Thomson’s original article: ‘Three megatrends collide in Cannon-Brookes, Brookfield’s AGL bid‘
With that, on to our megathemes.
1) Energy Transition
We find it hard to believe that there is such little financial literacy amongst policy makers to understand that this places immense risks on any new financing for traditional fossil fuels projects. It raises the question of stranded assets, front and centre. After all, what rational banker would underwrite large capex projects with decades-long payoffs if the risk is that there may not be a market at the end of that time horizon? This is why the yields on debt for coal or oil producers remains egregious. Newcastle Coal Infrastructure Group’s (NCIG) shorter-dated 2031, for example, comes through at a coupon of 12.50% p.a.; low interest rates anyone?
In fact, if it were not for the easy money policy from the Fed over the decade plus since the GFC, much of the shale boom that made the US the largest producer on the planet would not have been possible. Assuming that is about to change, the implications are tremendous for high cost producers and US production broadly. What we feel has been lagging is at best a lack of forward thinking and at worst a blatant disregard for the transition period. Economies dont transition overnight. Our base case is peak oil and upward energy costs either way, which makes the economics of renewables easier to swallow.
2) Private Capital
Sydney Airport and AusNet – a takeover offer from a consortium (including Sunsuper and three Canadian pension funds) led by the aforementioned Canadian outfit Brookfield being approved a few weeks ago – are the first of what should be many to come over the next few years. Looking globally, pension funds will have nominal targets of 7% on average in order to keep up with liabilities. With financial repression (i.e. official rates staying below CPI) very likely on the cards (closer than many may think), we see an even greater incentive for institutional players to show a preference for private markets.
Infrastructure and utilities might be worth a look.
3) The Billionaire Activist
What we feel is oft forgotten is that, despite the pushback from the more traditional central banker, QE has potentially given this trend further impetus. Valuations of tech giants and eyewatering multiples has ended up creating and exacerbating income income inequality not seen across most of the Western world since the late 1800s. It has arguably never been more visible. The Covid-19 era fiscal and monetary policies, for example, has allowed Australian billionaires to almost double their wealth.
Why does this matter to the investor?
This new class of billionaires will continue to have a disproportionate impact (more so than historically) upon both the policy environment and the investment landscape. This newer generation of billionaires clearly has no issue using their wealth outside the political sphere to advocate and/or force change. The more cynical view is that it is less to do with climate activism and more to do with the fact that there might now be outsized returns available in the green energy industry over the short to medium term. That is to say, the green transition is happening, the global renewable energy market was already valued at $881.7bn in 2020 (Source: Allied Market Research), and we are near an inflection point in terms of both technology and large scale adoption. Is this particular bid centred on Cannon-Brookes getting in early on a lucrative investment or climate activism?
Our guess at the reality? Two birds with one stone for Mike (he does have form on the climate change issue, to be fair).
4) The Politicisation of Everything
The debate on climate change and the energy transition is one we feel should be a purely economic question. But somehow it has ostensibly become a political debate between left and right, something we see as a megatheme the world over. The level of polarisation Stateside is at levels not seen since the Civil War. The debates across most of the developed world are similar, no doubt helped along by strongmen like Tsar Putin and Emperor Xi in their quest to dismantle a West they blame front and centre for their nations’ historic declines. Putin for the chaos after the fall of the wall (which arguably paved the way for his rise) and Xi restablishing Chinese “national pride” after the last 200-odd years of insults from the Opium Wars through to WWII and beyond.
But why does this matter to the investor? Simple, too often now we are seeing policy decisions made along broad partisan lines as opposed to being genuinely considered on the nuances/ economics of the matter. As the mainstream political spectrum has (seemingly) become wider and wider, compromise has become harder and harder. The Green Transition a perfect example; the further left you go on the spectrum, the more consideration given to immediacy and less consideration given to the economic impact (both the cost to consumers, how it will be achieved, and broader) while the further right you go it reverses. It is a variable that has become increasingly difficult to account for.