Nick Griffin

We are two to three years into a global AI boom, not a bubble, according to Munro Partners founding partner and chief investment officer, Nick Griffin.

“When I hear the word bubble, I hear valuation bubble. The last time we saw this type of bubble was in 1999, and that was a valuation bubble,” Griffin says.

“The NASDAQ actually went up more than 90 per cent that year.”

But Griffin points out the NASDAQ is up less than 20 per cent this year and the biggest companies in the S&P today, like Google (NASDAQ: GOOG), Nvidia (NASDAQ: NVDA) and Amazon (NASDAQ: AMZN), are trading at price-to-earnings (PEs) in the mid-twenties not the 99-to-100-times earnings which were seen during the tech bubble.

“It doesn’t feel like we’re in a valuation bubble. I think what people are questioning is whether we are actually in an AI spending bubble?” he says.

Spending on AI might be high, but that doesn’t necessarily equate to a spending bubble. Griffin suggests that the adoption of AI needs to be compared to the smartphone cycle.

“When the smartphone came along, there were hundreds of Apps on your phone that actually made the smartphone functional. Apps such as Uber, Spotify, Facebook, Google, or even Qantas, allowed users to perform tasks from their phones. The proliferation of all of those apps is what basically drove Apple to become the biggest company in the world because the device was so useful.”

He says AI is going to be very similar, with thousands of Apps being developed using AI technology, either for programming, or the likes of ChatGPT, Microsoft’s Copilot and Google’s Gemini. All of the Apps need to run through the AI large language models, which in turn, all need to run on the cloud.

As a result, Griffin says, cloud demand has accelerated with Azure growing 40 per cent, Amazon growth in the mid-twenties and new entrants like Oracle becoming cloud providers. The cloud providers must then buy more semiconductors to manage increasing demand.

“Hyperscalers are spending all this money and investing in the infrastructure, because they are getting the demand signals from all of these applications that are using AI,” Griffin says.

“So, the simple way to think about this is, demand is basically exceeding supply.”

As the use cases of AI continue to grow and people continue to use the services, AI companies will need to build more capacity to meet demand, which means the outlook for companies involved in the industry, from the applications to the semiconductors, is still robust.

“If companies are going to spend trillions building out AI infrastructure, our job is to invest in the companies that enable that construction, because that’s trillions of revenue for those companies,” Griffin says.

Griffin runs Munro Partners’ Munro Global Growth Fund and Munro Concentrated Global Growth Fund and is also responsible for the formulation and implementation of the fund manager’s proprietary investment process.

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Nick Griffin

Munro Partners has won Best Australian Based Global Equity Manager at the 2024 Australian Fund Manager Awards.

The Australian Fund Manager Awards is in its 25th year. The awards celebrate excellence in funds management while making a meaningful impact through philanthropy.

Munro Partners founder and CIO, Nick Griffin says the award win acknowledges the team’s persistence in building high-performing funds that provide positive returns for its investors.

“Our philosophy is based on finding long-term winners by identifying sustainable growth trends that are under-appreciated, not well understood and mis-priced by the market. This gives us the foundation to find those few great structurally growing companies and build a portfolio of winning stocks, that generate strong fund returns over time.

“Our investment team has a proven track record of delivering strong returns for investors, thanks to the calibre and expertise of each of the members. They have all played an important role in building and managing these portfolios to be high performing funds,” he said.

The Munro Global Growth Fund returned 34 per cent net in the 2024 financial year.

Damien McIntyre, CEO of GSFM – the distributor of Munro funds in the Australian market -said this win highlights the strength and expertise of the Munro Partners team.

“The team has an unwavering conviction that finding tomorrow’s winners comes from understanding how and why the world is changing, and investing to benefit from this – and its investment track record bears this out,” said Mr McIntyre.

Munro Partners was a finalist for the International Equities – Alternative Strategies category at the 2024 Zenith Fund Awards and in September 2024, won the Global Equity (above $500 million) category at the With Intelligence HFM APAC Performance Awards in Hong Kong.

Founded in 2016, Munro Partners is a global growth fund manager focused on investing in international equities. It manages the Munro Global Growth Fund, Munro Climate Change Leaders Fund, Munro Concentrated Global Growth Fund and Munro Global Growth Small & Mid Cap Fund.

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Nick Griffin

Interest rates could rise in the months ahead in Australia, inflation proving especially intractable in Australia, while US technology stocks are likely to continue rallying which could underpin growth in Asian markets biased towards the technology sector, according to GSFM and its fund manager partners Man GLG and Munro Partners.

While the United States (US) is looking at cuts in interest rates in coming months, the circumstances in Australia are different and do not warrant any rate cuts, according to GSFM investment strategist Stephen Miller. Inflation remains relatively high and sticky, which raises the possibility of the Reserve Bank of Australia (RBA) raising the policy interest rate in August.

