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Investment megatrends and the stocks to watch

Photo of Peter Switzer By Peter Switzer

min read

Big 3 are Chinese tourists, clean energy and healthcare.

There are some big economic and social trends at play, known as the megatrends, which are providing tailwinds to many companies strategically placed for some fantastic growth.

Here we look at three megatrends and which stocks are leveraged to them.

(Editor’s note: Do not read the following ideas as stock or sector recommendations. Do further research of your own or talk to a licensed financial adviser before acting on the themes in this story).

1. Chinese international tourism

When the mining boom faded as China switched from an investment-led to a consumption-driven economy, it was bad news for Australian miners. But the flipside is that other parts of China’s economy are opening and the rise of the Chinese tourist is a big positive trend.

You only have to look at data for Sydney Airport, Australia’s main international gateway, to understand that this is a real megatrend. Sydney Airport’s 2015 data showed total passengers grew 3 per cent to 39.7 million. International passengers grew 4.3 per cent and domestic 2.3 per cent. Chinese nationals grew by 17.8 per cent, second only to the 36.7 pr cent growth from the Philippines.

Capacity from China grew 8 per cent to 1,301,616 seats per annum. The January 2016 traffic statistics further supports the trend. Passenger growth of 7.5 per cent in January was driven by a 9.5 per cent rise in international passengers and a 6.2 per cent rise in domestic passengers.

January was Sydney Airport’s strongest passenger growth month in more than a decade, with Chinese arrivals being up 38.9 per cent year-on-year. The airport expected 430,000 Chinese tourists during the peak January to March period.

Obviously a company like Sydney Airport is in a terrific position to grow from this trend but Australia is also in a well-placed time zone to capture revenue from the Chinese tourist dollar, which bodes well for companies such as The Star Entertainment Group that can deliver the services demanded by Chinese tourists.

Its three key assets are Star Casino in Sydney, Jupiters on the Gold Coast and the Brisbane Casino, which will soon be known as the Queen’s Wharf development.

These are three currently monopoly assets in key east coast locations. Management believes one in every three Chinese visitors to Australia visits a Star Group property. That is an amazing statistic and confirms the company is a key play on this structural growth theme.

It is a well-run company with monopoly assets, growth projects and a structural tailwind in terms on visitors.

2. Renewable energy

Renewable energy is not just for the greenies. We all know the world is starting to move away from a reliance on fossil fuels to renewable energy, and stocks that are in the “clean tech” sector will be perfectly positioned in that transition.

There are also some big global forces at play. Developing countries such as India will speed up their use of renewables. Much like India’s telco industry bypassing the expensive infrastructure for mobile telephony, the country’s energy consumption looks set to bypass traditional energy infrastructure models.

On OECD forecasts, there will be another 3.1 billion middle-class consumers by 2030 – two-thirds from Asia, who will all drive higher demand for energy in the region.

Even China, which is grappling with its pollution, is investing heavily in renewables and implementing initiatives to control carbon emissions.

There is a good case for getting exposure to renewable energy companies to benefit from future growth. The question is how to best invest in this megatrend.

To be honest, clean-tech stocks have not been on the radar of many investors, and looking at the Australian market it is not hard to see why. The market is scattered with micro-cap stocks that are too small and illiquid for most investors. To put it in perspective, the combined market capitalisation of 62 stocks in the Australian Clean Tech Index was $16.2 billion in January 2016.

The Australian Clean Tech Index, however, has outperformed the broader sharemarket. You have to be mindful that the index is weighted by market capitalisation and therefore can be skewed to few of its biggest constituents. But over the three years to January, the index delivered a cumulative return of 30.6 per cent. The S&P/ASX Small Ords Index lost 13.1 per cent in that period.

Offshore indices also highlight that the sector has been improving over the past few years. The S&P Global Clean Tech Index, which includes 30 of the world’s largest clean-tech companies, has a three-year annualised return of almost 8 per cent to February 2016.

If investors want exposure to large renewable energy stocks they need to look overseas. For example, solar companies are represented in the NASDAQ but only a few solar providers exist on ASX, and they are all micro-caps.

Investors can consider the iShares Global Clean Tech ETF, which is listed on NASDAQ. It aims to replicate the price and yield performance of the S&P Global Clean Tech Index. The index is invested in the large US and Chinese clean-tech companies, so it is a good way to get exposure to the biggest stocks in the sector.

By investing in this ETF, investors can get exposure to some big names, such as First Solar Inc in the US and Enel Green Power in Italy.

Investors can also go local with this megatrend. Listed fund manager Australian Ethical Investment focuses on investing in environmental and socially responsible investments. It has delivered a terrific one-year return of 48 per cent and over three years around 51 per cent.

Although the fund focuses on clean energy, its mandate extends to investing in other sectors, such as healthcare. Its well-run unlisted international shares fund focuses on investing in global smart energy companies with a focus on energy efficiency.

3. Healthcare

When talking megatrends, you really can’t go past healthcare. An ageing population and medical innovation have made the healthcare sector a good choice for long-term investors. According to the Federal Government’s 2015 Intergenerational Report, in eight years there will be 4.3 million Australians aged 65 to 85. Within four decades, nine million Australians will demand more healthcare services and accommodation.

We can even look at Asia and other emerging markets to see how broader trends are playing out. Another two billion Asians will be part of the middle-class by 2030, according to OECD forecasts. This will lead to greater demand for healthcare services, some of which may be supplied by Australian companies.

The problem is that valuations are relatively high for quality businesses such as Ramsay Healthcare, but it is definitely a stock to keep on your portfolio watchlist.
 
Another way to play the healthcare sector is to buy the aged-care operators.

Stocks that are well positioned to grow in this sector are Regis and Japara. Both these aged-care accommodation providers have a solid future, having raised capital to build dozens of aged-care facilities around Australia, giving them first-mover advantage.

Regis has a clean balance sheet with no debt, which makes it well positioned to buy smaller businesses if it wants. I like its sensible approach to growing: reinvesting and buying new developments through its own cash flow rather than taking on extra debt or raising equity.

Japara is also a well-run business. It reported a 2.5 per cent profit increase in the first half of fiscal 2015, to $16.2 million, just ahead of consensus forecasts.

About the author

Peter Switzer is the founder of the Switzer Super Report, a newsletter and website for self-directed investors. Designed for investors who want to take control of their investment decisions but may be time-poor, the Switzer Super Report provides actionable ideas to grow and build your wealth. Start a 21-day free trial.

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