Under the series, we identified various stocks that have given stupendous returns, some of which have become multibaggers.

The following is the performance of the Thematic Investing bets (equal weight):

Thematic Investing 1 & 2( Defence)

Thematic Investing 3 (Luxury)

After the success of the Thematic Investing baskets, we have been frantically searching for the next theme.

Though we had planned and identified the stocks for this series before the announcement of “Deepseek,” the sentiment about anything related to “AI” in the US has suffered irreplaceable damage, whereas the “cheap” Chinese tech stocks have suddenly found the love and warmth of investors.

Nonetheless, some stocks will still benefit from the gargantuan CapEx announcements by big tech companies.

According to the latest announcements by hyperscalers, five companies will spend a combined $300 billion to augment their capacity to handle the data explosion (data centres) and train their AI models.

Thus, our focus remains on the companies benefiting from this CapEx.

PS: We have covered charts and brief about the cross asset moves at the end (so don’t miss them).

We have identified the following companies:

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The internet universe and netizens have raged in a vicious debate over the past several years about the impact of climate change and, thus, the “resources” that governments worldwide have committed to reaching a carbon-neutral society over the next 27 years.

The ambitious Net Zero targets would entail trillions of dollars of spending and, thus, will open a plethora of opportunities for various companies. Various sectors will benefit immensely, and millions of jobs will be created to meet the COP 26 goals.

The groundwork for the Net Zero Transition was laid in 2017 with the formation of the Network For Greening The Financial System (NGFS).

NGFS is a nodal agency that boosts 114 central banks and financial supervisors, paving the roadmap for various CBs to finance the mega transition.

You will be wondering why such a large organisation is required to oversee the financing?

Well, folks, the reason is the staggering amount of money required to achieve the Net Zero 2050 target.

At its peak in the next few years, the annual spending will reach a whopping 8.8% of the GDP from the current 6.8%. This will also mean higher fiscal deficits for governments worldwide as subsidies for the transition will be a significant portion of the government budget.

While market participants have only focussed on renewables and EVs, there is a whole host of sectors to explore that will likely benefit from the accelerated spending by governments globally.

The astronomical spending will be used for creating physical assets for energy and land use systems.

As per estimates, governments will spend almost double ($3.5 trillion more annually) on low-emission assets and enabling infrastructure on what they are spending today.

The mind-boggling fact is that while many new companies with billions of dollars of market cap will emerge, it will become unviable for many companies to operate, thus eroding shareholders’ wealth if they don’t diversify appropriately.

PS: Before we begin, we will increase our paid subscription prices to $24.99/M or $ 249.99/Yr starting 1st March.

Note that the subscribers who are currently enrolled or will enrol by 1st March will be subscribed at the mouth-watering current prices ($14.99/$149.99) “FOREVER”.

So, somebody who wants to take advantage of a massive 40% discount for a lifetime can subscribe till midnight on 29th Feb at the current prices.

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The three biggest sectors, which will witness 70% of the total $275 trillion of spending, are unsurprisingly emitting the highest CO2 emissions :

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One of the most fundamental concepts in economics is the law of demand. The law of demand states that:

“As the price of the given good increases, the quantity demanded decreases as long as all else is equal”.

Nevertheless, there is a specific section of goods that defy the law of demand and whose demand “increases” with an increase in “price”. These are known as “Veblen” Goods.

One of the noteworthy reasons to focus on these goods is that the post-pandemic world is witnessing a K-shaped economic recovery. You will be amazed to learn there is a mad rush globally among the aspirational upper middle class to upgrade to “luxury” goods as they elevate their “social status”.

Post covid, social media has demonstrated tremendous growth and thus has become a household phenomenon. Furthermore, apps like Instagram have become a tool to flaunt one’s wealth. As a result, “certain” luxury goods have benefitted disproportionately from the K-shaped economic recovery.

Furthermore, higher inflation is a tailwind for these companies as they can seamlessly increase the prices of their goods, which in turn stimulates demand. Thus supporting both volume and value growth.

One of the best examples of the craze is the “higher” replacement demand for the recently released iPhone 15 Pro Max, the costliest version of the just-released iPhone. While the demand for the primary/lower version is subdued or in line with expectations, the demand for the topmost version has exceeded the company’s forecasts in multiple regions.

Furthermore, some of the other tailwinds for luxury goods are:

• Customers' loyalty is one of the most significant contributors to the exponential rise in sales for these companies.

• Higher interest rates are a boon for savers as the interest income boost gives an impetus to the wealthy to spend on high-value purchases.

• Since these companies hike prices without affecting sales, this helps drive earnings higher without making incremental investments in capacity, plant and machinery and other capital investments.

• Some luxury products are also bought as an “investment” (collectables), which gives an added advantage for the topline growth.

• These companies are known for priceless Brands, aesthetics, quality materials, superior craftsmanship and for transforming everyday objects into “status symbols”.

Due to the above reasons, the luxury goods theme is a must-own in one’s portfolio.

Today, we will focus on the companies that produce “Veben Goods” and have the potential to outperform all other index constituents if we remain in an inflationary environment for the years to come.

Let’s dig deeper into some of the companies!

PS: This newsletter may appear truncated in an email due to its size; readers can click on "View entire message", and they'll be able to view the entire post in their email app.