“The current RBA forecast issued in May is for trimmed-mean inflation in the year to the June quarter to be at 3.8 per cent. That was upwardly revised from the previous forecast in February. That forecast is likely to be exceeded when the June quarter CPI is released on 31 July, and a ‘4 handle’ is a distinct possibility,” Mr Miller says.

“I think that makes an interest rate hike in August more likely than not.

“Inflation in Australia is proving more intractable than in the US, in part reflecting the more cautious approach to raising the policy rate to tackle inflation. The RBA Governor Bullock has noted that the Board needs ‘a lot to go its way’ to get inflation back to target in a manner consistent with the RBA’s inflation projection. My concern is that ‘a lot is going the other way’,” Mr Miller says.

Turning to US markets, Mr Miller believes that while positive tailwinds from AI might persist and indeed  be supported by Fed easing, there are some nascent risks on the horizon. In large measure associated with huge levels of US government debt.  Unfunded corporate and income tax cuts under a Trump administration may provide a fillip to the economy but that may prove a temporary ‘sugar hit’ as bond yields will likely stay high given the already gargantuan US budget deficit.

“Even if a Trump Administration were to emasculate the US Federal Reserve, making the policy rate a more ‘political’ device, the economic support from such a measure will likely be mitigated, if not frustrated entirely, by higher inflation expectations and higher medium and long-term bond yields,” Mr Miller said.

“The positive valuation environment currently underpinning markets leaves it vulnerable to episodic bouts of volatility where investor conviction comes under strain. The forgoing underscores perhaps the most important and over-arching principle of investing: diversification. That doesn’t just mean via security selection within a particular asset class or sector but also diversification away from both bond and equity risks within multi-asset portfolios,” he says.

Nick Griffin, CIO at Munro Partners, says moderating inflation and the prospect of policy rate cuts are providing a more positive environment for growth equities. He expects US shares to rally whoever wins the US election.

“From an earnings perspective, we continue to see robust growth from AI-related spending driving earnings upgrades for some companies. Over the last quarter, we continued to pick up more data points suggesting that the market is underestimating the long-term potential for earnings growth for the AI enablers. We maintain conviction in this area and see it as the beginning of a multi-year growth runway,” Mr Griffin says.

“As the year progresses, we foresee the market broadening out with a gradual economic recovery later in the year and a focus on the US Presidential Election. Our industrial names such as Schneider Electric and GE Vernova may benefit from an economic recovery, and we will look to broaden our portfolio as and when we see the catalysts for this,” Mr Griffin says.

He notes that Microsoft has guided for an increase in capital expenditure (capex) for every quarter over the past year. “We anticipate this to continue along with their peers, with the peak somewhat off, given we are still in the early innings of an accelerated capex cycle. This bodes well for continued earnings upgrades for high performance computing names such as Nvidia, with a large proportion of the hyperscaler capex coming in the form of Nvidia GPUs for data centres,” he says.

Andrew Swan, head of Asian equities (ex-Japan) at Man GLG, says the technology rally in the US will likely benefit some Asian markets. “The region’s larger tech manufacturers are beginning to see the benefits of AI tech demand moving downstream to AI enabled devices. Asia is disproportionately skewed towards component and device manufacturers so as this trend plays out, we would expect to see a meaningful pickup in demand,” Mr Swan said.

In China, however, he says the economy remains weak.

“On the positive side, external demand appears robust, driven in part by a recovery in capex but also by the efforts made by Chinese companies to expand their geographic client base in the face of ongoing trade tensions with US and Europe. China has worked hard to enhance its exports with other nations and regions, and this appears to be proving successful.

“On the other hand, domestic consumption remains challenged, with more work required to address excess property inventory before we can see any meaningful improvement,” Mr Swan says.

“The third plenum and Politburo economic meeting remain key in terms of seeing an improved policy response to the current issues we see around the lack of reflationary forces and property stimulus. I think for China to navigate this challenging environment around deflation, the market expects more policy support on the demand side of the economy, particularly around consumption. And this is where I think there is some hope, particularly with regards to rural land reform and Hukou reform.

Mr Swan remains focused on bottom-up stock picking in Asian markets. “Within the portfolios, we continue to reduce our exposure to momentum. Key relative exposures on a sector basis include overweights in healthcare, communications services and utilities versus underweights in energy, consumer discretionary and staples. By market, we are overweight in China and Indonesia, equal weight in India, and underweight Taiwan and South Korea,” he said.

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Nick Griffin

The biggest companies in the S&P 500 all grew earnings in 2023 after large structural changes accelerated technology earnings, and this is likely to continue in 2024, led by semiconductor designer Nvidia, which could eventually one day overtake Apple to become the world’s largest company, according to Nick Griffin, CIO of Munro Partners.

