The oil giant on the right road to net zero
Major European energy firms are poised to offer “big strategic value” as the world transitions towards decarbonisation, according to JOHCM’s Ben Leyland.
Leyland, who co-manages the JOHCM Global Opportunities fund alongside Robert Lancastle, cited UK oil giant Shell as being primed to benefit from this long-term theme over the next decade and beyond. Shell currently accounts for a 3.3% weighting in the fund, according to its December factsheet, marking it as the seventh-largest position within the 39-stock portfolio.
“What we’re really interested in is the need to invest in energy infrastructure over the next 10 to 15 years, and to move energy infrastructure broadly in a decarbonised direction,” he explained.
“It’s not about taking clear views on whether this is solar, wind, renewables or nuclear – or on whether carbon capture and storage, or hydrogen technologies, are the next big thing. These have their moments in the sun and then dissipate.”
In terms of European energy majors generally, Leyland said they tend to focus more on ‘midstream’ and ‘downstream’ opportunities as opposed to ‘upstream’. ‘Upstream’ refers to the exploration and production stages, while ‘midstream’ includes storing, processing and transporting oil, natural gas and gas liquids. The ‘downstream’ stages involve refining crude oil into fuels.
Leyland explained: “The recent action to launch US energy measures has been to double down in upstream.
“What we like, particularly when it comes to Shell, is that while they do have upstream [capabilities], the real value of the company is the midstream and downstream assets, which ultimately are going to have
big strategic value in the transitioning world.”
He added that Shell’s gas-trading division is also attractive, which was supplemented by the firm’s £47bn acquisition of gas exploration firm BG in 2015.
“There are multiple positives. The fact that LNG [liquefied natural gas] is a tradable transition fuel to help the world towards the decarbonisation agenda is one. Also, the fact Shell is paring back its downstream assets and moving its refinery hubs towards areas such as Rotterdam.
“These areas are well located in that they are industrial hubs for other hard-to-help sectors. So, steel-making or cement companies, which are going to find it very difficult to meet all of those net-zero targets – they are going to need technologies like carbon capture and storage in order to make those commitments real.”
Leyland added that Shell is one of the largest petrol station forecourt providers in the world. According to the company’s website, it has 40,000 forecourt locations across the globe as well as an additional 10,000 partner sites. In the UK, Statista figures show that Shell has the second-highest percentage of forecourts at 13.9%, second only to Esso at 15.2%.
“It’s up to [the consumer] whether they buy a petrol, diesel or electric [car], but at some stage, if we’re going to go down the EV route, we’re going to need charging stations for that. As the strong become stronger, the large will become larger. The tail of smaller companies, which cannot make that transition as effectively, is going to start atrophying.
“So this, alongside the strategic value of its midstream and downstream assets to help the energy transition, is what we think will help Shell generate strong returns.”
‘Where profit and purpose go hand in hand’
Nubank and Grab are two stocks which are tackling significant global challenges but are also set to generate strong long-term returns, according to Baillie Gifford’s Rosie Rankin.
The investment specialist director said Brazilian firm Nubank, which is held within the firm’s £1.9bn Positive Change fund, is one of the world’s largest digital banks. Currently headquartered in São Paulo, the Russell 1000 component was founded in 2013 and has more than 7,000 employees. According to a Bloomberg report in November, however, the bank’s parent firm Nu Holdings is considering moving its legal base to the UK.
“[Nubank] was founded with the intent of providing an alternative to the relatively expensive traditional Brazilian banking system,” Rankin explained. “When we first invested, it had around 58 million customers in 2021. Fast forward to today, and that’s around 100 million customers.
“It is incredible growth in a relatively short period of time, and that’s because it’s offering products and services that are really useful to micro and small enterprises.”
Seven out of 10 new jobs created in Brazil are now within micro and small enterprises, according to Rankin, meaning the ability to access affordable banking products easily is an “important driver for change”.
Similarly, an impact stock capitalising on the growing digitalisation across emerging markets is Grab, which she describes as a “southeast Asian super-app”. “Its core businesses are ride-hailing and restaurant delivery, but it does a whole range of stuff, from delivering packages and groceries to e-wallets and financial services. As a result, it has managed to build up a really impressive market share.”
Grab Holdings, which is based on One-North in Singapore, operates across Malaysia, Indonesia, Myanmar, Thailand, Vietnam, the Philippines and Cambodia, as well as its home market.
Hailed by Reuters as the biggest technology company within the south-east Asian region, the company was founded in 2012 and floated on the Nasdaq in 2021, following a SPAC merger with US investment firm Altimeter.
According to Rankin, Grab currently accounts for 70% of the entire ride-hailing market, within around 5% of adults in south-east Asia using the app at least once per month. “That means 95% don’t, so there’s huge potential there in terms of growing the number of users,” she reasoned. “And because it’s so innovative in developing technology solutions, it has been a real magnet for attracting tech talent.”
Rankin added: “Grab has many different services via its app, but they’re united by that one purpose of helping to improve lives and prosperity within south-east Asia. And so, ultimately, it’s a great example of a business where profit and purpose will go hand in hand.”
Through the lens of luxury
Investors shouldn’t give up on luxury goods stocks despite lacklustre results from the sector, according to senior analyst at Killik & Co Mark Nelson, who said the firm’s managed investment service team is taking “a defensive approach” to these types of companies.
“Luxury stocks have been getting a lot of attention of late, with softness in the market being largely driven by the continued weakness of the Chinese economy,” he explained. “The current predicament raises two big questions for investors: is there a long-term structural issue in China and, if that is not the case and it is just a cyclical downturn, when will the good times start to flow again?”
One stock the team owns shares in is Franco-Italian eyewear company EssilorLuxottica, which Nelson said combines a medical device business through its lenses, with a luxury goods one through its frames.
“[It] plays to the structural trend of the growing need for eyecare due to the increasing prevalence of eye conditions among the growing population due to changing lifestyles and demographics. Management has stated that 75% of revenues are vision care-related and therefore less discretionary in nature.”
Generally speaking, the team at Killik doesn’t think the slowing luxury demand in China is structural, despite the fact many investors are drawing comparisons between China and Japan in the 1980s. “While there are similarities such as ageing populations, there are some key differences, too,” Nelson pointed out. “For a start, there remain millions of people who have not yet reached middle-class status in China, and it is this emerging middle class that has been a key driver of luxury goods demand.
“China is an ambitious nation, with grand geopolitical goals which we believe are more likely to be achieved with a prosperous population and a growing middle class. We therefore expect the Chinese government to do whatever it takes to provide the economy with the necessary support in pursuit of these goals.”
In terms of when the performance of the luxury goods sector will turn around, the analyst said this is “much trickier to predict” but that there are “early causes for optimism”.
“China does seem to be making significant attempts to re-ignite the economy via stimulus measures. Additionally, the easing of the interest rate cycle in the developed west should be supportive of increased demand for those markets,” he reasoned.
“Finally, Trump’s election in November’s US election is being seen as a positive for the sector overall, with lower taxes and a currently buoyant stockmarket,both positive for the wealth effect and, in turn, luxury demand in the US.”
Not only this, but lower valuations in the sector could make it ripe for M&A deals, according to Nelson, with Italian luxury fashion brand Moncler allegedly interested in acquiring British fashion house Burberry.
This article first appeared in the January issue of Portfolio Adviser magazine