this has to shape markets in the future?

Nick Griffin: Yeah, so I think if you just think about what the goal is, okay, so it's net zero carbon by 2050. That's not emit less carbon, that's emit no carbon by 2050. And so if you think about that, that's just going to cost a lot of money. From our point of view, the Europeans have actually costed this and they think it'll cost roughly $10 trillion to do this over the next 30 years. If you add the US and China, you get to $30 trillion, and I think that's conservative. I've seen numbers over $50 trillion.

So from our point of view, that will affect pretty much most of the sectors in the market in some way, shape or form, whether it's semiconductors, which help obviously drive renewable energy or power semiconductors, or whether it's even building materials like insulation or heating and venting and cooling, or even electric cars and renewable energy. So there's lots of obvious places to look, but there's also lots of unobvious places to look that's why we think it's such an exciting opportunity today.

Bella Kidman: Okay. Well, you're very excited about this theme, obviously. So can you tell me, where do you think investors should be looking to get on the right side of this trade?

Nick Griffin: Obviously we saw Tesla last year. Tesla is, I suppose, the first climate champion that the world now has, as a leader in electric cars. And I'd argue that there's obviously going to be more of these coming along. You just have to think about where to look. And so the obvious place is renewable energy. So this is wind turbine manufacturers in Denmark like Vestas or battery manufacturers in South Korea or Taiwan like LG or Samsung SDI, they're obvious places. And then you can go beyond that to look at power semis or Infineon, which is effectively the semiconductor that converts battery power to kinetic power.

And then lastly, I do think the building materials are fascinating. The biggest chunk of getting to net zero is energy efficiency. And there are lots of companies in building materials coming up with some really good ideas as to how to do that, whether it's insulated panels or whether it's just simply heat pumps, because most heating and cooling systems run off gas or fuel oil. And so this is just a huge transformation that’ll happen over a long period of time. I'd encourage investors, not just to think about the obvious, but to think about the unobvious, because there's also opportunities there as well.

Bella Kidman: Alex, where are investors supposed to look for this type of opportunity and get excited about this opportunity?

Alex Pollak: Well, I mean, it's difficult to get excited about the oil companies right now because they've got a lot of work ahead of them. I absolutely concur with what Nick said about power semis, that is going to be a huge area. VW, we think, is going to be the scale player in batteries, outside of Tesla. So there will be some champions, I suspect, amongst the car companies that are probably playable. And then as Nick said that some of the power semi companies look very interesting to us. And of course, everything to do with transportation already has and will continue to have even more silicon content in it. And so, that's an area for us to look at as well and we're focused on that.

Bella Kidman: Okay. A term that's been thrown around a lot is greenwash. First off, what is greenwash and how should investors be looking to avoid it?

Alex Pollak: Greenwash is just kind of saying that our CO2 emissions are very low because we've bought carbon credits for example. And therefore, our emissions are a lot lower. We would never invest in companies that do that sort of thing. We're not interested in greenwash. AGL is doing something in the local market about that. I'm not going to pass judgement on it, but others have. That would be not something that we got involved in.

Bella Kidman: Nick, do you have any tips for investors on how to avoid this greenwash phenomenon that everybody keeps talking about?

Nick Griffin: The good news is obviously the race to net zero now, it has to be reported by the companies in their accounting standards. So you can actually go to the back of the annual report, whether it's BHP's or whether even BP's annual report, if you want. They have to commit as to how much carbon they are reducing. It's under the FASB standards. And we, as companies, can look at that and other outside agencies are looking at that. So investors need to be confident that over time, the reporting of lowering your emissions will get better. From our point of view, we're actually really looking for the companies that are going to help enable these companies lower their emissions. They're going to be the winners.

The last thing I'd just say about greenwashing is, it's just a nice wave of lying, quite frankly. Companies have been lying to us for 20 years, that's the reality of investment.

Alex Pollak: Oh, longer than that.

Nick Griffin: All companies you meet will tell you they do one thing and yet very few actually do. Our job really just comes down to experience of being lied to quite a lot over the journey and we’ve made a lot of mistakes over the journey. And that makes us better at being able to pick who is actually a winner.

Alex Pollak: We're more experienced at being lied to than others.

Bella Kidman: Okay, Nick, I'm going to put you in the hot seat here. What is the one company that you think is really going to capitalise on thematic and will win in the ESG space?

Nick Griffin: There's so many to choose from, and you're making me choose one?

Bella Kidman: One.

Nick Griffin: Look, if you want a simple weapons manufacturer in the war here, so you just want to go the shovels. The shovels, the shovels, the shovels. I concur with what Alex said earlier. It really is silicon. We'd point to Infineon (ETR:IFX) in Germany. They effectively make this thing called a power semi, which essentially turns battery power into turning the drive train in a car. It's applicable not just for cars, it's applicable for scooters, it's applicable for buses, it's applicable for a wind turbine, you name it. They really are just a simple weapons manufacturer in the war. They trade at roughly 30 times earnings, listed in Germany. That's the one I'd point to that you can hold for a very long period of time and should do reasonably well at it from our point of view.

Bella Kidman: Alex, the world is your oyster, who is going to win in this space?

Alex Pollak: Oh, I think it's not obvious right now so I don't know the answer to that. We are spending time on the German car manufacturers, in particular, we're looking at VW (ETR:VOW3). VW is the scale player with 10 million cars for annual production. And what we particularly thought was interesting was that VW finally has admitted that they have got a serious problem and they have committed now, by the board and the management to actually moving to battery electric vehicles.

As the scale player with 10 million cars and the distribution to sell those cars and the capital to do it, putting in the battery capacity for those cars is something that should work. So I think that is kind of the easy-ish one right now. There are pricing issues around that as well, but that's probably what we think.

Bella Kidman: Well, all the aboard the grain train, make sure you've got your ticket ready because this theme is here to stay. If you've enjoyed this episode of Buy Hold Sell, make sure you subscribe to Livewire's YouTube channel for more.

What do you think will be the next dominant theme of the decade? 

Do you agree that decarbonisation will be the major theme investors should back over the coming years? Or is there another theme that you think the market has overlooked? Let us know in the comments section below. 

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