18 July 2022
By Graeme Bencke and Mikhail Zverev
Our readers will be aware of the on-going tensions with Russia, the associated energy crisis and the implosion in the UK government. Plenty to be cautious about and this is clear in the economic data. Global consumer confidence has weakened significantly over the past few months, by some measures hitting record lows in several Western countries including the US, Germany and the UK. This means that in those countries the sentiment is worse than during the lows of the pandemic or even the global financial crisis in 2007/8. While difficult to construe this as positive it does suggest that we may be close to low point in consumer confidence.
One of the implications of a worried consumer is lower spending, particularly on ‘big ticket’ items such as TVs, cars and mobile phones. Parts of the semiconductor industry are sensitive to these changes in demand and the recent results from both Micron and Samsung (both big providers of chips for phones) confirm that. We don’t hold either stock, but the news weighed across the sector and affected companies we do hold, including Infineon, SK Hynix and Ambarella. All look very attractively valued in comparison to their past, and particularly so given the very strong secular trends from which they benefit. We will provide more details of those trends over the coming months but suffice to say the world will have many more semiconductors in 3 years’ time, and these companies will be helping to provide them.
In this unsettled environment it is perhaps not surprising that the two of the best performing holdings on the fund are ‘Enablers’ in our innovation terms – supporting the Pioneers in their industries who continue investing largely unaffected by the shorter-term noise. Qiagen and IQVIA provide services to pharmaceutical and biotech research and development: diagnostics & testing and trials & clinical data respectively. Investments in this segment span long periods and our holdings are intimately integrated in the process and continue to expand their presence.
As we write, the sunshine of the current heatwave outside is cruelly taunting. While pleasant enough for those able to enjoy it, it nevertheless reminds us of a number of factors driving innovation and opportunity for several investments in the fund.
The impacts of climate change are well documented and affect both supply and demand for energy. Growing investments in distributed sources of power generation (wind, solar, tidal) need to be connected to the broader electricity grid and intelligently controlled. Lower emission targets drive demand for more electric vehicles and residential heat pumps. Rising temperatures require energy for cooling in buildings and transport, and lead to more wildfire or storm activity which in turn requires “hardening” of the electric grid to mitigate this. All of this against the need to reduce exposure to natural gas driven by Russia’s aggression in Ukraine. Witness the UK National Grid’s recent £54bn network upgrade initiative.
This process is sustaining a huge frontier of innovation looking to drive efficiency improvements at every level of the electricity supply ecosystem. There are many exciting, but highly uncertain investment opportunities in ‘Pioneers’ in areas such as energy storage and photovoltaic and turbine efficiency. However, our focus on optimum return for least risk highlights two highly consolidated parts of the innovation cluster which are neatly positioned to benefit from this spending. Italian listed Prysmian is the leading supplier of power cables with a material exposure to the growing investment in offshore wind; and US listed Hubbell is a leader in electricity network equipment. Both are ‘Enablers’ and produce plenty of free cash to fund their own growth and to keep acquiring smaller peers. A low risk, high potential return way to invest in this innovation frontier. We are also invested in one of the best positioned ‘Pioneers’ of the ventilation and air-conditioning space – US listed Trane Technologies. This technology pioneer also has among the highest attach rates of service revenue in the industry providing a stable and sustainable platform to grow through innovation.
We look forward to telling our investors more on this subject through a coming deeper dive into the drivers, threats and opportunities across the electrification and grid investment innovation frontier.