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          Thematic Commentary – 30 November

          Thematic Investing

          Written by: Tom Barker, CAIA

          Published: 12 December 2023

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          In today’s rapidly evolving market, investors need to stay on top of the latest trends and themes that fuel growth. In this monthly publication, we offer our market commentary across our themes, covering new opportunities and potential challenges. By providing a deeper understanding of our themes, we aim to help you make more informed investment decisions and achieve your investment goals.

          Festive season

          Circular Economy Enablers

          Against a backdrop of deglobalising supply chains and soaring costs, one sector stands resilient, where companies are neither exposed to demand side or supply side disruptions. These are Circular Economy Enablers.

          With Biden maintaining Trump-era tariffs on China, the bipartisan “deglobalisation” strategy fosters reshoring and benefits Circular Enablers, particularly those in equipment and machinery rental for construction. Equipment rental companies Ashtead Group and United Rentals, are not only insulated from raw material cost increases but they’re also not involved in end-product sales. As a potential consequence of rising costs, the sharing economy, exemplified by companies like Herc Holdings (formerly Hertz), may also flourish, with usership models gaining traction over ownership. In response to localised supply chains, businesses are anticipated to heavily invest in smart, roboticised industrial manufacturing, driven by resource efficiency amid scarcity and higher costs. This trend is expected to boost demand for licensing agreements with technologically advanced manufacturing leaders, such as Lenzing and ANSYS.1

          Environmental Impact

          The Biden administration has implemented rules to limit China’s influence in the U.S. electric vehicle (“EV”) supply chain. It’s a move that aims to secure the U.S. EV future, addressing concerns about China’s dominance in key technologies and resources like lithium, cobalt, and graphite.

          Starting next month, U.S. manufactured EVs with Chinese-made battery components will no longer qualify for full subsidies under President Biden’s $USD 369 billion Inflation Reduction Act. Additionally, EVs from companies with significant Chinese government ties or licensing agreements with Beijing-controlled operators won’t receive incentives.

          Despite criticisms and tensions between the two nations, the Biden administration aims to balance environmental goals with economic competition, setting a 2030 target for EVs to represent 50% of new vehicle sales. The rules may impact tax credits, grants, and critical mineral sourcing, posing logistical and financial challenges to building a supply chain that is not reliant on China.2

          Transportation infrastructure

          Global Sustainable Infrastructure

          Canadian private capital group Brookfield has achieved a record-breaking $USD 28 billion in its infrastructure fund, marking the largest-ever capital raise dedicated to assets like airports, toll roads, pipelines, and natural gas export plants.

          This successful fundraising into traditional infrastructure reflects a growing trend among institutional investors deploying capital into investments that benefit from higher interest rates and a shift away from globalisation. Infrastructure investments are particularly attractive in a “deglobalising” world, where companies are reshoring production and sourcing energy locally. These assets also offer revenues closely linked to inflation, providing a hedge against rising price trends. We believe Sustainable Infrastructure compounds these benefits by providing access to the disruptive trends and structural shifts that are transforming traditional infrastructure capital flow, including the energy transition, deglobalisation, adoption of sustainability goals, and digitisation. This investment framework allows infrastructure investors to incorporate sustainability and capture the new emerging infrastructure opportunities in a rapidly transforming landscape such as EV, battery storage, 5G telecom networks, all whilst shielding against inflation and offering the benefits of a traditional infrastructure allocation.3

          Sustainable Future of Food

          On November 30th, the United Nations Climate Change Conference COP28 commenced in Dubai, United Arab Emirates. The international conference aims to address critical climate issues and concludes on December 12, 2023. The COP28 presidency revealed that 134 world leaders, representing over 5.7 billion people and almost 500 million farmers, endorsed the COP28 UAE Declaration on Sustainable Agriculture, Resilient Food Systems, and Climate Action.’ This landmark initiative addresses global emissions while prioritising the welfare of farmers on the frontlines of climate change. The Declaration emphasises the crucial link between food systems, agriculture, and climate action, urging countries to integrate these considerations into their climate ambitions. Notably, more than $USD 2.5 billion has been mobilised to support food security amidst climate challenges. The UAE and the Bill & Melinda Gates Foundation have also launched a $USD 200 million partnership for food systems innovation, aligning with the UN Sustainable Development Goals. Other key announcements so far include collaborative efforts, technical cooperation, and a call to action for transforming global food systems. COP28 is expected to convene over 70,000 participants, including heads of state, government officials, industry leaders, academics, experts, youth, and non-state actors.4

          United States View, valley, national park

          USA Environmental Impact

          A US-led solar manufacturing boom is underway with forecasts indicating a shift towards renewables, particularly wind and solar.

