The interrelated global challenges of climate change, environmental breakdown, a growing and ageing population, and consequent resource scarcity, have stimulated a shift towards a more efficient use of energy, water, and raw materials. This creates opportunities in infrastructure that underpins the use of these essential resources. We look for investments with low downside risk, backed by identifiable assets and/or cash flows, at attractive valuations.
Scandal drives a big shift
The rise of electric vehicles is happening faster than expected, with the number of them globally forecast to grow at more than 40% a year to reach 55 million in 2025. Rather than looking at new entrants, we picked Volkswagen (Frankfurt: VOW). VW has historically been associated with unethical practices, but we believe the well-publicised diesel scandal provided the catalyst for the world's largest carmaker which now has a new management team to shift its strategy towards leading the industry into the electric era.
The company has committed €20bn towards electrification and €14bn to ride- and car-sharing and self-driving technology by 2025. Moreover, the potential to achieve cost savings and boost profitability while on a discounted valuation also makes the shares attractive.
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A winner from cheap renewables
Renewable alternatives to traditional resources are becoming cost competitive, particularly in electricity generation. Since 2010 the cost of installing new solar photovoltaic power-generation assets has fallen by 70%. Electricity can now be generated by solar photovoltaic and wind technology at or beneath the cost of fossil alternatives in an expanding list of regions. While manufacturers of such technology have seen their margins squeezed, developers and operators of wind and solar assets have benefitted from falling costs.
Infigen Energy (Sydney: IFN) is Australia's leading developer and operator of wind farms. It is set to benefit from political support for renewables, as well as from the declining costs of wind-power technology. It has a large portfolio of high-quality operating wind assets, and a large pipeline of new assets under development. Considering the replacement value of its existing assets, the growing value of new assets, and the potential to reduce the cost of its debt, Infigen offers good value.
Tackling Brazil's water shortage
Of the world's scarce resources, water tops the list, with two-thirds of the world population expected to face water shortages by 2025. Some countries are already taking action Brazil is ramping up regulatory support for private-sector water and sanitation infrastructure investment.
Sanepar (So Paulo: SAPR4) is a regional Brazilian water utility in the state of Paran where it serves as a monopoly. These well-established regional monopolies offer attractive cash flows, backed by long-term contracts, with growth potential as water and sanitation reach previously unserviced households.
Ben Goldsmith is CEO of Menhaden Capital Management
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