High-performance computing companies drove gains in the US stock market in 2023, triggered by the artificial intelligence (AI) revolution. Nvidia led those gains, with its earnings up nearly 400 per cent for 2023 while its stock price has gained around 235 per cent as at 13 December 2023. Nvidia is the world’s most important producer of graphics processing units (GPUs), which enable artificial intelligence (AI) processing. Other technology companies, too, such as Microsoft (up 56 per cent), Google owner Alphabet (up 49 per cent) and Amazon (up 73 per cent) have been able to boost their earnings considerably, driving up their stock prices.

“The big moral of the story for 2023 is that earnings growth drove stock prices, and as soon as interest rates stopped going up, stocks went back to following their earnings.

“We see no reason why that’s not going to continue in 2024. We think this is the iPhone moment for AI,” Griffin said.

“Apple became the biggest company in the world, helped by the launch of the iPhone. Now, if we see a 10-times growth in demand for semiconductors, we think Nvidia will potentially one day become the biggest company in the world.

“The logic is clear enough: the demand for computer chips will become more and more as we move to an increasingly digital world. Innumerable generative AI models are being launched following the introduction of ChatGPT last year. Every time an AI application gets used, it increases revenue for cloud providers and semiconductor companies led by Nvidia.

“Businesses will need all of their data to run on the cloud, and then the cloud providers are going to increase capital spending to support these AI products, and a large chunk of that capital spending is going to end up with Nvidia, which handles the AI processing,” said Griffin.

According to Griffin, it’s not just Nvidia, but the whole semiconductor supply chain that will benefit from the growing use of AI, including Europe’s largest technology company ASML, which makes the machines that produce some of the world’s most advanced computer chips, and Taiwan’s Taiwan Semiconductor Manufacturing (TSMC), the world’s largest foundry or manufacturer of computer chips.

Semiconductors have gone from earning next to nothing in sales in 1977 to expected sales of roughly a trillion US dollars in 2030, with the launch of ChatGPT accelerating semiconductor sales. The chart below shows the forecast increase.

Apart from semiconductor companies, software companies like Microsoft benefit from the AI revolution. “We think software companies are also the biggest winners here. Microsoft is selling their CoPilot product at roughly an additional US$30 per user, which is effectively a huge revenue opportunity for this company,” he said.

The Munro Global Growth Fund invests in semiconductor and software stocks that are driving the AI revolution. Nvidia is the Fund’s biggest holding, accounting for 6.88 per cent of fund assets as at 31 December 2023, followed by Amazon at 6.86 per cent of the portfolio. Cloud service provider Microsoft was another top holding at 5.8 per cent.

Other sectors expected to grow strongly in 2024 include energy efficiency and sustainability companies, such as companies producing nuclear energy, Griffin says.

“Nuclear energy is slowly coming back into vogue. We saw this recently at the COP28 conference in Dubai, with 22 world leaders committed to triple nuclear capacity globally by 2050 compared with 2020 levels. Nuclear energy is the cleanest way to solve the carbon emissions problem,” he said.

Munro’s investment strategies include the Munro Climate Change Leaders Fund, which has exposure to nuclear energy through the stock Constellation Energy, which is a top-performing stock for the fund manager’s climate area of interest this year, given its importance in clean energy production.

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Nick Griffin

“Global equity markets made a solid start to the year in Q1 2023, following a particularly tough year in 2022. Having recognised we were in a bear market early in January 2022, the Fund has been focused for some time now on three things to become more constructive on equity markets:

1. Long-term interest rates to peak;

2. Earnings estimates to come down; and

3. Time.

“Coming into 2023, we felt confident that two of these three factors had been met, with long term interest rates peaking last October and the bear market passing one year in duration in January. As the quarter has progressed, our confidence has increased.

“While market participants still hang on every inflation print and Fed meeting, it’s important to note that the recent banking woes in the US are basically doing the Fed’s job for them, and the resulting tightening in lending standards means the inflation battle should soon be over. With this tightening cycle nearing its end, we essentially have one more macro concern to worry about before normal service resumes and that is the age-old question: are we going to have a ‘hard’ or ‘soft’ economic landing as inflation comes down?

“Here we see two possible outcomes. The global economy could muddle through this challenging environment supported by the China reopening, the energy transition spend, and the reshoring dynamic. Alternatively, the economy could enter a traditional recession whereby housing weakens, personal finance dries up and financial institutions get into difficulty via poor lending and balance sheet practices. Interestingly during Q1, the market started by believing in the ‘soft’ outcome and ended worrying about the ‘hard’.

“We are somewhat indifferent as to the outcome. With long term rates peaking, many of our holdings have returned to doing what they should be doing – following their long-term earnings prospects. The pressure from rising long term interest rates has been relieved, and hence valuation multiples have stabilised.