          Clean energy capacity is projected to surge by 84% in 2024, with wind and solar contributing 16% to total energy production in 2023.

          Since the Inflation Reduction Act was signed, the U.S. has attracted over $USD 150 billion in capital investments for utility-scale clean energy, supporting the creation of 18,000 manufacturing jobs and nearly 96 GW of clean energy capacity. Government initiatives, including a national blueprint for transportation decarbonisation, a push for EVs, and over $USD 90 billion allocated for US battery manufacturing, underscore robust policy support. Added to this are streamlined permitting processes which are advocated to expedite the clean energy buildout, enhancing competitiveness and revitalizing the manufacturing sector. One U.S. company capitalizing on this momentum is solar panel technology company Maxeon Solar who just announced a new 3.5-gigawatt factory planned for Albuquerque, New Mexico, cementing its status as a key U.S. residential solar-module supplier.5 6 7

          Cybersecurity and Data Privacy

          Many investors are familiar with the investment case for cybersecurity. In the digital era, the rapidly growing number of interconnected devices is expanding the attack surface for cyberattacks. In 2023, demand for cybersecurity products and services has continued to soar with artificial intelligence catalysing the tremendous growth of this sector. For investors, the nature of a portfolio allocation to cybersecurity is also evolving. Three years ago, around one third of listed cybersecurity equities were small-caps. Today, this stands at just 8% whilst the share of large caps has grown from 30% to 50%. This maturation of the cybersecurity theme follows considerable consolidation within the industry, with over 450 cybersecurity M&A deals seen last year alone. Today, the public market harbours the survivors of the highest whipsaw of a rate-hiking cycle we’ve seen in the past 50 years. Furthermore, the evolution of the market cap allocation in the cybersecurity theme towards large-caps suggests downside risk is therefore far more subdued today than was the case even two or three years ago.8 9

          Digital Payments Economy

          Black Friday and Cyber Monday achieved record-breaking global commerce results in 2023, defying concerns about inflation and the cost-of-living crisis in some regions. In the US, online sales on Black Friday surged by 7.5% year-over-year to $USD 9.8 billion, while Shopify reported a 24% increase in total sales across its global merchants, reaching a whopping $USD 9.3 billion over the entire weekend. More than 61 million consumers made purchases through Shopify, marking a significant rise from 52 million the previous year. The average cart price rose to $USD 108.12, 6% higher compared to average consumer spend last year. The growing popularity of buy now, pay later (BNPL) services, with reflected by British consumers spending £GBP 475 million over the weekend, suggesting a response to rising living costs.10

          Blackfriday sale, mobile payment, ecommerce

          References

          1

          Financial Times, “US moves to choke China’s role in electric vehicle supply chain”, November 2023. Available at: https://www.ft.com/content/7d80627e-c6a6-4216-b4c8-275f089fc447

          2

          Bloomberg, November 2023

          3

          Financial Times, “Brookfield raises $28bn for largest-ever infrastructure fund”, November 2023. Available at: https://www.ft.com/content/766b702e-acdf-4e71-ab9e-664e30611e83

          4

          COP 28 UAE, “Cop28 Presidency Puts Food Systems Transformation on Global Climate Agenda as More than 130 World Leaders Endorse Food and Agriculture Declaration”, November 2023. Available at: https://www.cop28.com/en/news/2023/12/COP28-UAE-Presidency-puts-food-systems-transformation

          5

          YahooFinance, “The 7 Best Clean Energy Stocks to Buy in 2023”, March 2023. Available: https://finance.yahoo.com/news/7-best-clean-energy-stocks-174948549.html?guccounter=1

          6

          Electrek, “The US has seen 5 years’ worth of clean energy investments in just 9 months – here are the highlights”, April 2023. Available at: https://electrek.co/2023/04/18/us-clean-energy/

          7

          Energy.gov, “Biden Clean Energy Plan Update: March 2023”, March 2023. Available at: https://www.energy.gov/articles/biden-clean-energy-plan-update-march-2023

          8

          Rize ETF, November 2023

          9

          Bloomberg, November 2023

          10

          FXC Intelligence, November 2023

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