15 September 2022
By Graeme Bencke
The current uncertainties regarding energy price inflation, post-Covid supply disruptions and the rising costs of borrowing have been widely discussed and difficult to avoid; our aim is not to add to the noise. However, since the broader team at Amati regularly meet with corporate management teams we are able to give some hopefully helpful insights ‘from the coal face’. The dominant position of energy in driving our economy makes the recent price movements an inescapable issue for almost all economic participants, and the much greater impact felt in Europe is reflected in the messages we are hearing. Some global businesses with operations in the both the US and Europe are reacting differently in the two regions. US operations remain cautiously optimistic with strong employment data and gas prices still low relative to Europe. There is an obvious pick-up in inflation but companies are patiently raising prices accordingly and the Federal Reserve is focused on the issue. In Europe however, the problems are similar but of greater magnitude. The very difficult outlook for consumers and the broader economy over the coming winter is leading some businesses to take more drastic steps including hiring freezes and reduced investment plans. These actions, while understandable, can have a self-reinforcing effect. For those of us living in Europe it is easy to forget that the issues are not felt equally elsewhere and that there remain many interesting pockets of growth, often driven by innovative and structurally advantaged businesses.
Once such company became a new position for the fund during August; MasTec, a US specialist construction services company. We have written elsewhere about the enormous innovation and investment focused on power grids around the world, and MasTec is a clear beneficiary of that trend. In addition, they are a leading contractor for the construction and maintenance of telecoms networks, clean energy and oil & gas infrastructure, each of which is expected to see an increase in investment over the coming 3 years and beyond. The telecoms segment in particular is seeing a sharp rise in spending as operators invest to capitalise on their large spectrum purchases in 5G, and the subsequent developments in the internet of things. Mastec maintains a strong position in the construction of energy pipelines across the US which is likely to experience a renaissance in investment as operators attempt to increase exports of LNG to replace the lost Russian gas supplies. These secular trends have the added tailwind of the recently agreed $1.2 trillion Infrastructure and Jobs Act in the US.
The mid-year results season continued into August, but with more mixed results for the fund. Polypeptide, the Swiss listed specialist contract manufacturer, saw further weakness after reporting a combination of higher investment spend and short-term inflationary pressures which were not offset during the period. We continue to see significant growth for the industry over the coming years and appreciate the high barriers for new entrants, however, the business has clearly been impacted by post-covid adjustments, higher than anticipated inflation and poor communication with investors. In addition, our holding in Ambarella (US listed producer of computer vision semiconductors) fell as investor sentiment weakened towards the sector. Ambarella’s product range is perfectly positioned to benefit over time as the demand for vision sensors grows rapidly in areas such as automotive and surveillance.
Over the month the most significant positive contribution came from Trane Technologies, the US listed ‘climate solutions’ business (heating/air con), which reported a strong order backlog and continued market share gains. Trane Technologies focus much of their innovation and development spending on creating more sustainable products across their core building and transportation markets. In the construction sector in particular both residential and commercial buildings are increasingly designed to require less energy input for heating and cooling while at the same time improving air quality. These trends are taking place as energy sources also shift from fossil fuels to renewable and low carbon electricity generation. Traditional gas boilers are replaced by lower carbon heat pumps for example. This confluence of changes tends to advantage the larger players like Trane with the R&D investment power to stay ahead of the curve. This raises entry barriers, in turn supporting margins and growth.