“We now see many instances where market participants can look through the valley and see earnings prospects improving and rewarding stocks accordingly. In our High-Performance Compute Area of Interest (AoI), the launch of ChatGPT and Microsoft’s adoption of generative AI across its product suite has seen accelerating demand for high performance semiconductors, ultimately benefiting our key holdings in this space and allowing investors to look through the economic malaise to improved future earnings, with their stock prices responding accordingly.

“Elsewhere, the reopening of the Chinese economy is likely to see a wave of Chinese travellers returning, with luxury goods spending likely to benefit. Again, our Emerging Consumer holdings are seeing improving earnings prospects despite the economic slowdown, and stock prices are responding accordingly. This is indeed welcome news. While starting the year somewhat conservatively positioned, we have increased the Fund’s holdings in both these specific areas as this news developed over the quarter and see this as a good sign that this bear market is nearing an end.

“While there is no doubt there are a few bumps to come, we eventually expect earnings estimates for the whole market to bottom at some point and expect other AoIs to exhibit similar earnings acceleration and stock performance as market participants eventually look through the valley to the other side of this difficult period.”

Read the report.

By Nick Griffin, CIO

The post Market outlook: Quarterly update appeared first on AdviserVoice.

Nick Griffin

In a world of artificial intelligence (AI), semiconductors are the new ‘oil’, says Munro Partners’ founding partner and chief investment officer, Nick Griffin.

During a panel discussion at the Portfolio Construction Forum Markets Summit Mr Griffin told the audience that a deep-rooted structural change will impact markets over the next decade or more.

“As we move into the fourth era of computing, which is the era of AI we will start to see the next big inflection in semiconductor demand,” says Mr Griffin.

“This is a time of exciting possibilities and huge investment potential via artificial intelligence and machine learning technology.

“The miniaturisation of integrated circuit components and the exponential speeding up of computer power enables new technological possibilities, such as AI. This also helps to drive costs down.

“In 1971, Intel’s first chip contained roughly 2,000 transistors compared to Nvidia’s latest graphics processing units which contain 81 billion.

“These technologies enable gigantic volumes of Cloud based real time data to be generated and manipulated from virtually unlimited connectivity.

“We are seeing this used in traffic lights, fridges to predictive chatbots” says Mr Griffin.

With endless possibilities of how AI can be applied, large language models rapidly scaling their parameters and the complexity of problems being solved, consumers and industries are quick to adopt AI functions as their ‘co-pilot’.

“ChatGPT reached 100m users in 3 months, being one of the fastest tech adoptions in history. To provide some perspective, it took Netflix 7 years and Tik Tok 3 years to reach the same amount of users” says Mr Griffin.

The semiconductor industry has grown at about 8 per cent a year over the past 20 years but is now poised to hit a ‘brewing sandstorm’ of accelerated growth.

“As costs continue to fall and the global appetite for high-performing computer power continues to grow, semiconductor demand is increasing exponentially.

“For every big technology company – such as Samsung or Apple – there are dozens of providers further down the supply chain. As global growth investors, we liken investing in these companies to the age-old analogy of ‘selling picks and shovels to miners’,” says Mr Griffin.

One of those companies is Dutch lithography equipment supplier ASML. ASML is now the only manufacturer of the photolithography machines that enable semiconductor design to meet the AI era’s computing power requirements. ASML supplies these machines at very high margins to technology companies like Samsung and Intel.

“When it comes to ASML, we see a path to the doubling of earnings over the next two years, and therefore expect its share price to reflect this over a similar period, as ongoing structural earnings growth drives structural share price growth.

“This brewing sandstorm of semiconductor demand will create a handful of investment champions and an open canvas for possibilities of tomorrow.” says Mr Griffin.

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Ms Ma has 15 years experience in finance and investing, with a focus on global long/short equities. Prior to joining Munro she was a portfolio manager at the Melbourne-based Cooper Investors. Prior to that, she spent nearly a decade with well-known hedge funds in New York City, including Coatue Management and Jerico Capital.

Ms Ma joins Munro’s nine-person investment team and will be responsible for contributing research and stock ideas to all three of Munro’s global strategies – the Munro Global Growth Fund, the Munro Concentrated Global Growth Fund and the Munro Climate Change Leaders Fund.

Mr Griffin said Ms Ma’s experience as a high performing portfolio manager, covering a wide range of geographies and sectors, makes her a good fit for the business. 

Mr Griffin said: “We are delighted to have Qiao’s extensive experience and unique perspective to help bolster our global equities team. Her long track record in identifying underappreciated, long-term, founder led stock opportunities, will be invaluable in helping Munro sustain fund performance and help grow our business in the months and years ahead. We look forward to welcoming Qiao into the Munro partnership and are excited that she has chosen to join us for the journey.

