Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 498

The coming supercycle in tangible assets

This is an edited version of a presentation by Jacob Mitchell, Founder and CIO of Antipodes Partners, at the Pinnacle Insights Live 2023 event.

We've been observing for some time now, and it really started in 2018 with the Trump Tax Cuts: fiscal activism. There's been a real shift in the backdrop. And it was a result, I think, of the failure of QE. QE stimulated asset prices, but it was less than optimal when it came to stimulating the economy. So, it led to very wide wealth differentials, populism, then we had Trump, and then we had COVID.

And through all of this, what we saw was the response to every crisis was stimulation on the fiscal channel and also central banks reinforcing that. So, central banks normally act in a countercyclical manner, and they were reinforcing it with procyclical central bank policy. And it really reflects the fact that we think the central banks are increasingly captive to their political masters. We've really gone down the pathway of losing central bank independence. 

Out of this, you'll start to see policy-led winners - that increasingly fiscal stimulus will start to go towards decarbonization, towards onshoring, and infrastructure projects. We're seeing it, but we're going to see a lot more. Let's unpack what that means for the composition of investment in the economy.

Tangible vs intangible investments

If you go back to 1980, most investments – 70% of investments went into tangible stuff, equipment structures as opposed to intangible, which is software and intellectual property. Fast forward to today and the split is 50-50.

We know why that happened. We had the emergence of the Internet; we had ecommerce, streaming video-on-demand, social media; and we also had things like the digitization of the enterprise, the emergence of the cloud. All of those things – the interesting thing about them is some of them led to productivity growth. Not all of them. I don't think Netflix has improved productivity, but the digitization of the enterprise definitely did.

Now, what we see happening is that's not going to go away, but the step change is going to come in tangible. It is all of the investment we need to solve for climate risk, to solve for geopolitical risk. And we think it will end up being more inflationary because it doesn't have a big productivity payoff.

Structurally higher inflation

The inflation backdrop - we think pressures are there; structural pressures are there. You have this fiscal activism, you have the wage pressure, which is a combination of the participation rate having fallen through COVID in the U.S. and in the U.K. We also have a big skills mismatch and part of that mismatch is really the change. And when you change the investment in the economy in a major way, you don't necessarily just all of a sudden get the skills that you need to take that tangible investment forward. You need electrical engineers, because it actually is just a super-cycle in investment in the power sector. Those skill shortages are real. The Fed is very concerned about the level of wage growth in the U.S. economy, and that's why it's been tightening.

Then you have China. China is no longer a low-cost manufacturing hub. We have the aging population in the West. We're losing workers, but we still have to take care of our elderly folk.

We have AI. AI, machine learning, certainly will start to deflate some of the service sector. AI will be very powerful actually in removing some of the most expensive jobs from the economy. But that is a longer-term trend, and it won't necessarily fix the issue that Fed has in the medium term.

We've seen this story before

Have we seen this playbook before of fiscal policy being much more active, of central banks having to try and deal with governments and their policies, which ultimately reflected a much more volatile nominal GDP growth era? And we have.

It was the 70s and the 80s. Nominal GDP growth went through these big swings. And we know equity markets don't like volatility. It drives up the discount rate and it results in lower multiples, and that's what we saw in that period. The average multiple on the U.S. market on a cyclically-adjusted CAPE basis was around 11 times versus where we are today at 30 times. We think there is a real risk of volatility in the economic cycle, and it's already starting. You can see that leads to a derating.

What you're seeing with the euphemistically-described Inflation Reduction Act in the U.S., which should be more accurately titled the inflation reacceleration act, is US$400 billion of investment targeting the energy transition. And we say $400 billion, but actually no one really knows, because it's open-ended. It's actually production credits; it's investment credits; it's manufacturing credits; and there's no cap. And renewables are already competitive in Midwest of the U.S.; they're very competitive in the sunny parts, the windy parts of the U.S.

You don't need these incentives to encourage utilities to invest. It's actually happening anyway. So, it will really accelerate the market opportunity.

