Thematic Investing Part:1

Welcome, folks, to the brand new edition of the Marquee Finance By Sagar. Most of you know me as a macro investor; however, since the advent of my investing journey, one of my passions has been to pick stocks actively.

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.