The best way to predict your future is to create it.
- Abraham Lincoln
Our mission is to safeguard the future financial prosperity of our clients. While many find comfort in what may have worked in the past, we know that our goals can only be achieved by boldly looking into the future. As such, we are completely focused on finding investment opportunities that offer compelling upside convexity, while managing downside risk. Our purpose is not to time markets, but to identify ascendant industries and best-of-class companies and have the patience to reap substantial rewards.
2020 has been a year that has dispelled our conception of normalcy, and broken open a whole new set of challenges and possibilities. The past year has proven that predicting set outcomes and their second and third level effects is an impossible task, and yet there are certain seismic trends that have been set into motion from which we will never look back.
We have identified a few key trends that we believe will change our world over the next five years and beyond. Although we fully expect that other opportunities will present themselves in the future, these key trends will be the focus of our investment strategy for the foreseeable future:
Green Tech & Infrastructure
Over the next thirty years Europe is set to invest over 7 trillion euros in public and private funds to reach climate neutrality as part of the EU Green Deal. In the US, the incoming Biden administration also has ambitious plans to encourage significant investment in next generation green energy infrastructure. China has stated that it intends to reach net carbon neutrality by 2060, which will also require continued, enormous investment in its own green infrastructure.
We have been following this theme closely and have identified a number of high potential companies that have already posted impressive returns. Another key issue in the transition to green energy is the availability of key resources. One of those is copper, the most critical metal for electrification. Our research suggests that current demand expectations for the use of copper are far too modest and that there will be more demand than supply for the foreseeable future. As such, we believe that responsible copper mining companies will benefit tremendously from the coming green energy transition.
Biotech & Healthcare
Even before the Covid-19 crisis, the biotech industry was approaching a tipping point where advances in genetic research and big data computing were opening up extraordinary possibilities in terms of analyzing and treating disease.
Our thesis going forwards is that the inspired mission to create a Covid-19 vaccine will serve as a generational accelerant towards exploring the ways that we will be able to observe and influence our bodies. From a demographic perspective there will continue to be increasing investments in prolonging longevity and engaging in the pro-active deterrence of disease. And yet, as investment managers Baillie Gifford so aptly pointed out: “If we were to condense our relatively short 200,000-year history into a single year, then most of the medical progress has occurred in the past four hours.”
We are confident that the most stunning advances in biotechnology have yet to occur, or might not yet have even been imagined.
Digitization and Cloud Computing
The rise of the digital economy is more than just a few big technology platforms or shifting existing business to an online format. Digitization, computing power and availability, new 5G connectivity technology and the hardware and infrastructure necessary to power it all are evolving at break-neck speed, especially in the areas we don’t see. These advancements are enabling the creation of new businesses and novel business models that will fundamentally change how we live in the years to come.
Cloud computing, for example, provides companies access to computing power for a fraction of the cost and complexity of maintaining their own IT infrastructure, completely changing the way they do business and allowing smaller players to more easily compete. As computing power improves and cloud computing technologies are further leveraged, new use cases will appear and businesses will be disrupted. We see a number of exciting opportunities among the companies developing these technologies as well as the hardware manufacturers that enable them.
Monetary Debasement and Negative Real Interest Rates
The Covid-19 crisis sparked a collapse in market liquidity, which was only alleviated by a staggering amount of Central Bank intervention. There continues to be such demand for “riskless” government bonds, that Central Banks have expanded their balance sheets to previously unimaginable levels. Moreover, developed world governments have been able to finance massive deficits without an adverse impact on interest rates.
They did what had to be done, but there stands to be a reckoning down the road. The least painful variation of dealing with these massive debt burdens will be to allow for a prolonged period of negative real rates that will diminish the future value of government liabilities. This can also be called inflating away debt. Negative real rates occur when the interest rate is lower than the rate of inflation. The governments of the economically most successful nations on earth have committed to not raising rates for the foreseeable future. What’s more, the US Fed is committed to “Average Inflation Targeting”, which implies that inflation rates can rise over the targeted rate of 2% for a significant period of time before they would take action and respond with higher rates.
This opens the door for considerable inflation that will not be offset with interest rate policy. Such an environment favours real assets, precious metals and commodities whose prices will rise to offset the diminishing value of hard cash or liabilities priced in fiat currencies.
We do not know the magnitude of the changes that the next five years will bring. However, we will continue to test and update our views on the aforementioned world shaping trends. The narratives are clear, but they will be tested on an ongoing basis. In time like these we will rely on our experience of having navigated through previous market cycles to keep our resolve, while being very much aware of what risk new risk factors might come into play.
We look forward to the rich possibilities that lie ahead and to safeguard and grow our clients’ assets, not by fearing change, but by profiting from it.
The BlueOrange Bank Investment Management Team