IN the ASX midcap space three themes – energy, data centres and battery materials – look like opportunities at the moment, argues Pendal portfolio manager Brenton Saunders.
Saunders manages Pendal’s MidCap Fund, which invests in the 100 biggest companies outside the ASX50, where market caps typically range from around $1 billion to $10 billion.
“A number of factors provide a constructive backdrop to the energy picture in the short, medium and longer terms,” Saunders says.
Short-term considerations revolve around oil prices and the geopolitical backdrop.
“It’s not just a function of the conflicts in Israel and Ukraine but also how the United States economy performs especially ahead of the election next year.
“Ultimately the people that control the oil market – OPEC and its aligned bodies – view an oil price in the $US90 to $US100 a barrel range as a more acceptable outcome than one in the 60s or 70s.
“I think they will reverse-engineer that market to achieve that outcome,” he says, adding that the dynamics in oil markets will play into coal markets as well.
“The medium-term considerations are more around opportunities available to companies that have strong positions in transition fuels, like natural gas.”
Saunders highlights some stocks held in Pendal MidCap Fund:
“An example in that space is Beach Energy (ASX: BPT),” Saunders says.
“The more tangential opportunities, in the medium term, are the oil refiners which are using the decarbonisation period to reinvent their strategies.
“We’ve seen Viva Energy (ASX: VEA) delve much more into convenience retail, for example.
“We also think energy generators could possibly benefit as economies struggle to replace baseload power with renewables. That helps companies like Beach Energy, Viva and Whitehaven Coal,” he says.
In the longer term, Saunders believes there are opportunities in uranium.
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“The narrative around uranium is not as just a transition fuel, but possibly a renewable baseload fuel.
“Countries have progressively comes to terms with the fact that they will need to add uranium to their mix of fuels over time.”
Another opportunity in the midcap space is data and data centres, as business demand for bandwidth and data storage grows.
Saunders believes this bodes well for NEXTDC (ASX: NXT) — another holding in Pendal Midcaps Fund.
NXT is well placed with respect to existing and planned data centres.
Its premium land bank in Australia and growing ambitious in ASEAN provide a strong and long growth pipeline, he believes.
“The advent of generative AI and the broadscale the adoption of it in some industries is accelerating the need for the transmission of data and the storage of data.
“With think this has a relatively long timeframe to play out.”
The third thematic among mid-caps is the battery materials markets.
“It is on the nose at the moment, but the demand for demand for batteries and battery materials continues to ramp up aggressively,” Saunders says.
“With both supply of — and demand for — lithium compounding at 20 to 30 per cent a year, there is a fairly big dislocation as lumpy new supply comes into the system.
“At the moment we are dealing with an oversupply of some raw materials for batteries, and of batteries themselves. This should clear as electric vehicle penetration continue to progress.
“Pricing for materials and for stocks in the space is relatively depressed and has sold off significantly in the last four or five months.
“But we think this is a trend that has longevity.
“The sector will have some cyclicality in growth and we are experiencing that now, and that provides investable opportunities.
“We retain good exposure to that through our lithium names and our rare earths names.”
Brenton is a portfolio manager with Pendal’s Australian equities team. He co-manages Pendal MidCap Fund and our natural resources portfolio, drawing on more than 25 years of expertise in resources, derivatives, investment banking and private equity. He is a member of the CFA Institute.
Pendal MidCap Fund features 40-60 Australian midcap shares. The fund leverages insights and experience gained from Pendal’s access to senior executives and directors at ASX-listed companies. Pendal operates one of Australia’s biggest Aussie equities teams under the experienced leadership of Crispin Murray.
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