3 investment themes worth backing in 2022

Hue Frame

Frame Funds Management

Theme 1

Battery market consolidation

Looking back at 2019, we initiated coverage on the battery metals sector and mentioned at the time the market had reached an inflection point. We noted that ‘Recently, an inflection point has been reached on the demand side. Investors have become extremely bullish on Tesla’s electric vehicle and battery market demand forecast’. We saw a market that went from being over-supplied with key battery components, to a market that was expected to be undersupplied over the next 5 years.

Two years later, we have seen the demand for these key components continue to accelerate, even as additional supply is brought to market. This is benefiting the companies that are producing these raw materials, Syrah Resources, Pilbara Minerals, Lynas Rare Earths, and Allkem, have risen by 246%, 1038%, 322%, and 230% respectively, from the 1st of January 2020 to the 24th of December 2021.

In our view, the next stage of this secular theme is the consolidation and integration, both vertically and/or horizontally, across the supply chain. We have already seen this with a merger between Galaxy Resources and Orecobre (now named Allkem). This merger improves their production capacity, allows them to gain market share, and at the same time, ideally improves their profit margins.

This theme can be further demonstrated by the recent agreement between Syrah Resources and Tesla Inc. They announced an offtake agreement with Tesla Inc to supply natural graphite from its vertically integrated production facility in the USA. This agreement locks in a price and the materials for Tesla Inc, and production capacity for Syrah Resources.

We expect that there will be further consolidation within the battery material producer and explorer space. In our view, it is prudent for the larger and more established companies, to acquire junior explorers with significant deposits. Also, a focus on acquiring other businesses that may operate within different parts of the supply chain, battery production facilities for example can be good business.


Theme 2

Mid-cycle bull market

As economies recovered from the initial shock of COVID-19 in February 2020, global central banks and governments attempted to reflate their economies, which we believe they have managed to do. Now that economies have moved past the initial reflation phase of the current market cycle, we now focus on the next stage of the bull market. In our view, this stage can be defined as mid-cycle.

This is essentially where policy-makers are restraining stimulus, the earnings cycle has picked up, demand is slowly rising (independent of policy), and economies are growing at above trend.

Historically, when equity markets are within the mid-cycle, we see mid to high single-digit growth for equity markets (in 2016, the S&P 500 rose ~12%).

Currently, the US Federal Reserve is restraining stimulus, by reducing their asset purchases by $30bn a month, with an expected end date early-to-mid 2022. After the wind-down of their monthly asset purchases, they have communicated to the market that they may look at lifting interest rates after that time, however it is data-dependent.


This phase of the market cycle can be challenging to manoeuvre, as on the horizon is the late cycle stage. Generally, this is when policy makers surprise on the tighter side to restrain demand significantly. Equity markets generally underperform during that period.

Investors should focus on a pivot in policy from central banks which may be ahead of current market expectations. This pivot may indicate we are entering the final stage.

Theme 3

Inflation

In our ‘2021 Themes’ document, one of our ‘tactical’ themes was an inflation spike. We continued to cover its development over the course of the year in issues 2 and 10 of ‘In the Frame’ and it is now back as a main theme for 2022.

2021 saw sustained supply chain bottlenecks combined with elevated consumer demand and wage growth to fuel inflation to levels not seen since the 1980s. The CPI in the United States is now running at 6.8%, with the United Kingdom at 5.1% and Australia trailing at 3%. As gas shortages hit Europe, UK CPI numbers are expected to continue to rise. Australia on the other hand is comparatively behind, however the most recent CPI figures hail from a quarter Sydney and Melbourne spent in lockdown.

The battle for 2022 will be how global central banks decide to deal with inflation. Most seem content to push the inflationary envelope to ensure the economy is strong enough to withstand an increase in interest rates. The Federal Reserve has begun tapering, however, continues to reinforce that interest rate increases are disconnected from their tapering timeline. The Reserve Bank of Australia will re-evaluate their bond purchase program in the February meeting, however, have indicated they do not see the economic conditions necessary for a rate hike materialising until 2023/2024.

With this in mind, we believe we will see inflation remain at elevated levels in the United States and continue to increase in Australia and the United Kingdom. If this occurs and central banks sit on their hands, inflation will pose a real threat to the continued economic recovery in 2022.

Consumer purchasing power will deteriorate, which would result in money being withdrawn from markets as the cost of living rises and wages lag. We will continue to closely monitor consumer and producer prices, as well as central bank rhetoric over the next 12 months.

There are a variety of options when positioning a portfolio for a high inflation environment. Real estate assets generally hold their value as rental income typically keeps pace with inflation. Investing in REITs (Real Estate Investment Trusts) can be a good way to get exposure to the property market without needing excessive amounts of capital.


Commodity markets also tend to outperform in an inflationary environment. This is because increased demand for goods flows down the supply chain and causes price rises in base production materials like copper and oil. Investments in listed copper and energy companies may be a good way to get exposure to this trade.

Within the original version of 'Investment themes worth backing in 2022', we include three tactical themes worth monitoring.

They can be found here: (VIEW LINK)

........
This information is prepared by Frame Funds Management Pty Ltd (ACN 608 862 442) (Frame Funds, we or us) is a Corporate Authorised Representative (CAR No. 123 9068) of Primary Securities Limited (ACN 089 812 812 635) and is intended only for "wholesale clients" within the meaning of sections 761G and 761GA of the Corporations Act 2001 (Cth). This material is not intended to constitute advertising or advice (including legal, tax or investment advice) of any kind. These materials are not to be distributed to any person who does not qualify as a wholesale client and must not be copied, reproduced, published, disclosed or passed to any other person at any time without the prior written consent of Frame Funds. Primary Securities Ltd (ACN 089 812 635 635, AFSL 224 107) is the Trustee of, and issuer of units in, the Frame Futures Fund (Fund). In deciding whether to acquire, or to continue to hold, units in the Fund please read the current Information Memorandum available from Frame Funds. Past performance of the Fund is not a reliable indicator of future performance. The value of an investment in the Fund may rise or fall. Returns are not guaranteed by any person. Total returns are calculated before tax and after ongoing management costs. In preparing this information, we have not considered your investment objectives, financial situation or personal circumstances and therefore the Fund may not be suitable for you. Neither Frame Funds, Primary Securities Ltd, nor any of their respective related parties, directors or employees, make any representation or warranty as to the accuracy, completeness, reasonableness or reliability of the information contained in this publication or accept liability or responsibility for any losses, whether direct, indirect or consequential, relating to, or arising from, the use or reliance on any part of this material. Any rates of return, forecasts or estimates contained in this publication are not guaranteed. The content of this publication is current as at the date of its publication and is subject to change at any time. It does not reflect any events or changes in circumstances occurring after the date of publication.

4 stocks mentioned

Hue Frame
Founder & Portfolio Manager
Frame Funds Management

Hue Frame is the founder of Frame Funds Management and Portfolio Manager for the Frame Futures Fund and Co-Portfolio of the Frame Long Short Australian Equity Fund.

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.