In his most recent book “The Changing World Order”, Ray Dalio (founder of Bridgewater Associates) argued that the peak of the American empire occurred somewhere between 1970 and 1980. More recently, Larry Fink (CEO of BlackRock) wrote in his annual shareholder letter that the Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades. Lastly, Mr. Putin mentioned that Russia will seek payments for its commodity deliveries in rubles and Saudi Arabia did the same with China who is requesting payments in CNY. This is directly challenging the USD supremacy for world-trade.
What are the investment ramifications of this?
First, on the back of a disrupted supply chain, prices for commodities and other base materials are expected to stay elevated. For companies and nations to become less dependent on third parties, they are expected to relocate and onshore their operations to regions closer to their key consumers. All this will drive up inflation and subsequently interest rates. And what about the USD as the world reserve currency? Up to very recently, holding onto the US dollar was most likely an effective portfolio hedge. Given the present backdrop (war in Europe and interest rates rising faster in the US than in the EU, amongst others), one could have expected the USD to appreciate massively against the euro. Yet, a mere 3% to 5% appreciation occurred during the weeks before the start of the war.
We don’t think that the global world economy will stop growing, but interchanging one major piece of an engine can make it run less smoothly. It is a fact that developed countries run their debt/money flow/capital market allocations at highly optimized levels – any disruption may lead to redistribution of the coming opportunities. Hence the question of where are the opportunities will be is warranted.
Positioning of the portfolio
The war in Ukraine is likely to have meaningful longer-term consequences. With immediate effect, one can expect more governance and security; this will be at the expense of less efficiency and higher prices. This in turn will, most likely, result in areas of opportunities such as cybersecurity, energy security, food security, automation and robotics, and semiconductors.
Food security
The food chain is a triangular relationship between customers, regulators, and the food producers and transformers. The disruption caused by the Russia/Ukrainian conflict has impacted the entire relationship. Producers and transformers are lacking base products such as fertilizers and wheat, regulators need to prepare and adapt for new cross-border guidelines re food import and distribution, and ultimately consumers will pay the bill.
We think that reinventing the food chain, to bring it closer to the consumer, is likely to attract investments. Addressing requirements such as yield, food waste, and efficiency is probably the best response to disruptions impacting the prerequisites for optimal harvest results. The future opportunities include digital technologies that ensure safety, production transparency, and estimated consumer trends.
Energy security
Higher commodity prices are likely to put upward pressure on inflation. While the changes are highly visible for food and energy, they also translate in relatively small parts across the entire discretionary segment. The present spike occurs on the back of Russia’s invasion of Ukraine. This prompted an absolute strategy change from Western Chancelleries towards purchasing commodities from Russia. This attitude change is accelerating the green technology park and in particular we see opportunities in 1) clean energy, 2) energy efficiency and digitalization, 3) electrification and batteries, 4) bioenergy, 5) intermediaries like financials, 6) hydrogen, and 7) carbon capture, utilization, and storage. The last two opportunities are particularly interesting as they are in an early stage, have a high-entry point in terms of technology, and are capital intensive to start with.
Cybersecurity
During the last two years, internet users, companies, and private users have experienced an ever-increasing level of cyber threats. In response to these developments, companies, governments, and private individuals are allocating more resources to combat cyberattacks. This in turn will fuel not only solid growth opportunities but also M&A activity.
Key considerations are:
- The “New Global Order” Russia and China are calling for is a systemic threat for liberal democracies. The war in Ukraine is a perfect illustration of this.
- Cyber-threats are part of Russia’s asymmetrical response to the sanctions taken by the West.
- Longer-term geopolitical attention will go back to US vs. China as one can expect Russia to become mothballed and economically neutralized for a given number of years.
Therefore, countries and companies will have no choice other than to rethink their defense strategies and significantly beef up their defense capacities. This includes a wide-ranging cybersecurity strategy.
The present addressable market in 2022 is in excess of USD 50 billion, and it is expected that security-related investment will increase by 9.5% (on average between now and 2025), which is well above the 5% for standard software licenses.
Semiconductors
A number of high-quality information stocks have declined by more than 20% based on an aggressive Fed interest rate cycle, slower growth, and now some geopolitical issues. At the same time, investment to enable the roll-out of 5G in applications such as the metaverse, autonomous driving, and artificial intelligence is continuing.
While there is room for caution, we believe that there are valuable opportunities investment can grasp now. Enablers (particularly semiconductor, semiconductor equipment companies, and e-commerce) have led the broad-based decline, partially reversing the outperformance in 2021. Notwithstanding the concerns of lower consumer demand, we believe that the fundamentals for these companies are still in place. The 2022 EPS growth is above market average and this should ultimately be recognized by the market.
Automation and robotic
Automation and robotics is one of our favorite secular growth trends ever since 2016. The theme consists of a mix of industrial and IT (semiconductor) firms which tend to interact in tandem. Both sectors have passed lasting changes ever since the start of the pandemic. They occurred mainly on the vulnerability of the global supply chain. It can be expected, given the present crisis, that relocating production facilities closer to the consumer becomes a key initiative for most international oriented companies. The process of automation is far reaching; it goes from mining, oil and gas, and manufacturing facilities to distribution of the consumer-ready product.
Currencies.
The dollar is currently overvalued against the euro and other currencies. But given its predominant status und the current backdrop, we would only see moves below USD 1.08 per euro as an opportunity to buy the single currency.