Post #92: Forget the election

Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.

It’s been hard for all of us to tear our eyes away from the still-ongoing saga of the US Election. The final outcome may not be known for some time. At the same time, however, in the real world, America and almost every country globally continues to grapple with the coronavirus pandemic. Many places are already, or soon will be, back in lockdown.

As we first discussed in early May, behaviours have changed as a result of the virus – and we believe such changes could well become more permanent and enduring. Perhaps the best way of gauging this assertion is to listen to what companies are saying. In every area we first highlighted in our Digital Rubicon thesis, we see further evidence to support the idea that there is no turning back from the digital by default world.

Take online retail first. Beyond the blow-out figures released by Amazon (sales were up 37% year-on-year in the third quarter of 2020 to a remarkable $96.1bn), consider what Prologis has to say about the outlook. As a reminder, Prologis is the largest owner of industrial real estate in the world – the big boxes through which Amazon’s and others goods transit on the way to our houses (for the record, Amazon is Prologis’ biggest customer). On 20 October, at the time of its quarterly results, Prologis management highlighted that not only was demand for its warehouse space “becoming more broad based” but that we are “still in the early stages of e-commerce growth” and that even post-pandemic, we are “not going to give [any demand] back.”

Turning to the area of online education, Chegg – the leading direct-to-student service in the field – raised its financial guidance for the third time in 2020 when it reported results on 26 October. Management talked about the shift towards online as “an inevitable trend” and – in messaging remarkably consistent with that of Prologis – asserted that “we don’t see any evidence that things will go backwards.”

A final important (even if unrelated) area to consider is alternative energy. Listed businesses within the space initially traded negatively yesterday on the assumption that the absence of a clear-cut Democrat ‘blue wave’ might mean less near-term expenditure on renewables in the US. Regardless of the final political outcome in the US, it might be more important to consider that 23 countries already have defined dates when they anticipate becoming net zero carbon producers. As a result, global installed renewable energy generation is forecast to more than double over the coming 30 years, with the amount spent on renewables set to exceed that spent on oil and gas drilling globally for the first time in 2021 (per the UN, EIA and Goldman Sachs respectively). We note that on its earnings call yesterday, Vestas – a leading wind turbine manufacturer – disclosed a record order backlog of €33.9bn. The future is both digital and renewable.

5 November 2020

The above does not constitute investment advice and is the sole opinion of the author at the time of publication. Heptagon Capital is an investor in Prologis, Chegg and Vestas. The author of this piece has no personal direct investment in the business. Past performance is no guide to future performance and the value of investments and income from them can fall as well as rise.

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Alex Gunz, Fund Manager, Heptagon Capital