Nick Griffin is the Chief Investment Officer of Munro Partners. Mr Griffin will present an investment idea at the Sohn Hearts & Minds conference in Tasmania on November 18.
The global tech giants are in the penalty box right now. After a decade of strong growth, with most of them reaching $US1 trillion in market cap, they have ultimately become more sensitive to the macroeconomy than they have been previously due to their enlarged size. As the economy slows, so too has their revenue growth.
However, what has surprised us a little is not their slowing growth but their inability to manage the cost base better in a downturn. As predominantly digital businesses, they should be able to adjust the cost base better than more traditional companies. But so far, while management has talked a good game like hiring freezes, they have continued to spend.
Meta (previously Facebook) is the most egregious example, who looks set to spend in excess of $US100 billion in corporate expenses and capex in 2023 building out founder Mark Zuckerberg’s metaverse ambitions.
While the sell-off does look overdone, the decision from here is which one of these companies can manage costs to a slowing revenue environment and ultimately improve shareholder returns. For us, Amazon and Google have the management teams and the opportunity to do this and look best placed to solve this over the coming quarters. Meta, on the other hand, looks likely to be stuck in the penalty box until the metaverse investments start to pay off … if at all.
For us, the obvious winners are utilities that will need to be incentivised to build the transition – so think the renewable power that will drive the clean economy. Here we like companies like Nextera Energy in the US and RWE in Germany.
Beyond the utilities, there are also many opportunities in electric vehicles and home generation. But the ones we are most bullish on are the forgotten ones, where some don’t realise how important they are to the transition.
Here we would flag LNG. While gas is a fossil fuel, it is essential to replace coal in countries like China, India and more recently Europe. Cheniere Energy, based in the US, is the second largest LNG exporter in the world and looks well-placed to fill this need over the coming decades.
The semiconductor stocks have been horrible in 2022 as the economy has slowed, and customers have begun to unwind the double ordering they were doing during the supply shortages in 2021. This will ultimately lead to a great opportunity to invest in an area we see as the oil of the digital economy.
A company we like but had missed in the previous semiconductor cycle is Marvel Technologies. The company focuses on networking products that are vital to how we connect to the cloud. As cloud computing grows, Marvel grows, and we see nothing to suggest this opportunity has gone over the medium term.
Short exposure is relatively small currently, but for the ones we do have, there are two main areas we are currently focused on. The first is industrials, where we think the slowing economy that has gone through housing, retail and technology stocks will ultimately lead to a slowing capex environment for most industrials.
The second area is China, specifically Chinese listed equities. While clearly not a new idea, we suspect that government policy will ultimately see capital continue to leave the country, pressuring the equity market and the ability of Chinese corporates to raise financing.
For us, it was Amazon. We are long-term supporters of the company, and while we halved our holding at the start of the year, we were looking to get bigger in the holding at some point and were hopeful that new CEO Andy Jassy would be able to show some more concrete progress towards improved profitability in the retail business.
Unfortunately, the economic slowdown and some over-investment during 2021 means it is taking longer to turn things around, and profitability shrank in the third quarter versus the second quarter. While we remain confident that Jassy can right the ship, it is taking longer than we hoped, and that was our biggest disappointment.
While we are a little late, we recently added pharmaceutical mega caps, Eli Lilly and Novo Nordisk. Both companies are at the forefront of commercialising GLP 1’s for the treatment of obesity.
Previously, pharmaceuticals were used to treat less than 5 per cent of morbidly obese patients. However, with the introduction of easy-to-use drugs such as Ozempic and Mounjaro, we now see this treatment expanding to the wider population to prevent Type 2 diabetes and the related co-morbidities.
Both companies appear to have a blockbuster on their hands here, and we are excited about the earnings growth ahead.
Lupino, Little Collins St. Richard Lodge and his team make the best crumbed veal in Melbourne and always have a good service and a good Barbera to accompany it.
Apart from the Invest in the Journey podcast from Munro, I recently started listening to a podcast called The Knowledge Project, which is full of helpful insights from experts on how to make better decisions, keep your head and continue being nice to your family when things aren’t quite going the way you want them to, which has been happening a bit in 2022!
This article was originally posted by the AFR here.
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