A large cap stock to play the theme

Siemens Energy: we describe it as the Swiss Army knife of decarbonization. It's a leading manufacturer of wind turbines and a leading manufacturer of high-voltage transmission equipment. It also solves for hydrogen. And look, this investment cycle is genuinely structural. Even if you just take the reality of having to decarbonizing the existing power grid, if you want to remove hydrocarbons, we need to resize the power grid by 3X. It's very hard for investors to get their heads around that number, and that's why we think this is a great opportunity to buy. You don't need to go onto the lunatic fringe. You can buy very sensible companies run by sensible people on sensible multiples because they were perceived to be cyclical companies that are transitioning to a structural growth profile.

In summary, we need to position for a real change in regime: fiscal activism and a super cycle in tangible investment. We need to be selective around yesterday's winners. We really should be focusing on tomorrow's and take advantage of the current valuation divide in markets. There are some very attractive choices. And as always, a pragmatic value approach in this environment is about finding resilient businesses that offer us a margin of safety and are really well-placed to deal with this economic volatility and looking for opportunities to protect our investors via hedging out tail risks when we see that sort of risk when it's very cheap to do that.

 

Jacob Mitchell is Founder and Chief Investment Officer of Antipodes Partners, part of the Pinnacle Group, a sponsor of Firstlinks. This article is an edited transcript of a February 2023 presentation and the general information does not consider the circumstances of any investor.

 

banner

Most viewed in recent weeks

Are term deposits attractive right now?

If you’re like me, you may have put money into term deposits over the past year and it’s time to decide whether to roll them over or look elsewhere. Here are the pros and cons of cash versus other assets right now.

Uncomfortable truths: The real cost of living in retirement

How useful are the retirement savings and spending targets put out by various groups such as ASFA? Not very, and it's reducing the ability of ordinary retirees to fully understand their retirement income options.

Is Australia ready for its population growth over the next decade?

Australia will have 3.7 million more people in a decade's time, though the growth won't be evenly distributed. Over 85s will see the fastest growth, while the number of younger people will barely rise. 

How retiree spending plummets as we age

There's been little debate on how spending changes as people progress through retirement. Yet, it's a critical issue as it can have a significant impact on the level of savings required at the point of retirement.

20 US stocks to buy and hold forever

Recently, I compiled a list of ASX stocks that you could buy and hold forever. Here’s a follow-up list of US stocks that you could own indefinitely, including well-known names like Microsoft, as well as lesser-known gems.

The public servants demanding $3m super tax exemption

The $3 million super tax will capture retired, and soon to retire, public servants and politicians who are members of defined benefit superannuation schemes. Lobbying efforts for exemptions to the tax are intensifying.

Latest Updates

Property

Financial pathways to buying a home require planning

In the six months of my battle with brain cancer, one part of financial markets has fascinated me, and it’s probably not what you think. What's led the pages of my reading is real estate, especially residential.

Meg on SMSFs: $3 million super tax coming whether we’re ready or not

A Senate Committee reported back last week with a majority recommendation to pass the $3 million super tax unaltered. It seems that the tax is coming, and this is what those affected should be doing now to prepare for it.

Economy

Household spending falls as higher costs bite

Shoppers are cutting back spending at supermarkets, gyms, and bakeries to cope with soaring insurance and education costs as household spending continues to slump. Renters especially are feeling the pinch.

Shares

Who gets the gold stars this bank reporting season?

The recent bank reporting season saw all the major banks report solid results, large share buybacks, and very low bad debts. Here's a look at the main themes from the results, and the winners and losers.

Shares

Small caps v large caps: Don’t be penny wise but pound foolish

What is the catalyst for smalls caps to start outperforming their larger counterparts? Cheap relative valuation is bullish though it isn't a catalyst, so what else could drive a long-awaited turnaround?

Financial planning

Estate planning made simple, Part II

'Putting your affairs in order' is a term that is commonly used when people are approaching the end of their life. It is not as easy as it sounds, though it should not overwhelming, or consume all of your spare time.

Financial planning

Where Baby Boomer wealth will end up

By 2028, all Baby Boomers will be eligible for retirement and the Baby Boomer bubble will have all but deflated. Where will this generation's money end up, and what are the implications for the wealth management industry?

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.