Three themes that will shape the coming decade
Major shifts in the way the world does business can have vast, long-term impacts on economies. They also offer fantastic investment opportunities for fundamental investors.
Three themes have emerged which will be major drivers of stock market performance over the coming decade: Deglobalisation, Decarbonization and De-dollarisation. We explore these in more detail below..
The Deglobalisation trend started to emerge in 2019 with the US-China trade war. The trend has continued ever since. Australia has had its own trade war with China, and the Russia-Ukraine war has highlighted the risks inherent with concentrated supply chains.
Over the next decade, governments and companies will prioritise supply chain security over cost. Companies operating in friendly countries with a stable rule of law will be favoured as business partners.
Australian companies will be net winners from this trend. Australia is a friendly country with stable government and rule of law. Australia also has the resources that the world needs. Not just iron and coal. But also uranium, gas and decarbonisation metals. As an example, Santos (ASX: STO), an Australian natural gas and LNG producer, is well positioned to benefit from higher energy prices as a result of increased global demand for energy security and lack of investment in traditional energy projects.
Mexico is also a winner from deglobalisation. Mexico has experienced record levels of foreign direct investment as a result of US companies moving supply chains out of China. In the Firetrail S3 Global Opportunities Fund, we hold Mexican airport operator Grupo Aeroportuario del Pacifico (BMV: GAPB). We believe the company is set to benefit materially from a higher volume of international business arrivals and rising domestic wealth.
Today, almost all companies we speak to are taking carbon emissions reduction seriously. Australia will be a major player in the shift to a net-zero global economy.
While it would be fantastic to switch from fossil fuels to renewables today, technology and infrastructure still has some way to go. In the meantime, we need a baseload energy source to supplement intermittent renewables like solar and wind.
Coal is currently the major source of baseload energy. Gas is starting to play more of a role given it is less emissions intensive than coal. In the future, uranium and hydrogen could provide the world with near-zero emissions baseload energy. Under all scenarios, Australia is a winner. Australia has significant stores of coal, gas, and uranium, and is developing clean hydrogen technology.
To decarbonise, the world will also need batteries. To make batteries, we need lithium, rare earths, nickel, cobalt and copper. We hold Lynas Rare Earths (ASX: LYC) in our Australian portfolios. Lynas is the world’s only rare earths producer of scale outside China and a key beneficiary of increased demand for energy security and battery minerals.
In the Firetrail S3 Global Opportunities Fund, we hold several positions contributing to decarbonisation. For example, Weyerhaeuser (NYSE: WY) owns more than 12 million acres of timberland which extract over 30 million tonnes of CO¬2 from the atmosphere each year. Over time, we expect Weyerhaeuser to be well positioned to sell some of the world’s highest quality carbon credits into a rapidly emerging US carbon credit market.
Today, the US dollar holds the crown as the only global reserve currency. Over 80% of global foreign exchange transactions involve US dollars. However, the US dollar’s dominance is starting to show cracks…
Since 2020, US money supply has increased by over 40%, budget deficits are running at over a trillion dollars, and national debt is at elevated levels. The result is higher inflation in the US, putting pressure on the US dollar’s reserve currency status.
Will another currency emerge as the global reserve currency in the coming decades?
Our view is no. However, we can see a world in which a group of three or four currencies share dominance. These would include the US dollar, the Euro, and the Chinese Yuan.
If you have three or four major currencies and no clear reserve currency, you still need a reserve base. We believe gold can play that role. Gold was the world’s reserve currency for 5,000 years. It was only usurped by the US dollar 40-years ago following the breakdown of the Gold Standard.
We believe the US dollar could potentially lose its absolute dominance. Other currencies will grow in importance. And gold can play a major role as the reserve base. A greater role in world finance will put upward pressure on the gold price to the benefit low cost, long life Gold miners such as Newcrest Mining (ASX: NCM) held within the Firetrail Australian High Conviction Portfolio.
Deglobalisation, Decarbonisation and De-dollarisation are likely to be dominant themes in markets over the coming decades.
Once again, the lucky country is well positioned to benefit from three key themes that will shape the next decade. However, there will also be many stocks and sectors that will benefit globally as these themes play out across borders.
At Firetrail, we aim to identify the best opportunities and build high conviction portfolios of our best ideas. Whilst we prefer to focus on stock selection as opposed to macro-economic trends, we are finding compelling bottom-up opportunities across our Australian and Global equities portfolios that will be set to benefit materially from Deglobalisation, Decarbonisation and De-dollarisation in the coming years.
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Managing Director at Firetrail Investments as well as Portfolio Manager for the Firetrail High Conviction Fund and the Firetrail Absolute Return Fund. 34+ years’ experience investing in equity markets.
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