Trying to forecast where technology may lead us is relatively easy compared to determining where to invest in order take advantages of these technological trends. Some companies that may appear ideally suited to do well in the future may actually find technology works against them and some sectors that appear “hot” might actually turn out to be quite unprofitable.
In Part One I looked at some areas where I believe we will see some major technological developments in the years and decades ahead, now in Part Two I will outline what investment opportunities may present themselves in each of these areas.
Investing in Electrical Power Generation
My general view is that it is better to invest in the companies that supply parts for power plants, wind farms etc. or construct these facilities, than to invest in the companies that own and operate them.
The reason for this is that the supply of electricity in most nations is regulated to some extent and particularly so in Australia. Suppliers of electricity cannot charge what they want for each kilowatt they generate and a lid is kept on prices due to competition and government price controls.
However a manufacturer of the gearboxes needed for wind power generators can pretty much charge what the market will bear, and if this manufacturer has a technological edge then they will probably be able to charge more then their competitors. The same goes for suppliers of other key components needed for power generating facilities of all shapes and forms.
I mention wind power generator gearboxes because from what I have read they are nice little earners for the companies that make them. In addition the companies that make these components keep on raking in the money as the gearboxes need fairly regular maintenance (i.e. parts replaced) and the entire assembly needs to be replaced at some point. People may think those windfarms just sit there and generate clean energy forever but they don’t..they need attention.
I would apply the same logic to nuclear and coal power plants as well. If you invest in the companies that supply the major components needed for these facilities then I reckon you will do better than say a company that operates a them. All these plants needs to be maintained and components will need to be replaced on a fairly regular basis.
As for solar power I guess there are few moving parts involved so there is probably not so much business for the manufactures of this equipment after the initial installation is done.
I prefer the suppliers of components over the companies that construct power plants simply because suppliers can keep making money for decades after construction is completed. Also major construction projects tend to be risky affairs and I wonder if there will be a bit of a drop in the construction of clean energy power plants once all the climate change hype dies down?
The major players in terms of supplying components for power generation facilities are all overseas companies as far as I know, but on the construction side there are some Australian companies like Leighton Holdings (LEI) and Lend Lease (LLC) that might be able to tap into the clean energy market.
However my research so far seems to indicate that Australian companies are not well placed to tap into the global market in terms of constructing major power facilities or supplying major components.
Investing in Food Production and Supply
Australia is ideally placed to take advantage of a rapidly expanding middle class in Asia in terms of supplying food and other soft commodities such as cotton. In addition Australia is also one of the leading nations in terms of agricultural research and so there are plenty of investment opportunities for those who wish to tap into this sector.
ASX listed companies in the agricultural sector include Prime Ag Australia (PAG), Graincorp (GNC), Elders Limited (ELD) and in the research/biotech area; Chemeq (CMQ) and Nufarm (NUF).
Just remember that farming has it’s ups and downs so if you invest in this sector I think you need to prepare yourself for times when these stocks will take a beating while overall the stock market might be rising. However over the longer term (5 years plus) I feel this sector will be one of the stand out performers.
Investing in Transportation
This is a tricky area in which to make any long term investment decisions. Logic suggests that if we want to reduce CO2 emissions then we should be making large investments in public transport, but it just does not seem to be happening.
Yes there is the odd project here and there but by major I mean for example a high speed rail link between Sydney and Canberra (and then onto Melbourne perhaps), a new underground metro subway network in Sydney (not just some line extensions..a network!) and a major investment into higher speed rail lines from capital cities to regional hubs.
The airline industry (or parts of it) will emerge from this mess but frankly I don’t feel that companies like Qantas (QAN) or Virgin Blue (VBA) are particularly attractive long term investments.
There are probably companies that will do well from the Government’s economic stimulus measures as parts of the Australian transportation network are tweaked, but this is likely to be a relatively short term burst of activity.
Long term I find it hard to get too excited about the transportation sector in Australia. The only company that has really caught my attention is Downer EDI Limited (DOW) but I am happy to hear from anyone who has some other suggestions.
Sadly as I looked into the subject of technology and investing I realised that Australia will probably miss out on many opportunities in the next few years and decades simply because we still do not have a well developed high tech sector. (To counter this I am an investor in Japanese stocks as I feel many Japanese companies will benefit from their long term research & development efforts in the coming decades.)
Australia might be investing in clean coal technology but the chances are clean coal power plants will contain few Australian components and will probably be constructed by foreign lead consortium’s. As for tapping into the boom in nuclear power we will almost have no part to play and end up being one of the few developed nations without a nuclear power industry.
Even in the transportation sector I would guess that much of the technology used in Australia is imported, so the only area so far where I have feel Australian R&D may reap major rewards is in agriculture. I am aware that Australia has some major medical/biotech companies so I might look into some of these companies in another article.
But I am quite happy to be corrected, so if anyone knows some area(s) where Australia can take on the world in terms of home grown technology then please let me know.