Perspectives
2 August 2022
The world has experienced the fastest economic recovery in history, aided by significant policy support, a rapid health response to COVID-19 and a gradual reopening of international borders. The recovery has been particularly strong in the US, where policy support has been instrumental in its recovery. While this recovery has been positive in the short-term, it has led to an overheating in the economy causing broad-based inflation. Markets are also facing implications of the invasion of Ukraine and rolling lockdowns in China, including global supply chain issues and surging food, fuel and energy prices.
As the cost of capital rises and growth slows, it appears the long equity bull market may be coming to an end, with high valuations suggesting that we could see further falls as recession risks rise. However, while challenging - downturns are regular, temporary and often provide opportunity.
Looking to some emerging opportunities, we refer to the long-term structural trends like the energy transition, urbanisation, sovereign resilience and technology. In this article we explore these themes and their broader impact on the Australian and global landscape in the near term.
The energy transition continues to be supported by corporate commitments in ESG and a rapidly evolving technology landscape. With sustainable investing turning mainstream after it dominated headlines at COP26 last year, ESG considerations are increasingly critical for corporates and investors. In the near-to-medium term, it is expected that corporates will further incorporate ESG-focused metrics into management scorecards as well as improve disclosure on these KPIs. This is reflected in the ASX300 where almost 60 per cent have tied their variable remuneration to ESG metrics, which include culture, employee engagement, health & safety, environment, sustainability, net zero transition, etc.
Looking to energy transition technologies, solutions are accelerating but investment is experiencing a shortfall with financial flows currently 3-6x lower than levels needed by 2030 to limit global warming to below 2°C (3.6°F)1. A surge in electric vehicle (EV) sales should help drive investment levels – with annual volumes set to break the $US1 trillion mark in the coming years. The exponential growth of adoption of EV is in part driven by:
Chart 1: Energy Transition Investment Trends 2022: Tracking global investment in the low-carbon energy transition, January 2022, BloombergNEF.
Global insight
“As we look to the future, in addition to a broadening of demand for traditional electrification and battery metals such as copper, lithium and nickel we expect continued growth in demand for uranium as the world looks to diversify away from fossil fuels.”
Lance Rishor
Managing Director, Critical Minerals and Energy and Head of Macquarie Capital, Canada
Lance brings over 20 years of experience in the sector to the Macquarie Capital team in Canada. Specialising in global mining and metals.
Despite a temporary stalling of international migration and population growth throughout the pandemic, urbanisation and population growth are reforming as key drivers of infrastructure demand. After falling into negative territory for the first time, population growth is forecast to rebound to a long-term growth rate twice the OECD average3. This growth should support strong investment in residential building, non-residential building and transport infrastructure. These sectors remained resilient throughout the pandemic and have recovered quickly to spending levels pre-pandemic. This bolstering is also supported by an uptick in government funding, with a forecasted spend over the next four years expected to be 2.30 per cent of the Federal Budget, representing a substantial increase over 10-year average of 1.40 per cent.4
Looking to the future, core infrastructure capital is increasingly seeking out opportunities in social infrastructure with a focus on healthcare. Over the last five years, Australian social infrastructure transactions have increased to $US6 billion (from $US2.5 billion), with healthcare transactions growing from ~37 per cent of social infrastructure transactions to 60 per cent over that period. Key investment opportunities in this space are hospital PPPs (with a strong pipeline of potential projects nationally) and companies and technologies in healthcare adjacencies.
Chart 2: Federal Budget Report 2022-2023, Infrastructure Partnerships Australia.
Global insight
“The social infrastructure market is facing increasing global demand caused by demographic shifts and historic under-supply of facilities by government. In more affluent countries, this is linked to aging populations - driven by longer life expectancies and a growing retired age bracket - and a need to replace and/or upgrade facilities built in the post-war period, and many governments’ reducing discretionary spending on social care.”
Alex Kornman
Managing Director, Infrastructure & Energy Capital, EMEA
Alex brings over 15 years of experience of principal investing in a wide range of infrastructure for Macquarie, specialising in the economic and social infrastructure sectors.
In the earlier days of the pandemic, sovereign resilience was positioned as an opportunity to increase stability and security in the response to unprecedented supply chain disruptions, increased deglobalisation, and a significant increase in COVID-19 themed cyber scams.5 However, since the emergence of the Omicron variant, the invasion of Ukraine and the reverberating impact of sanctions, we have seen sovereign resilience transform into a global priority.
In Australia, the government has committed to increasing defence spend to >2 per cent of GDP – surpassing historic spending levels of 1.5 to 2.0 per cent – and committed to a spend of $A565 billion this decade. As well as a significant investment into defence, Australia’s cyber security market has been growing at an 8 per cent CAGR (Compound Annual Growth Rate).6 The war in Ukraine, the continued trend of remote working and cyber security attacks (growing 13 percent year on year7), and recent government legislation on cyber security requirements for critical infrastructure assets is expected to accelerate investment in affected industries.
Chart 3: Australia’s Cyber Security Strategy 2020, Gartner, IBISWorld, AustCyber’s Digital Census 2020, AlphaBeta analysis.
Global insight
“Increased global spending on defence and cyber security provides opportunities for the private sector to support government in protecting against the complex, multi-domain threat environment by investing in new technologies and adapting existing solutions to new use cases.”
Jeremy Parker
Co-Head of Aerospace, Defense & Government Services, Macquarie Capital
Jeremy brings over 25 years of experience on a wide-range of mergers & acquisitions and financing transactions across the aerospace, defence, government and information technology sectors.
In pre-pandemic times there was a move towards digitising front-end, consumer-facing processes to enable consumers access to essential goods and services with ease. Post-pandemic, the transition has moved towards back-end processes including logistics, order fulfilment, payments, and cyber security (as seen in the sovereign resilience theme).
At a sector level, we have seen fast-growing green shoots in AgTech, EdTech, RegTech, GovTech and healthcare. Sectors that remain under-digitised, where there is opportunity to close the tech investment gap include:
As we look to the emerging trends for the next decade in the technology landscape – there is increasing interest from corporates and consumers respectively in the metaverse and blockchain with the focus on their enabling technologies and predictive analytics.
Global insight
“The pandemic has accelerated decades of digital adoption into two years, creating an ideal backdrop for continued technological innovation. We continue to see significant investment into software and enabling technologies to improve the efficiency of enterprises through digitisation and automation."
Colin Wu
Senior Managing Director, Macquarie Capital Principal Finance, Hong Kong and Head of Technology Capital
Colin brings 20 years of experience in global technology investing and co-investment.
Macquarie Capital
