ARK Invest Europe | Thematic Investing Commentary

In today’s rapidly evolving market, investors need to stay on top of the latest trends and themes that fuel growth. In this monthly publication, we offer our market commentary across our themes, covering new opportunities and potential challenges. By providing a deeper understanding of our themes, we aim to help you make more informed investment decisions and achieve your investment goals.

Circular Economy Enablers

In challenging macroeconomic environments, businesses often look to offload under-utilised balance sheet assets. This has greatly benefited companies like Ashtead Group, a key player in circular economy enablement. Operating as “Sunbelt Rentals” in the US, London-listed Ashtead rents a range of products including construction equipment, power generators and various types of tools and machinery for industrial, construction, and home improvement projects. It even counts Hollywood among its clients where it rents equipment for film production. Its business model prioritises equipment rental to save resources and minimise environmental impact from manufacturing and disposal. The company’s strategic acquisitions and expansion, including the Sunbelt 3.0 initiative for adding greenfield locations in North America, have positioned it as the second-largest equipment rental company in the region.

Ashtead’s financial growth, with a notable revenue CAGR of 16.25% between 2013 and 2023, underscores its effective scaling and profitability.

Its success exemplifies the momentum of circular economy enablers, benefiting from the rise of conscious consumerism and the preference for rental or second-hand options amidst the drive for capital-lite business models and operations.¹

Environmental Impact

In 2023, the world witnessed some progress in the battle against climate change, thanks largely to the surge in clean energy technologies. According to a new report by the International Energy Agency (“IEA”), global CO2 emissions from energy rose by just 1.1%, a smaller increase compared to the previous year, thanks in part to the growing role of renewables. This rise was limited to 410 million tonnes, totaling 37.4 billion tonnes overall. Despite challenges like exceptional droughts affecting hydropower and leading to increased fossil fuel use, the expansion of solar, wind, nuclear power, and electric vehicles has been pivotal. Without these clean technologies, emissions could have tripled over the last five years. Advanced economies notably saw a record drop in emissions to a 50-year low, driven by renewable energy, shifts from coal to gas, better energy efficiency, and reduced industrial production. The IEA’s findings highlight the resilience of the clean energy transition amidst global crises, emphasising the need for more investments, especially in developing economies, to sustain this positive trend. While clean energy deployment has been concentrated in advanced economies and China, the report calls for global cooperation and policy support to ensure an equitable transition.²

Global Sustainable Infrastructure

The past years have underscored the robustness of sustainable infrastructure as a defensive yet progressive investment. Take the digital revolution, this has been intensified by the advent and adoption of power-intensive generative AI, which has ushered in a new era for data centres. Deloitte’s 2024 manufacturing industry outlook noted the sector has seen a 50% boost in global capacity, signaling not just growth but a seismic shift in how we approach digital infrastructure’s sustainability. Meanwhile, Gartner forecasts an 8% uptick in I.T. spending, which will drive hardware consumption while organisations look towards practical benefits from AI such as streamlining and productivity. This trend is pivotal, as it intersects with the increasing strain on electrical grids and the urgent need for innovative and sustainable power generation solutions. The imperative for energy efficiency is clear as geopolitical factors and climate reporting legislation drive the sector towards granular operational transparency.³ ⁴

We believe this confluence of economic incentives, robust policy support and escalating market demand for sustainable solutions presents an unparalleled opportunity for investors.

Sustainable Future of Food

As we step into 2024, we believe the alternative protein industry is on the cusp of a significant evolution. Governmental initiatives are set to bolster the sector’s infrastructure, reflecting a deeper recognition of alternative proteins’ role in sustainability and economic growth. In the politically charged atmosphere of a U.S. election year, we believe the industry’s bipartisan appeal could play a crucial role in navigating policy shifts, with stakeholders aiming to underscore the sector’s contribution to national competitiveness. The landscape is also witnessing a shift as startups mature, moving towards a phase of strategic investments and away from the speculative valuations of the past. On the regulatory front, cultivated meat is expected to break new ground with approvals in key markets, enhancing consumer choice and addressing safety and nutritional concerns. These advancements, coupled with efforts to slash production costs, promise to make cultivated meat a more viable, eco-friendly alternative. Moreover, the fusion of alternative proteins with the culinary world is set to enrich the food landscape, as chefs and food innovators integrate these proteins into mainstream dining experiences.⁵

Cybersecurity and Data Privacy

February extolled the virtues of a diversified approach to cybersecurity. Earnings season was in full swing, with over half the names in the market reporting earnings and 92% exceeding Wall Street estimates, which led to a strong rally in the sector. This ended abruptly when Palo Alto, which has wide analyst coverage and considerable positive sentiment, reported earnings on the 20^th February. Despite a solid earnings beat, the phrase “spending fatigue” in the earnings call and the lowering of full year guidance for revenue and billings growth triggered a sell off. This triggered broader risk-off sentiment in certain cybersecurity equities. The impact on the overall market however has been limited. The cybersecurity market bounced back to finish the month in positive territory.

Overall, February was a timely reminder that the cybersecurity industry tends to have greater volatility and its own set of drivers compared to broader benchmarks like the Nasdaq 100.

Maintaining a diversified approach in one’s investment allocation to cybersecurity, therefore, can reduce stock specific risk and general volatility for investors whilst still maintaining exposure to an industry that continues to grow at a robust pace.⁶ ⁷

Digital Payments Economy

Brazil’s instant-payment system, PIX, launched in late 2020, has become a national success with over 160 million users completing rapid, real-time financial transactions in place of credit and debit cards. Transactions with PIX are completed within seconds, either through scanning a QR code or using a unique PIX key for each user. PIX has become so ingrained in daily transaction in Brazil that it could be considered something of a cultural phenomenon, with creative uses emerging such as splitting dinner bills or even using it as a modern ‘piggy bank’ by transferring small amounts to one’s own PIX key to save money. Now, PIX has wider ambitions and looks set to go global! Brazil’s central bank is exploring ways to extend PIX’s benefits internationally, aiming to make cross-border payments faster and cheaper. As it recently hosted G-20 policymakers in Sao Paulo, discussions included forming agreements with other countries, with Italy showing interest in PIX. The platform’s rapid adoption has sparked interest in Latin America, Europe, and Africa. Additionally, the Bank of International Settlements is considering connecting PIX with its Nexus project for global instant payments. Already popular among Brazilian tourists in Argentina and Uruguay, PIX’s expansion could further financial inclusion, reducing the unbanked population significantly in Brazil.⁸

References

Ashtead, March 2024.

IEA, “Emissions in 2023”, February 2024. Available at: https://www.iea.org/reports/co2-emissions-in-2023

Deloitte, “2024 manufacturing industry outlook”, February 2024. Available at: https://www2.deloitte.com/uk/en/insights/industry/manufacturing/manufacturing-industry-outlook.html

Gartner, February 2024.

Rize ETF, February 2024.

Palo Alto, February 2024.

Bloomberg, February 2024.

Bloomberg, “Brazil’s Wildly Popular Instant-Payment System Is Going Global”, February 2024. Available at: https://www.bloomberg.com/news/articles/2024-02-27/brazil-takes-its-central-bank-digital-payments-app-pix-across-borders