Ms Ma said: “I have admired Munro from afar for years and I am deeply humbled by the opportunity to join the firm. I look forward to hunting for best long term investment ideas in global growth companies for our investors.’

Ms Ma has a dual degree of Bachelor of Science, Commerce (B.Sc) and Economics from University of Virginia, and a Masters in Business Administration (MBA) from Harvard Business School.

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Stephen Miller

The first half of 2022 will continue to be an uncertain time for markets as the full impact of the Omicron variant makes its mark on the Australian economy – but there are still opportunities for investors, with certain sectors and thematics set to shine, according to GSFM and its fund manager partners Munro Partners, Tribeca Investment Partners and Redpoint investment Management.

Munro Investment Partners chief investment officer, Nick Griffin, says he remains positive on global equity markets in 2022, although he concedes the outlook is murkier than usual.

“Market outlook predictions have become increasingly problematic in the last few years, and 2022 looks to be no exception. However, despite the many unknowns, there are a couple of trends that are now reasonably clear.

“One is that growth will slow.  Alas, the world can only re-open once and many businesses will begin the cycle by being assessed against the strong re-opening led numbers they produced in 2021. At the same time, government stimulus will begin to run off, most notably in the US.

“Regardless of economic outlook, our focus remains on identifying sustainable growth trends and the resulting winning stocks. And the trends of decarbonisation, eCommerce or cloud computing don’t abate because the macro landscape evolves.

“The key areas where we see positive tailwinds for 2022 include climate – where the race to decarbonise the planet is likely to accelerate as corporates and countries alike start to implement plans to reach carbon net zero by 2050 – and high performance computing – as every major corporate seeks to harness the power of its own data and implements AI across their organisations. This will unleash a torrent of silicon demand that should lead to exponential growth for the key players in the semiconductor industry,” Mr Griffin says.

Meanwhile GSFM investment strategist, Stephen Miller, says bond yields have started the year under pressure and that seems likely to continue.

“Notwithstanding the recent increase in yields, bond markets remain at close to historically low levels. More tellingly, the gap between the 10-year bond yield and annual core CPI inflation was close to 4 per cent in December, the highest gap since February 1975.

“Persistence in inflation and a rapid scaling back of central bank purchases could send bond yields significantly higher as bond markets price in that eventuality.

“At this point, inflation continues to surprise on the upside with December readings in the US, Europe, the UK and Canada all exceeding expectations and all close to multi-decade highs. This is not a comforting scenario for global equity markets. However, it must be acknowledged that a more benign scenario has central banks getting on top of inflation quickly and bond markets retaining confidence in central banks’ ability to do so.

“The same challenges exist locally even if their magnitude may be slightly less. Of course, the Australian economy is different from other developed economies not least in its exposure to China, but not sufficiently so that the same laws of supply and demand and their effect on prices do not apply here,” Mr Miller says.

Pointing to the local share market, Tribeca Investment Partners portfolio manager, David Aylward, says that uncertainty will be the order of the day – at least for the first quarter of 2022.

“Omicron may be a game changer, possibly washing the COVID-19 recession that Australia thought it had avoided up on our shores.

“With previous COVID-19 variants, the government response was to implement a lock-down where everyone stayed home, and when lock-downs were lifted they later came out and spent money. And the government’s fiscal stimulus programs ensured there was money to spend.

“From an economic point of view this was a net positive. But it is different this time. With Omicron people either don’t want to go out, or they can’t go out because they are isolating – and this time there is no government stimulus to support their spending in the economy.

“This Omicron impact will be an important narrative in the upcoming Australian reporting season. It won’t necessarily show up in the numbers as yet, but it will be interesting to hear company management remarks on how they have been trading recently, and how their supply chains have been impacted.

“But even with this uncertainty that there will always be opportunity in markets, on the long and on the short side. One such area of opportunity comes from the energy transition.

“The energy transition is going to be hugely inflationary. When you combine that with the likely stimulus program coming out of China over the next six months, we could be locking in a supercycle round two for commodities. This will have significant ramifications for markets.

“A lot of stocks in the mid cap sector will be exposed to benefit from that. And it will be quite a positive for small caps as well.

“Mid and small sized Australian companies can do well in 2022 but commodity-based stocks will need to do a lot of the heavy lifting. A rebound in services can contribute as we move past Omicron but non-earners and consumer finance type stocks will likely find inflation and higher interest rates tough going,” Mr Aylward says.

Redpoint Investment Management chief investment officer, Max Cappetta, says that while the upcoming reporting season is likely to provide a strong overall dividend harvest, investors need to ensure they look beyond high yielding names and look ahead to where dividends will be growing most in the future.

“We are expecting approximately 130 dividend announcements across the ASX200 in the months of February and March 2022 and it will be a mixed bag. It is important to look across the entire market – and capture income across all sectors and yields – because there will always be winners and losers within each of these groups.

