Market Hot Plays
The market is a discounting mechanism, it looks forward, always focused on some idea, sometimes several factors, that will determine the future of asset prices. Currently, that focus is on inflation. Since we started to re-open following the covid shut down, there has been a demand supply imbalance. Shipping container prices have trebled, and many raw materials are in short supply. This had led to speculation around inflation, and this is the theme that now dominates market thinking.
Inflation will be bad for stock prices if it leads to a rise in interest rates. Stock markets have discounted future company cash flows/earnings at exceptionally low interest rates. If rates were to rise, those earnings would be less attractive and therefore lead to a lower valuation in the stock price. With current valuations so high the correction could be severe.
The authorities in the US say recent price rises are transitory and do not represent higher inflation long term. So far, the market has bought that theory and markets are stable. The US stock market is flat year to date which is a good performance against this background but not much use if you are invested.
For the past decade passive investing has been extraordinarily successful, just buying the index has made substantial returns. However, given the over-extended valuations of the US stock market, where most are invested, we are unlikely to have success with that strategy this decade. We need to look for investment strategies elsewhere, the return of the stock picker is nigh!
When you research the market there are currently several hot plays. You must be careful to buy a value investment as there has been some serious ramping on the back of stimulus cheques and some ideas are too pricey already. Electrical Vehicle battery components for example.
We like Uranium as a play. Whether you like it or not Nuclear is the easiest alternative to fossil fuels. There are several ways to invest in Uranium so be careful. We have liked the Uranium mining companies in the past and that has been a winner but when you buy the mining company you are exposed to how well it is run. Currently we are invested in the metal itself and that is up 20% YTD. We believe there is plenty of upside left.
Carbon Credit Markets are a new asset class and a huge ESG friendly opportunity!
“One of the most powerful ways to reduce emissions…is to move toward carbon pricing that puts basic free-market economics to work.” – Special Presidential Envoy for Climate, John Kerry
“I’m a Republican. I believe the greenhouse effect is real, that CO2 emissions generated by man is creating our greenhouse effect that traps heat, and the planet is warming. A price on carbon – that’s the way to go in my view.” – Senator Lindsey Graham
“My position is unchanging and unequivocal: international carbon markets – that put a price on carbon – are absolutely crucial if we’re to have any chance of stabilizing global temperature rise and avoid runaway climate change.” – UN Climate Change Executive Secretary, Patricia Espinosa
Fiscal Stimulus Globally is insane. A lot of it in the US, Japan, Europe & the UK will be directed at the Carbon Market. It is ESG (Environmental, Social & Governance) friendly which is where capital is going. Carbon has a low correlation to all other asset classes and is already a large and growing market which Governments are fully behind, to incentivise and fund green innovation. Targets on Emissions cuts are quite aggressive out to 2030 and beyond. This virtually guarantees Carbon Credits are going to be increasingly more valuable in time because they are limited in supply and become more valuable at each new cut in Emissions standards.
This is one of the most exciting long-term investments we have ever seen and the fact that it is not correlated to other asset classes makes this a rare opportunity. Risk relative to reward potential looks extraordinary on a 5/10-year time horizon.
We like Uranium as a long-term investment, it also has an exceptionally low correlation to traditional asset classes, we are very bullish as nuclear is zero emissions. Nuclear is a big part of a zero-emissions world and zero-emissions is a big part of ESG. We have done well with our Uranium positions and see potential for 100/200% returns over the next few years but the Carbon Credit market opportunity over the coming years absolutely dwarfs that of Uranium.
On a simpler play we like FBD Holdings PLC. We bought into that on the back of a share price dip on the Covid cover court case at €7.30. We believe the fundamentals of the company are strong and in comparison, to the RSA deal, we believe FBD will be bought soon at a price between €11/13 per share. It is currently trading at €9.20
Just a note of caution; with all investments you need to be able to allocate in accordance with your risk profile, so these types on investment may not be suitable or accessible to all. Also, you need to know when to cut and run.
For further information please contact Peter Brown at firstname.lastname@example.org