Livewire Christmas Cracker #9: Three thematics to get a boost in 2018

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In our new 'Christmas Cracker' series, each morning through to Christmas we will bring you a top insight from one of our contributors. These will be diverse and could be a macro call, sector view, stock idea, or even some useful tech. Today’s insight is by Nick Griffin from Munro Partners.

When we look ahead to 2018 we would make the following 4 broad observations: 1) Macroeconomic growth is good and generally getting better; 2) Corporate earnings are improving; 3) Tax rates will drop dramatically in the US, which will put pressure on other countries to take similar action; and 4) The ability to repatriate offshore cash is becoming easier for US corporates and again expect other countries to facilitate a similar process.

The question we ask all corporates when we meet them is ‘What are you going to do with all this extra money?’ We believe the answer that may concern some investors is that it will not be returned to shareholders. Jeff Bezos is said to have made the controversial point, ‘dividends are what you pay when you run out of ideas’.

Faced with the growing threat from digital disruptors, (Amazon et. al), corporates need to spend to continuously grow but they also need to spend capital and invest to remain relevant in a rapidly changing landscape. The competitive environment is being disrupted by well-financed non-dividend paying entrants and traditional dividend-paying businesses are limited in their ability to fight back. Following a tax cut, the potential cash windfalls for corporates is significant, and what seems obvious to us is to ‘follow the money’ to find where additional capital will be allocated and invest in the likely corporate beneficiaries.

Three thematics for 2018

The key areas we see that look likely to get a boost in 2018 and beyond include:

1. Digital Transformation: A great catch phrase at the moment, but we ultimately expect corporates to adopt new technologies at an accelerating rate and expect Cloud Computing, Data Analytics, AI and Robotic Process Automation to grow at an accelerating rate. Likely beneficiaries include Blue Prism, Microsoft and Accenture.

2. Automation: Most companies we meet give us the impression that they are currently engaged in a fulfilment arms race. The demands of 24-hour delivery and just in time inventory management require heavy investment in automation of factories, sortation centres and infrastructure. Robotics, Machine Vision, Conveyer Systems and the Electrical Grid all look like good areas to invest and hence Kion, Cognex and ABB should benefit.

3. Transformative M&A: The changes in the US tax system and the ability to repatriate offshore cash means a whopping $1.4tr in US corporate offshore cash holdings can return to the US. With money to spend and increasing pressure on established business models, we suspect many management teams will choose to acquire to either transform their business or scale up in the face of larger competition. This is positive for advisory firms like Goldman Sachs, Evercore, Moelis and positive for the potential targets such as Video Game publishers, Content providers and finally for a potential prize target like Netflix.

For further insights from Munro Partners please visit their website

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