Four listed leaders for the biggest global megatrends

There is a striking duality in play when it comes to the human race. At the same time, we are both the biggest threat to our own existence and the greatest opportunity to survive and thrive. 

As whilst that might sound dramatic and has long been the case, never before has there been so much to play for, for so many of us.  

Ignoring wars, pandemics and other extremities of human behaviour, the ongoing growth of the human population places pressure on our ability to exist and be supported by planet earth - and we need to make rapid and significant changes if we are to be to support our lifestyles long into the future.

The companies that will fare best in the future are already pivoting towards these changes and opportunities, but do you know who they are?

Livewire Markets was fortunate to be invited to an event hosted by Morgan Stanley in Melbourne, to hear from demographer Bernard Salt AM and Portfolio Manager Todd Warren from Tribeca Investment Partners, in a discussion on the biggest demographic megatrends and companies that will thrive in this environment.

Below is a summary of the key themes in the presentations. 

The driver behind the megatrends comes back to population growth

The UN anticipates that the global population will peak at around 10.4bn in the 2080s - we hit 8bn last year.

“To sustain our needs such as food, energy, space, we need to look for alternative ways of doing things,” says demographer Bernard Salt.

To add to the complexity of the situation, Salt notes that there is likely to be a skills shortage - our populations are ageing, and birth rates are not at a level that will be able to sustain and support this.

It’s one of the foremost concerns of our time and driving megatrends in terms of the green energy transition, digitisation and automation - including in the agricultural space.

Being at the forefront of change is a massive opportunity.

Salt argues that Australia’s best opportunities lie in energy and agriculture for the future. Unsurprisingly, these sectors are a heavy focus of Tribeca Investment Partner’s 2050 strategy which focuses broadly across decarbonisation activities.

The big financial opportunity in decarbonisation

While we commonly think of decarbonisation in terms of energy needs, the truth is many of our activities emit greenhouse gases and will need to evolve for us to continue to enjoy a certain quality of life as the population continues to rise. 

Greenhouse gas emission by sector

Source: Climate Watch, The World Resources Institute

The financials might paint a terrifying picture of required spend - but it’s worth remembering this creates enormous opportunities for companies to benefit.

“China needs to spend $17tr on power and transport alone to achieve netzero by 2060. It’s looking at $2tr per year to decarbonise. And that’s just China. Every country in the world is spending,” says Warren.

Source: UBS

The decarbonisation theme could be one of the greatest financial opportunities the world has seen, even just looking at its impact on individual sectors and industries.

“Decarbonisation could have 3-4x as large an impact on global commodities demand as the urbanisation of China had,” Warren says.

The 2050 strategy

Tribeca’s 2050 strategy focuses on decarbonisation and electrification, but it comes with a stringent approach to investment. There are often a range of concerns with ESG-focused strategies, with one being that companies are selected more for ESG credentials rather than balance sheets. Warren avoids this with a strict approach to both.

To avoid this problem, companies must fit the following:

• Strong earnings and bottom of the cost-curve

• Strong compounding growth profiles

In addition to this, Warren notes the 2050 strategy ensures a diversified allocation to capture upside from multiple decarbonisation verticals and make heavy use of on-the-ground research for hard-to-understand sectors.

Warren uses a ‘barbell’ approach to building the 2050 strategy. This entails the use of long-standing defensive names to act as core holdings and support, and satellite tilts using cutting-edge small caps and private companies.

The names of the future

There are a number of long-established, profitable names that feature in the 2050 strategy. Some of the big opportunities Warren tips for the future follow, and there’s even an Australian small-cap on the list.

1. Freeport-McMoRan (NASDAQ: FCX): Freeport is a top copper producer and the only copper miner in the S&P 500. Copper is an essential component in battery technology for the EV revolution. “Freeport is well placed to capitalise on higher copper prices and further capital returns,” says Warren.

2. Bayer AG (DE: BAYG): Bayer is a leading agricultural and pharmaceutical business with a significant pipeline in seed technology. Tribeca views it as being cheaply valued at the moment on a 7.2x PE. 7x EV/EBITDA and 18.6% ROE.

3. Darling Ingredients (NYSE: DAR): Darling Ingredients is a leader in the processing of waste oils and are rapidly deleveraging. “It has cornered the sustainable aviation fuel market and has policy tailwinds to support this,” says Warren.

4. LGI (ASX: LGI): LGI is a biogas company - that is, they take methane emissions from landfill and convert it into the power network. It’s the only biogas pure-play company on the ASX. It also receives a number of carbon credits for its activities which it can sell for additional revenue. It has a 30% EBIT margin and 67% compounded annual growth rate in EBIT since 1H 2021.

The private companies leading the charge

The 2050 strategy also uses private companies and carbon credits as part of its allocation. Two private companies that Warren tips for future growth are:

• Stacked farm is a global leader in vertical farming. It already has significant client bases in Grilled and Guzman & Gomez. It has had a compound annual growth rate of 63% in EBITDA.

• Mute offers electric mopeds on a subscription basis. It has a 35% EBIT margin.

When it comes to carbon credits, Tribeca focuses on nature-based credits which is still a developing space but one with potential.

“The price of carbon is too low. People change their behaviour if there is a hip pocket incentive,” says Warren.

Profitable change

While it can be easy to dismiss decarbonisation and other such themes as heart before finance, Tribeca is a firm believer you can make money from the essential global change with the right focus. The 2050 strategy is testament to this.

Either way, a megatrends like decarbonisation is not something that individuals or companies can ignore - the population growth is inevitable and the required spend to support the population unavoidable. 

Thinking of sustainability is not just a matter of the heart, it might just be essential for future investment returns.

This article was first published for Livewire Markets on Monday, 27 March.