Commodity sector shines as Coca-Cola confirms inflationary pressures

The best performing stock in the basket is Lynas Rare Earths which is a miner of rare earth minerals which is currently experiencing a renaissance and repricing because the US has made it a strategic objective to reduce the reliance on Chinese production favouring non-Chinese producers. Rare earths minerals are heavily used in the technology sector as thus experiencing increasing demand as the world is hungry for computer chips. China has acknowledged the threat from the US and is urging the world to cooperate on rare earth production.

Coca-Cola also confirmed yesterday on its Q1 earnings conference call that the commodity environment is challenging the next 12-18 months with the biggest inflationary pressure in commodities such as plastic, aluminum, juice, and coffee. The beverage company said that it can control inflation in 2021, but that next year will be a challenge. As inflationary pressures continue into 2022 it will start a ‘hunger game’ as companies will be forced to choose whether to reduce margins or pass on the rising input costs to the consumer with the risk of losing market share. The companies with market power in their industry are the ones with the greatest strategy flexibility and also why we recently introduced our mega caps theme basket, as these companies have the strongest businesses, best brands, and the largest profit margins. Hence mega caps should also do well during inflationary pressures relative to other companies.

IBM transition to cloud is still in slow-motion

The old technology giant IBM excited investors yesterday with their Q1 earnings pushing the story about its Cloud and Cognitive Software segment seeing double-digit growth rates. However, the segment is still only 31% of the business up from 28% two years ago. The transition for IBM is under way but it is really slow and will continue to put a lid on the company’s valuation metrics which otherwise look quite attractive in a world of low yields. The free cash flow yield is currently around 10% which is quite unusual for this type of business, but also highlighting how much narratives mean for your valuation.

Upcoming equity themes

According to the International Energy Agency (IEA) the world will see a major increase in carbon emissions this year as the world economy rebounds driven by rising coal demand in Asia expected to reach levels not seen since 2014. The world is desperately short on reaching its goal of reaching net zero carbon by 2050 as coal is still the cheapest energy source available when you exclude negative externalities such as air pollution and impact on the climate more generally. As long as, the world does not have a global carbon emission mechanism like the one in the EU, the developing countries will continue to adopt coal for electricity production for many years.

In late March, Reuters had a story on EU moving closer to designate nuclear power as a green energy source thus qualifying for government programmes to deliver the green transformation. Our view is that the world eventually adopts nuclear power again (building out new net generation capacity) and create a renaissance for this efficient energy source. Why is this needed? Because the system costs increase as renewable energy sources increase in weight on the grid, so we need an efficient base load energy source. In the transition natural gas will be used due to low cost and high energy density, but this energy source still emits carbon emissions unless it is combined with the expensive carbon capture storage technology, and thus we believe nuclear power is a natural extension.

As a result, we will soon be launching a nuclear power theme basket to track this industry and the pricing action better. On top of this theme, we are also working on a financial trading theme basket consisting of exchanges, brokers, market makers and financial data firms. We are also working on a Millennials theme basket, but this is a more complex one to do, but fascinating and something that spans many different industries like our green transformation basket. Finally, we are looking at creating a rare earth and semiconductor theme basket.