“The mining sector was responsible for carrying the ASX200 to a record aggregate dividend payment year in 2021 and remains well placed to provide solid cashflows again in 2022 supported by more accommodative policy in China.  However, there are many opportunities in the metals of tomorrow such as copper and lithium and Australia has some great companies with great assets already in production across the globe.

“Those companies benefitting from a domestic consumer unable to travel and move more freely, such as JB HIFI, consumer group GUD and auto retailer Eagers are also likely to deliver strong dividend yields in February. 

“We also see the potential for revenue and profit growth in 2022 in the lower yielding healthcare sector from diagnostics services firms such as Healius and Sonic.

“We expect modest dividend growth from banks and financials even though dividends in this sector remain below pre-COVID highs.  Investor should also note that the dividends of major banks are offset through the year with Commonwealth Bank being first up in mid-February.  This provides a valuable insight into trading conditions for the sector,”  Mr Cappetta says.

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Nick Griffin

Munro Partners and GSFM have launched their second ASX quoted fund, the Munro Climate Change Leaders Fund, with ASX ticker MCCL.

The actively managed MCCL.ASX seeks to maximise long-term capital appreciation, by investing primarily in a concentrated long only portfolio of companies focused on decarbonisation and climate change solutions located anywhere in the world. The unlisted units of the Munro Climate Change Leaders Fund was launched in October 2021.

Nick Griffin, Munro Partners founding partner and chief investment officer, said the Fund invests primarily in listed equities across a range of industries and countries whose earnings prospects should improve with increased investment and focus on decarbonisation.

“The investment strategy is designed to identify sustainable growth trends that are under-appreciated and mispriced by the market, and invest in the resulting winning stocks.

“Globally, the move to a green economy and decarbonisation will shape markets and lives. We are only at the early stage of a growth trend in decarbonised investing and the race to net zero, and the Fund will help investors to gain access to these early opportunities.

“MCCL.ASX invests across four sub-trends of interest including clean energy, clean transport, the circular economy, and energy efficiency. All of these areas cover large swathes of the global economy, and the opportunities are significant,” he said.

MCCL.ASX will be co-led by Munro chief investment officer and portfolio manager Mr Griffin and Munro partner and portfolio manager, James Tsinidis.

GSFM is the responsible entity and distributor of the Munro Climate Change Leaders Fund, as well as the Munro Concentrated Global Growth Fund, and the Munro Global Growth Fund in the Australian and New Zealand markets.

GSFM chief executive officer, Damien McIntyre, said the growing move to decarbonisation and the strength of the green economy presents many opportunities for investors, but it is also about picking the right ones to bolster portfolios.

“The Munro team has an enviable track record of identifying s-curves in its focused areas of interest, and investing in early stage opportunities, to the benefit of investors. This latest Fund is designed for investors seeking a long term exposure to a portfolio of high quality global growth and climate change focused equities with the potential for capital gains.

“The decision to provide ASX quoted units was made to provide investors with a simpler way to access the Munro Climate Change Leaders Fund,” he said.

“Exchange quoted products have a number of advantage over traditional managed funds. They have no minimum investment, no paperwork, transparent pricing, offer better diversification – with the ability to diversify a portfolio through holding a single security, and are liquid – as a traded security, investors can enter and exit the investment on the ASX anytime during trading hours,” he said.

The Fund will hold between 15 and 25 stocks at any one time. The minimum suggested time frame for investment is at least five years. The ETF has a flat management fee of 0.90% per cent per annum of the net asset value (NAV) of the Fund.

The Fund launch follows the recent appointment of Mike Harut to the newly created role of Responsible Investment Manager. Mr Harut joined Munro from The Australian Council of Superannuation Investors (ACSI), where he was Manager, Equities Research and Engagement. He has 10 years of experience in responsible investing and ESG.

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What are the investment opportunities presented in meeting the net zero carbon targets by 2050?

While the world has been preoccupied with the COVID-19 pandemic, another epidemic has emerged alongside it: the accelerating rush among nations and corporations to announce carbon reduction targets to address climate change. This article from GSFM discusses the investment opportunity presented by addressing climate change.

While the advent of the internet has been life changing for most of us, it was a slow start. When Australia joined the global internet on 23 June 1989, via a connection made by the University of Melbourne, it was mostly used by computer scientists^[1]. In the 32 years since then, there’s been enormous innovation to enable faster download speeds and greater points of access. Over 89 percent^[2] of the Australian population now has access to the net, with nearly 50 percent of access via smart phones. Its applications are integrated into our daily life and it’s hard to imagine work, leisure, education, shopping or communication without it.

