Time to invest in FAANG 2.0?

When Jim Cramer, host of CNBC’s Mad Money, coined the acronym FANG in 2013, even he may have underestimated the exponential returns Facebook, Amazon, Netflix and Google would produce over the next decade, as the global economy increasingly digitalised.

At the time, he called these companies "totally dominant in their markets” and said that they were poised "to really take a bite out of the bear market”, giving double meaning to the acronym. Cramer expanded FANG to FAANG in 2017, adding Apple to the other four companies.

FAANG 2.0

Today, the good folk at Merrill Lynch believe it may be time for FAANG 2.0 – a set of sectors rather than stocks that reflect a new world of geopolitical risks and resource intensity. “It’s within these areas of the market – fuels, aerospace & defence, agriculture, nuclear and gold/metals/mineral – that we find future value given the defining market rotations we expect,” they said.

Here, Darius McDermott, managing director of Chelsea Financial Services, gives his views on the prospects for each element.

Fuels

Geopolitical tensions, strong demand, constrained supply and underinvestment are all factors that could keep energy prices elevated over the short-medium term.

“Oil and gas companies have been benefiting from rising oil prices for some time now and some of the industry’s biggest names have reported staggeringly high annual profits in recent weeks,” said Darius. “Unsurprisingly, their share prices have also soared. The invasion of Ukraine – whilst forcing some companies to get rid of any Russian links – has led share prices even higher. And while some people had written the sector off, many of these companies are going to play a vital part in the transition to renewable energy.

“But it’s also important to remember that, just two years ago, oil futures were negative! It is a cyclical and very volatile area of the market.”

Lots of UK equity income funds invest in oil and gas companies – Rathbone Income holds BP and Shell in its top ten* for example, while Schroder Income has Shell, BP and Eni Spa amongst its largest holdings*. A purer play would be via the TB Guinness Global Energy fund.

Aerospace & defence

Defence stocks have done well so far this year amid expectations that heightened geopolitical tensions could lead to greater military spending. Germany, for example, has pledged twice its annual defence budget.

“The current situation has brought defence spending back into the spotlight,” said Darius. “There will undoubtedly be more government spending in the short term, but will this be a decade or longer trend? I’m not so sure. It will depend on what the world looks like after this conflict ends.”

Ninety One UK Special Situations fund owns BAE Systems and Rolls Royce*, while JOHCM Global Opportunities holds L3Harris Technologies, a US defence contractor and Thales, a French firm that builds electrical systems and provides services for the aerospace, defence, transportation and security markets*.

“Another area within this of course is cybersecurity,” said Darius. “President Biden has just warned US businesses to be extra vigilant.”

Zed Osmani, manager of FTF Martin Currie European Unconstrained fund has this as one of his trends on the portfolio. He said recently, “There's clearly more risk of cybersecurity attacks both at the national level, but also at the corporate level, and we think corporates are going to be spending more of their IT budget on cybersecurity.”

Agriculture

The planet will need to produce more food in the next four decades than in the past 8,000 years, according to Merrill Lynch. One of the biggest challenges that the world must address, is how to sustainably achieve this.

“And it’s interesting, because we’re seeing developments in all sorts of areas – not least ‘smart or precision’ farming,” said Darius. “In fact, the ‘fourth agricultural revolution’ refers to the impact that advanced technologies, particularly artificial intelligence, will have on planning and farming operations. I think this theme has more traction longer-term.

“For example, John Deere not only has a driverless tractor now, but is using artificial intelligence via its ‘See and Spray’ technology to differentiate between cultivated plants and weeds, enabling each plant to be treated and dosed appropriately – an approach that boosts yields and reduces pesticide use significantly.”

Montanaro Better World also has nutrition as one of its six themes. And David Coombs, manager of Rathbone Strategic Growth Portfolio, commented: “We think the food industry could be the next sector ripe for disruption through greater embracing of scientific innovation, technology and environment efficiencies.

“Companies which can remove emissions from the food chain, increase yields through natural stimulants or provide foods that are less commoditised and more organic to shift pricing power to a more equal footing, could provide superior returns. Move over retail, it’s agriculture next in the crosshairs of innovation.”

Nuclear and Renewables

Nuclear energy produces reliable, carbon-free power more than 92% of the time, according to Merrill Lynch. It is three times more reliable than wind or solar plants.

“After the accident in Japan in 2011, I thought nuclear was on its way out,” said Darius. “Germany even shut down three of its last six nuclear plants at the start of this year. But one of the short-term consequences of our dependence on Russian fuel coming into the spotlight is that we could see more nuclear power coming through. The prime minister has already said as much in the past couple of weeks.

“But there are issues with this – not least getting the uranium needed and then dealing with the waste. I still expect renewables to be the dominant form of energy we use in the future. As a trend it is only just beginning, and I think it is a multi-decade theme as we transition to a zero-carbon world by 2050.”

Funds to consider in this area are VT Gravis Clean Energy Income and Ninety One Global Environment.

Gold, metals and minerals

“Gold is often seen as a safe haven (which is why it has done well recently) as well as a hedge against central bank mistakes,” said Darius. “But it can be a very volatile asset class. I think it always warrants a small place in investor portfolios and the two funds I like are Ninety One Global Gold and Jupiter Gold & Silver.

“When it comes to metals and minerals – we go back to the energy transition theme because both are necessary for its success. This is another long-term trend for me.”

According to the latest Janus Henderson Global Dividend Index, more than one-quarter of the $212bn annual increase in dividends in 2021 came from miners which benefited from soaring commodity prices. “They delivered record payouts, almost twice the previous high in 2019, with BHP becoming the world’s largest dividend payer,” it said.

This is backed-up by other recent announcements from Anglo American, Glencore and Rio Tinto - which has recently delivered the second largest pay out in FTSE 100 history.

Again, UK equity income funds are an option in this space. JOHCM UK Equity Income, for example, has all four of the aforementioned mining companies in its top ten holdings*.

*Source: fund factsheets, 28 February 2022

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius's views and those of the fund managers are their own and do not constitute financial advice. The mention of specific funds and securities are for illustration purposes only and should not be taken as a recommendation to buy or to sell.