Thematic Review | Performance Analysis (3/6)

Chapter 1:News and Updates

Chapter 2: Performance Table and Heatmap

Chapter 3: Performance Analysis

Chapter 4: Looking Ahead – Going Green and Clean?

Chapter 5: Thematic Survey

Chapter 6: Thematic Deep Dive

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Performance Analysis

In a period where oil and gas prices have soared it is no surprise that the Midstream Energy theme came out on top seeing a return of over 18%. Natural gas prices briefly jumped above $8 per million British thermal unit (MMBtu) on 18th April.[9] These prices were driven by several factors including colder than expected temperatures strong LNG export demand and below-average inventories. The price jump is particularly notable given that April is normally the time of year when natural gas prices are moderate due to lower demand.[10] Companies in the Midstream Energy space are also becoming more ESG focused looking toward solutions such as carbon capture and responsibly sourced gas. Midstream Energy is favoured for its income potential -in 2021 the ETF provided a yield of 8.3%. [11]

The long-term outlook for US natural gas benefits from plentiful resources and growing demand. In its Annual Energy Outlook 2022 the US Energy Information Administration (EIA) forecasted that US natural gas demand will grow through 2050 and production is expected to grow by over 20% from 2021 to 2050. The expected growth in natural gas production and demand will require additional energy infrastructure which is the “bread and butter of midstream energy”. [12]

Also positive in the first four months of the year was the Global Airlines Industry theme. In January travel was slow to pick up due to the emergence of the Omicron strain of COVID-19. However many companies are now forecasting record travel demand this summer with implications that the long-awaited “reopening trade” has arrived. As Frank Holmes manager of the US Global Jets UCITS ETF (JETS) notes “there has been a clear upward trend so far this year especially since omicron cases began to recede in January. As an example on Saturday April 16 some 1.9 million people boarded commercial jets in the U.S. which is about 95% of the volume seen on the same travel day in 2019.”

Holmes continues: “that’s volume. If we’re talking about money spent people are spending more on air travel now than they were in 2019 due to inflation. In March online spending for domestic flights touched $8.8 billion or 28% higher than pre-pandemic levels according to Adobe.”[13] However travel stocks have not yet reflected this sentiment suggesting that we may have to wait a little longer for the aforementioned “reopening” of trade.

Another defining feature of the first four months of the year was rising interest rates.[14] As a result growth stocks across the board have been hard hit. This was reflected in the performance of many of the growth stock orientated themes.

One victim of rising rates was the Digital Infrastructure theme which returned around -24%. According to Chris Versace from Tematica the index provider of Digital Infrastructure and Connectivity UCITS ETF (DIGI) while performance reflects the current market backdrop the theme still has potential. Versace noted: “if history once again repeats itself (Great Recession Pandemic) there will be no slowdown in content creation consumption and sharing. The continued increase in data traffic/congestion should give way to catch up spending that drives demand for the overall basket of DIGI constituents. IDC recently published a report predicting the annual data creation rate will exceed 180 zettabytes per year by 2025 roughly triple the 2021 rate.”

Meanwhile the Medical Cannabis theme returned almost -25%. Partially this can be put down to the poor performance of growth stocks in the rising rate environment. However there are also specific factors weighing on the theme. According to Nawan Butt manager of The Medical Cannabis and Wellness UCITS ETF (CBDX) the performance was “less a function of company and industry fundamentals and more a function of regulatory challenges and investor access.”

It is important to stress that companies in the sector continue to improve their topline sales and achieve bottom line success as total addressable markets for medical and adult-use cannabis are both on the rise.[15] Instead we believe performance is more related to a lack of enthusiasm centred around the slow speed of regulatory reform which plagues the sector and investors.

Therefore valuation multiples in the sector are at multi-year lows and do not reflect the underlying fundamentals and growth potential of the industry. Put simply: low stock prices are an example of the current financial ostracization of the sector.

We expect with regulatory reform the growth on offer will be rewarded by more appropriate trading multiples and lift valuations for all cannabis companies especially those operating in the United States which is the major immediate growth market. Another key growth market will likely be Germany where momentum continues to chug along. The German Health Minister is pushing for cannabis reform to be expedited. Although part of a larger agenda surrounding the German healthcare system a vote of confidence from the Health Minister should push lawmakers to prioritize cannabis reform in Germany. [16]

Also hit hard has been the Global Online Retail theme. Over the course of the year it returned -49.67%. It has been a tough environment for many online retailers who ramped up for peak production during the pandemic only to have to cut back now that demand has returned to normal levels. According to Jane Edmondson manager of the Global Online Retail UCITS ETF (IBUY): “online retailers have not been immune from inflationary pressures and supply chain issues. That has been evident during this quarter’s earnings seasons where sales revenues have been strong but earnings (due to higher costs) have missed.”

However Edmondson stressed the long-term thesis is still intact. While new shopping habits have been born of or solidified by the pandemic&mdashnamely online grocery buy-now-pay-later (BNPL) and food delivery services&mdashthere is still growth to be had considering penetration rates in many markets.” [17]

Next Chapter: Looking Ahead: Going Green and Clean?