by Michael Steele – Portfolio Manager
The significant rebound in equity markets from its COVID lows will prompt many investors to ponder their ability to generate suitable risk-adjusted returns in the years ahead. For us, compelling opportunities remain ever present in the smaller companies market, with many earlier stage companies offering compelling growth opportunities which are less hamstrung by legacy businesses and earnings. Importantly, we continue to see an increase in market inefficiencies driven by the rising prominence of passively invested capital and [historically] low sell side coverage.
To illustrate the prevalence of compelling investment opportunities within the small end of the market as we move into 2022, here are three positive investment themes we currently favour across the resources, technology and e-commerce sectors.
Net zero: As the world transitions to lower carbon emissions, we will need to undertake potentially the largest ever replacement of capital stock. This large and long dated super capex cycle, ranging from your personal vehicle to the source of your power generation, will cost at least US$55 trillion and will bring increasing demand for commodities over a 10+ year time horizon. Our preferred commodities within this backdrop are lithium and copper: we expect lithium demand will increase by at least 10-times to 2030, supported by accelerating demand for electric vehicles (EVs) (refer Chart 1), while copper demand will be driven by renewables generation investment, transmission network expansion and EVs. We see Pilbara Minerals (PLS) and 29Metals (29M) as best placed to leverage this attractive demand outlook.
Shift to the cloud: The importance of technology’s role to the global economy has been further highlighted by a rapid shift to working from home once never thought possible. While COVID has accelerated the shift to the cloud, we still see a significant growth runway as businesses chase the large productivity benefits that come from shifting on-premise data storage to multiple cloud products (refer Chart 2). These productivity benefits require expertise, however, since the volume of data and complexity of networks continues to increase exponentially as extra cloud products are added. We see Megaport (MP1), a global leader with an expanding product offer, being particularly well positioned to benefit from the continued growth in cloud products.
Outdoor media: we see an attractive opportunity at this point of the cycle, with the media market below its pre-COVID levels, in clear contrast to many other cyclical industries that are materially above sustainable levels (e.g. discretionary retail and housing). Outdoor media provides a broad cyclical exposure across the whole economy and has a positive outlook, with the current starting point below pre-COVID levels (refer Chart 3) despite economic activity more than recovering.
oOH!Media (OML) is our preferred media exposure which we expect will benefit from a re-opening of the economy and which also has longer term growth through an expanding digital product offer and improving audience measurement.
These three themes represent a small subset of the compelling investment opportunities that are represented within the Yarra Australian Small Companies Strategy, which delivered a stunning 26.2%* in the 12 months to 30 November 2021 (outperforming its benchmark by 773 bps).
* Performance is gross of all fees, meaning it does not reflect the deduction of any investment management fees which would reduce returns and assume reinvestment of distributions.
