The last decade in terms of investing in stocks has been defined by the rise of companies in the technology sector, better known as the “Faang” (Facebook, Amazon, Apple, Netflix and Google). With the beginning of this new decade, this combination of companies has lost strength, mainly due to increases in interest rates, inflation rising as never before and low economic growth. This is why the strategists at Bank of America and Merrill Lynch (BAML) have reassigned the letters of that well-known acronym, and have redistributed the letters between different sectors to adapt them to the new times. Today we are going to review the different sectors that make up the new “FAANG”* and how we can position our investment portfolio in stocks. *(We remember that the acronym of the new “FAANG” comes from English words).
What sectors make up the new “FAANG”?路♂️
F for fuels.⚡
As we have seen in recent months, the conflict between Russia and Ukraine has sparked a energy crisis never seen. These geopolitical tensions have led us to a limitation in supplies, caused by little investment in oil and gas production. These two factors, together with continued strong demand, will keep energy sector prices high for a long time.
Forecast of price development in the energy sector. Source: ECB.
The energy sector took a backseat during the decade of prosperity and growth that we experienced after the great crisis of 2008. Funds moved towards more “green” assets. This has led to an increase in the cost of capital for that sector, driven largely by policies ESG. This has led to a large reduction in interest in investing in oil production. According to Goldman Sachs, oil producers are currently only incentivized to develop new projects at $90 a barrel. If capital costs were lower, they would be incentivized at $57 a barrel. This has led us to limited oil supply along with higher oil prices for much longer.
How do we position ourselves?
To take advantage of the first letter that makes up the renewed “FAANG”, we have several investment opportunities in stocks in the technology sector. raw materials. Warren Buffett is a fan of the energy sector, accumulating huge stakes in two of the largest American oil producers: Chevron (CVX) and Western (OXY). At the same time, they are also a good hedge against inflation, but it must be taken into account that, if a recession occurs, it is likely that the price of oil and consequently oil companies will fall. We can invest in the energy sector by making our investment in individual stocks. If we want to diversify our exposure, the iShares US Oil & Gas Exploration & Production ETF (IEO) or the iShares Global Energy ETF (IXC) are the most viable options to benefit from the rise of the energy sector.
The first A in the aerospace and defense sector.️
Since we started this year, 2022, we saw that it did not predict a calm future for us. The beginning of the conflict between Russia and Ukraine and tensions between China and Taiwan have caused a growth in military spending both in European countries and in the Asia-Pacific region. Currently, spending on defense It is no longer limited to the construction of armored vehicles or tanks. With the innovation of the technology sector, wars currently exert quite a force through the network. Which is why governments and industries are investing large sums of capital in cybersecurity.
How do we position ourselves?
An immediate increase in revenue is unlikely in the aerospace and defense sector, as defense projects typically have multi-year schedules. But it is likely that they will achieve greater stability in income in the medium term. If we want to take advantage of the second letter of the new FAANG, we can invest in the iShares US Aerospace & Defense ETF (ITA), at Invesco Aerospace & Defense ETF (PPA), at SPDR S&P Aerospace & Defense ETF (YES) or the SPDR S&P Kensho Future Security ETF (FIT).
The second A for agriculture.
Geopolitical tensions have also caused an increase in food costs due to supply cuts or the recent droughts we have suffered this summer. At the rate we are going, there won't be enough food to feed everyone. According to the World Resources Institute, food production will need to grow by 69% by 2035 to feed the growing population and expanding middle class. The global agricultural sector is huge. It is not only about food, it is also made up of agricultural machinery, fertilizers, pesticides, crop and seed producers. Not all members of this sector will generate the same benefits equitably in the face of growing demand. Food price increases may vary between them.
How do we position ourselves?
If we want to invest in the second letter A, we must think about the parts of the production chain of this sector with the highest barriers to entry and that help the most to improve the production chain. Like, for example, seed producers. The vertical farming It is also an interesting way to make our investment in stocks within the agriculture sector. In turn, we contribute to the preservation of the environment. If we want to gain exposure to this sector in a diversified way, we can invest in the ETF iShares MSCI Global Agriculture Producers (VEGGIES) or the iPath Series B Bloomberg Livestock Subindex Total Return (COWON).
No nuclear and renewables.☢️
Nuclear energy is experiencing a resurgence years after falling out of favor following the Chernobyl plant disaster. Governments are looking for reliable, low-carbon energy sources. High gas and electricity prices in Europe, caused by Russia's gas cut, are forcing Europe and the rest of the world to reconsider their plans to close nuclear power plants. Both nuclear and renewable energy do not emit carbon and are essential to contribute to meeting the UN's climate change objectives.
How do we position ourselves?
Europe is immersed in an energy crisis, since Russia has cut off our gas supply. In recent months, the countries of the old continent have filled their gas storage tanks as much as they could. In turn, they have begun to turn to other alternative energy sources, such as liquefied natural gas (LNG). But the purchase of LNG from the United States is not a long-term solution, since it continues to be a cost that harms the growth of the bloc. On the other hand, nuclear energy could be. To invest in nuclear energy, we can buy the Global X Uranium ETF (IVR) or invest directly in uranium through the Sprott Physical Uranium Trust (U.A.).
G for gold and metals/minerals. ⚒️
A hundred more years may pass physical It will always be considered the refuge asset par excellence. Investors want to have it for security when things get bad. But there are other reasons to invest in minerals or metals. The transition to electric vehicles, for example, is going to be mineral and metal intensive. According to the International Energy Agency (IEA), the manufacture of electric vehicles requires six times more "critical" minerals than a conventional car with an internal combustion engine (ICE), the most important being copper, nickel, manganese, cobalt, lithium and graphite. In the short term, interest rate increases are not going to help gold's profitability. After all, gold offers zero returns compared to Treasury bonds, whose returns continue to rise. However, gold may continue to perform well as a hedge if inflation persists and geopolitical tensions rise.
How do we position ourselves?
If we want to make our investment in individual stocks, we can buy shares of Newmont (NEM) or Barrick Gold (GOLD). If, on the other hand, you prefer to diversify the risk, the best way is through ETFs such as SPDR Gold Shares ETF (GLD) or the iShares Gold Trust ETF (IAU). The metals/minerals supply chain, like agriculture, is quite complex. One of the most direct ways to invest in them is through investment in critical minerals through the VanEck Rare Earth/Strategic Metals ETF (REMX).
So, is it a good idea to invest in stocks in the new FAANG?
The returns on the new FAANGs may not be as attractive as those generated by the technology sector's FAANGs in their day. This shift gives us a more diversified and defensive approach to our equity investing, with primarily low beta and low volatility exposure across aerospace and defense, agriculture and gold. Of course, they are going to require much more patience, given that the aerospace and defense industry, agriculture, nuclear and renewable energy, and gold sectors can take years to develop. But if you want a glimmer of hope, both Elon Musk and Warren Buffett agree on at least two of the issues: fuels and nuclear energy.
Investment forecast in renewable energies from 2006 to 2030. Source: Industry Tap.
The new FAANG is a bet on climate change, growing geopolitical tensions and persistently high inflation. So, if you think this world is going to be much more volatile, this approach could be the most appropriate for our stock investment portfolio.