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After using multiple filters and spending days researching the sector, we selected 9 stocks out of more than 200 global companies in the A&D sector. We further covered one large-cap stock in detail in the first part, and today, we will take a deep dive into the potential multi-baggers that we added to our portfolio last week.

Before I begin, congratulations to those who have been holding URA in their portfolio as we bought the same in June. It has given pretty healthy returns of more than 20%+ and has been an excellent pick.

Let’s discuss the rationale behind the addition of the two A&D names to our portfolio!

Let’s go!!

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History guides us that every new bull market has new leaders from new industries and geographies, which compound at an astonishing pace over decades. These megatrends create new multi-baggers.

The 90s saw the emergence of internet stocks; the next decade was dominated by the roaring Chinese stocks, and the 2010s saw the unprecedented rise of the trillion-dollar mega tech stocks.

Nonetheless, the narratives flow ruthlessly; thus, most market participants are “propelled” to believe that tech stocks will continue with their relentless run.

In the quest to find the new leaders of the next bull market, I am beginning this new edition of “Thematic Investing”.

My thesis about the megatrends:

“We live in a new “multi-polar” world marred with occasional skirmishes across the Middle East, Africa and Europe. This will lead to protectionist policies, deglobalization and indigenization, known as friend-shoring/reshoring across the various large economies. (CHIPS Act, Critical Raw Materials Act etc.).

Furthermore, the government policies will be aligned for the gargantuan green transition (Inflation Reduction Act). The A.I. revolution and WFH culture also mean cybersecurity will be the prime focus. We also need enormous upgrades to our healthcare facilities to prevent further pandemics.

The other megatrend has been the premiumization of economies as the world grapples with income inequality and K-Shape recovery across the globe post the pandemic.”

Thus, A.I., quantum chips, semiconductors, healthcare, green energy, space and defence (drones, autonomous tech), and luxury goods will be the focus of our bottom-up ideas /thematic investing in the next few months.

Today, we will commence with the broad outlook of the defence (and somewhat space) industry and then move on to some of the stocks I have been looking across.

Due to a confluence of factors, the defence industry is undergoing a renaissance. The most significant tailwind for the sector has been the accelerated spending post-war last year. NATO countries have announced an enormous increase in the defence budget.

Outside NATO, Japan is set to double its defence budget by 2027, and Australia has also announced a considerable increase in its defence spending thanks to the aggression by China in the South Sea. Furthermore, the “Global South” evolution will lead to elevated defence exports.

The other tailwind has been the development of autonomous military technologies. No human contact on the battlefield will be upgraded to “remote” combat, with the machines learning how to evade the enemies. Using “A.I.”, these future autonomous weapons will dominate the battlefield and function with less supervision and almost no human intervention.

Before we begin with the fundamental analysis of the industry and stocks, we must memorize a few things about the industry:

Nuclear Triad: The U.S., Russia, China and India are the few countries that possess the nuclear triad. These countries have ICBMs, SLBMs and strategic bombers in their kitty.

GBSD: The U.S. is the oldest country with the nuclear triad and is undergoing massive modernization. The U.S. Air Force’s LGM-35A Sentinel weapon system, formerly known as the Ground Based Strategic Deterrent (GBSD), is a critical modernization of the ground-based leg of the U.S. nuclear triad. The Sentinel (GBSD) system replaces the ageing Minuteman III intercontinental ballistic missile (ICBM) system, which has been in service for over 50 years.

NGAD: Next Generation Air Dominance is an ambitious program by the U.S. Air Force to develop the 6th Generation fighter jet. Currently, the most advanced technology in the USAF is the 5th Generation: Lockheed Martin F22 Raptor.

Future Combat Air System (FCAS): It’s the classified program by Dassault, Airbus and Indira Sistemas to develop the 6th generation fighter jets replacing the current Rafale, Typhoon and EF-18 Hornets.

Tempest: The 6th Generation fighter jets that BAE Systems is working on developing for the U.K.’s Royal Air Force.

AUKUS Pact: Trilateral security pact between the U.S., U.K. and Australia for developing nuclear-powered submarines for Australia.

NGI: Next Generation Interceptor is the Missile Defence Agency’s (MDA) ambitious program to upgrade the Ground-Based Missile Defense (GMD) system (to protect the U.S. from ICBM Attacks).

LRIP: Low rate initial production (LRIP) is the initial phase of small quantity production. It’s exclusively used for military weapons programs.

DARPA DRACO: The DRACO program is to demonstrate a nuclear thermal rocket (NTR) in orbit. If Mars colonization is indeed the future, then DARCO will be the technology behind it (More Info Here).

Book-to-Bill Ratio: Extensively used in the defence (and semiconductor) industry, the book-to-bill ratio refers to the ratio of orders received to units shipped and billed for a specified period.

Cost Plus Contracts: It’s a term that military contractors use for those contracts where the profits as % of the total contract value is fixed. On the contrary, in fixed-price contracts, the contractor assumes the risk arising from supply chain risks and inflation.

One may be well versed in these basic terms before venturing into the limitless A&D (Aerospace and Defence) sector.

Various ETFs are also dedicated to the defence and emerging “space” industries. We will start with the ETFs, understand the broad theme, and then move on to a detailed analysis of the individual stocks I have scrutinized.

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