Alec Cutler
Decades of underinvestment in the foundational needs of nations, including in critical energy infrastructure, is creating a new set of opportunities for global equity investors, according to Orbis Investments Portfolio Manager Alec Cutler.
Cutler uses what he calls the ‘hierarchy of needs of a nation’ to identify areas where capital investment has been scarce, and market expectations remain low. Orbis is identifying value-based opportunities across energy, defence and critical infrastructure where market expectations no longer reflect the economic importance or future cash-generating potential of the businesses involved.
His contention is that developed economies have spent decades over-investing in higher-order “wants”, including entertainment and technology, and comparatively less on the foundational systems needed to keep them running. Awareness of that imbalance is increasing, Cutler says, but rebuilding those foundations will take years.
“The opportunity we see now is where enormous new demand is meeting parts of the economy, like energy infrastructure, that have been neglected for decades,” Cutler said.
“AI might sit near the top of the pyramid, but it cannot function without reliable electricity underneath it. Follow that demand down the hierarchy and you get to power generation and natural gas and the investment case for the infrastructure needed to deliver it.”
“That is where we think some of the more compelling investments are and where the market may be still mispricing the opportunity.”
The investment opportunity beneath the AI build-out
The build-out of data centres globally is an example of the hierarchy of needs investment thesis in action: investment at the top of the pyramid is creating new demand, and scarcity, in the systems beneath it.
For Cutler, it’s an example of how his adaption of Maslow’s Hierarchy of Needs works as an investment framework: investment at the top of the pyramid creates new demand and potential scarcity, in the foundational systems beneath it. In this case, AI is creating opportunities in natural gas, power generation and critical energy infrastructure.
It also strengthens the case for looking beyond the initial data centre build to the recurring inputs needed to keep it operating.
“The internet build-out was infrastructure that lasts forever,” Cutler said. “AI is consumables because the chipsets, which account for the majority of the capital spent on AI infrastructure, wear out every three to seven years and need to be replaced. If you must replace something at that rate, that’s a consumable.”
Fibre laid during the internet boom, by contrast, can carry data for decades.
“That gives demand for these critically important chips a much more annuity-like profile. And the multiple warranted by a more recurring demand stream can be higher than the market is assigning today,” Cutler opines.
Cutler stresses, however, that the hierarchy is not a broad thematic call on the energy sector but rather a way of identifying where structural demand is building. For Orbis, a value-driven, bottom-up investor, the investment case ultimately depends on whether that demand is mispriced.
Multi-asset opportunities with a ‘value’ filter
While pockets of the energy complex have been caught up in AI enthusiasm, Cutler has identified a US natural gas business that remains an underappreciated AI enabler.
He points to Pennsylvania’s Marcellus region, where large quantities of gas have historically been constrained by pipeline capacity. Orbis’s investment in US natural-gas producer EQT Corporation (NYSE: EQT) reflects the view that rising power demand can create another route to market.
“EQT’s Appalachian assets sit within one of the most prolific gas producing regions in the US,” explains Cutler. “Rather than transporting gas long distances, it makes economic sense to generate electricity near the gas field, use it for AI computing and transport the resulting data through fibre.”
Cutler says opportunities can also exist in higher-order “wants” further up the ‘hierarchy of needs’ such as in entertainment and technology, though selectivity is key. At this point, expectations may already be reflected in valuations, making identifying company-specific mispricing particularly important.
Nintendo Co Ltd. (TSE: 7974) is one example of the differentiated, idiosyncratic opportunities Orbis is finding at the top of the pyramid. Orbis holds Nintendo in its Global Balanced multi-asset strategy, attracted by the value it sees in its intellectual property beyond gaming consoles as the business expands into films, digital content and theme parks. For Cutler, it is a stock-specific opportunity driven by the gap between the market’s expectations and the value Orbis sees in Nintendo’s broader franchise.
Rethinking where safety sits
Cutler applies the same contrarian lens to fixed income within Orbis’ multi-asset strategy, pointing to what he sees as a secular shift towards higher inflation.
Against that backdrop, Orbis sees selective opportunities beyond developed-market sovereign bonds, particularly where higher real yields are accompanied by comparatively disciplined fiscal settings. In markets like Brazil, Norway and Iceland a combination of real yields and tighter fiscal settings can compare favourably with larger developed sovereign markets.
“If inflation is running above 3 to 3.5 per cent, historically bonds haven’t been a diversifier against equities,” Cutler said. “But that creates opportunities in a multi-asset portfolio. We’re finding much higher real yields in places like Brazil and Iceland, while some emerging markets are behaving more like developed markets should from a fiscal perspective.”
For Cutler, the common thread across asset classes is to look beyond conventional labels of safety and risk and focus on where valuations adequately compensate investors for the risks they are taking. He adds:
“The point isn’t that everything at the bottom of the pyramid is attractive and everything at the top is expensive. It is about finding where expectations and fundamentals have become disconnected.”