Today, all the largest companies in the world are internet businesses. The biggest media company is Facebook (now known as Meta), the biggest advertising company is Google, and the biggest retailer is Amazon. Twenty-five years ago, these companies either didn’t exist, or were mostly unknown.

Nick Griffin, Chief Investment Officer at Munro Partners, has often described the internet as the largest S curve in his lifetime. And while it might seem like the internet was a once-in-a-lifetime paradigm shift, it seems there’s a second. According to Nick Griffin, there’s another paradigm shift staring us all in the face: decarbonisation. And just like the internet changed our lives and our businesses, so will decarbonisation.

The S-Curve revisited

The S-Curve tracks how a company or industry grows over its lifecycle. There comes a point in a lifecycle when growth inflects, driven by a structural change. It is the tailwind created by the structural change that allows a company to deliver and create wealth.

To recognise companies likely to grow and create wealth, investors need to identify both the next round of structural changes and the companies that will benefit from them. Importantly, this needs to be as close to the start of the S-Curve as possible, and not at the end.

The simplest way to understand the S-Curve is by way of example. Using smartphone adoption to illustrate, figure one shows the development of the global mobile phone market. The mobile phone market in 2008 was 1.6 billion phones; today, that market is 1.7 billion phones. However, in the move from basic mobile phones to smart phones, we’ve seen smart phones moving from a 10 percent market share to an 80 percent share. Apple’s revenue went from US$27 billion to $US250 billion, and its market capitalisation went from US$50 billion to over US$2 trillion.

When it comes to climate, it’s at the beginning of its S-Curve. Whichever climate sub-sector you consider, the S-Curve has a long runway of growth. For example, if you consider wind power in terms of onshore wind – which has been around for a long time – it has targets that indicate decades of growth ahead of it. Offshore wind power is at the beginning of that cycle. These forms of power will need a to harness battery technology to make them efficient; another, integral component of the move to decarbonisation that’s at the beginning of its runway of long, continuous and sustainable growth.

The climate investment opportunity

In 2020, global investment in the transition to low-carbon energy broke the $500 billion barrier for the first time^[3]. This was spent on renewable power, electric vehicles and other technologies to cut the global energy system’s dependence on fossil fuels. The investments in the transition to a low-carbon economy showed a 9 percent increase over 2019 expenditure and came despite the Covid-19 pandemic.

Munro Partners likens the climate opportunity to the early stages of the technology boom, with many climate change companies set to get dramatically bigger.

However, funding this climate epidemic is going to be extremely costly. Given the ambitious carbon goals now being announced, Munro expects it to cost over $30 trillion US dollars between now and 2050. Figure two shows the estimated breakdown of where this huge investment will need to be made, and thus where the sectors of opportunity exist. In Europe alone, Munro expects $8.3 trillion US dollar investment potential across areas such as renewables, energy efficiencies and charging stations for electric vehicles.

Over the past 12-18 months, every European country has effectively committed to zero carbon by 2050. The recent COP26 summit in Glasgow saw more countries take this pledge, including the US and Australia. China has committed to zero carbon by 2060. It’s not just countries making these pledges – individual states and local government areas, companies and others are committing to net zero by 2050.

It’s important to note that the “zero carbon” 2050 target does not mean emitting any more carbon; it means emitting no carbon.

These ambitious political commitments are being mirrored in the corporate world, which rather than taking a ‘wait and see’ approach, is transitioning to a low carbon future independently of government mandates. Many corporations are changing their behaviour – or promising to – in the face of overwhelming demand for ESG and other socially responsible initiatives from customers, employees and shareholders.

It’s also important to note that zero carbon by 2050 is not simply driven by politics; there is, in fact, a strong economic argument for decarbonising. If we continue on the current trajectory, it is estimated that the planet is likely to warm 2.9 degrees Celsius by 2050; a net zero target is estimated to reduce this increase to 1.5 degrees. The cost of no action is estimated to impact global GDP by US$23 trillion per annum (figure three), which puts the cost of decarbonisation into stark perspective.

Closer to home, professor of environmental economics Tom Kompas from the University of Melbourne^[4] estimates climate change will cost the Australian economy at least $584 billion by 2030 and $762 billion in 2050 under the current trajectory for a 2-degree rise in average global temperatures on pre-industrial levels.

Governments, corporates and people around the world have to decide; do they want to deal with the outcome of failing to address climate, which is already costing trillions of dollars in terms of natural disasters, or do they want to spend the money to reduce the temperature on the planet? The cost benefit analysis is clearly in the favour of taking action.

This is supported by the convergence of strong tailwinds (figure four). Investors are scrutinising companies in terms of corporate governance, social governance and their environmental footprint. ESG is increasingly important to investors and there are a number of rating agencies around the world that are rating this. In response to this scrutiny, companies respond to investors by committing to zero net carbon over the next 30 years. Many companies today have announced targets to be net carbon neutral by 2050.

Finally, governments are also under growing pressure from their constituents to commit to net zero by 2050; as such, the convergence of these tailwinds converged mean it’s inevitable that we’re going to attempt to decarbonise the planet.

Munro Partners has identified four structural categories from which will emerge the climate success stories that will enable the decarbonisation of our planet:

1. Clean Energy: Companies at the forefront of renewable energy generation covering wind, solar and renewable diesel.
2. Energy Efficiency Companies at the forefront of insulation products, electrical switches, lighting and metering technology.
3. Clean Transport Companies benefitting from the growth of electric vehicles, battery technology and alternative transportation.
4. Circular Economy Companies most likely to benefit from efforts to improve recycling, alternative packaging materials and management of wastewater.

Case study: clean energy

Clean energy is the starting point to decarbonising the planet – everything needs to move to electricity, and the electricity that we generate needs to be renewable. Companies at the forefront of renewable energy generation cover wind, solar and renewable diesel.

Figure five indicates global energy consumption in 2018; just 19 percent comes from electricity, with the majority generated by oil, gas and coal. To meet net zero goals, in 2050 at least 50 percent of all global power generation needs to electricity from renewable sources. This represents approximately ten times global growth over the next thirty years. At the same time, the cost of these technologies are falling, so there is an economic imperative to adopt renewable energy sources.

Figure six examines the size of the opportunity in the global wind market. In the both the onshore wind market (LHS) and offshore wind market (RHS), a significant ramp up in capacity is required by 2050 to meet net zero targets. Interestingly, there have been more offshore wind projects commenced in 2020 than are currently installed across the planet. As such, there is exponential growth that investors can exploit here looking to invest in companies that benefit from this growth.

From Munro Partners’ perspective, the obvious place to look for investment opportunity is the wind turbine manufacturers, who will clearly be beneficiaries of this trend. The total addressable market for building and servicing wind turbines is expected to grow dramatically, from US$45 billion in 2020 to US$100 billion (excluding China) in 2050^[5].

Stock example: Ørsted

Listed in Denmark and already with a market capitalisation of over $100 billion, Ørsted is the world’s largest offshore wind developer. While onshore wind energy has been around for a while, offshore wind is at an earlier stage on its S-curve, as shown in figure six.

Offshore wind is coming from a lower market share base than onshore wind and solar; and hence one of the fastest growing parts of the renewables industry. Offshore wind only really exists in Europe today, with US and Asian opportunities now starting to open up. Analysis of net zero targets around the world suggests that Offshore capacity can grow from ~40GW today to ~200GW in 2030 and then substantially again beyond this to 2050.

Although not without competitors, Ørsted’s experience and strong lead in offshore wind makes them the global developer of choice – for example, it is helping Taiwan Semiconductor develop the largest offshore wind farm in Taiwan. Munro Partners sees decades of growth ahead for Ørsted and while it is expected that Ørsted will lose some share as the industry matures and oil companies enter, the increasing complexity of projects and the company’s considerable head start should see it maintain a strong industry position.

Climate is at the very start of its S-curve. Many new climate technologies are still early in the adoption phase and therefore have the potential for significant growth. Globally, fighting climate change is about far more than just clean energy and electric vehicles. The principles that underpin the transition to net zero by 2050 is something that will impact nearly every company around the globe. While climate as a stand alone investment opportunity should be viewed as a satellite investment to complement broader core global equity strategies, investing in the decarbonisation of the planet is not only likely to add value to investor portfolios, it’s likely to add to the quality of life.

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[1] https://theconversation.com/30-years-since-australia-first-connected-to-the-internet-weve-come-a-long-way-118998
[2] https://www.statista.com/topics/5261/internet-usage-in-australia/#dossierKeyfigures
[3] https://www.bloomberg.com/news/articles/2021-01-19/spending-on-global-energy-transition-hits-record-500-billion
[4] https://www.theage.com.au/politics/federal/a-real-hail-mary-experts-say-net-zero-2050-plan-fails-to-account-for-billions-in-climate-costs-20211116-p599dv.html
[5] BNEF, Bernstein, Munro Partners

The information included in this article is provided for informational purposes only. The information contained in this article reflects, as of the date of publication, the current opinion of Munro Partners and is subject to change without notice. Sources for the material contained in this article are deemed reliable but cannot be guaranteed. We do not represent that this information is accurate and complete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date, are subject to change and should not be relied upon as the basis of your investment decisions. All reasonable care has been taken in producing the information set out in this article however subsequent changes in circumstances may occur at any time and may impact on the accuracy of the information. Neither Munro Partners, GSFM Pty Ltd, their related bodies nor associates gives any warranty nor makes any representation nor accepts responsibility for the accuracy or completeness of the information contained in this article.

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