A VIEW FROM THE TOP END

Markets:

Markets have continued to rise over the Black Friday/Cyber Monday shopping period as we begin to enter the “silly season” before the Xmas break. Festivities are a bit subdued around the globe and we are fortunate to celebrate nearly Covid free here in Australia, as other regions of the globe will not be as cheerful. In the UK, the first public vaccinations occurred this week, as Pfizer’s vaccine was injected into a 90yr old woman. Humankind is now on the offensive against the scourge of the virus. As positive sentiment grows heading into 2021 the ASX returned 1.73%, the S&P500 0.94% and the Nasdaq 3.48%.

Framework Series: Defence – Drones

Drones became popular in the early 1980s’ as a military technology, and later smaller versions of drones were used by photographers and movie enthusiasts around the world. While you can buy a small personal drone (light weight) from any Kmart store for as little as $25, the more advanced commercial drones (heavy weight) can cost $1,500 to $25,000 per unit. While this seems expensive these drones are saving millions of dollars for businesses who are deploying them to map roads, survey pipelines, spray fertilizer, attend emergencies and to trace criminals. Mining companies are using them to estimate inventory-levels, military officers monitor borders, and scientists collect climate data with their drones. Additionally, young inventors are making thousands of dollars by racing their drones in the globally organised Drone Racing Leagues. It is a fast moving and high-flying space.

Resurrection of the drone industry is made possible by the coming together of regulations, internet connectivity and Ai

Over the past decade, the drone industry has been through a boom-and-bust during which many start-up companies failed, and venture capitalists lost their investments. The major hurdles that prevented the ultimate take-off of these drone businesses were low battery life, weak internet connectivity and lack of regulatory support/guidance from authorities. However, in recent years, these hurdles have faded, and the drone industry has been resurrected with the arrival of 5G internet connectivity, advances in machine learning, availability of superior lightweight HD cameras and other sensory add-ons. The latest commercial drones have in-built GPS navigation systems, automatic take-off and landing functionality. Moreover, research has gone into enhancing the drone’s battery life (including, wireless charging towers), protecting drones against cyberattacks and making them quieter. Companies in the drone sector have found their niches and the sector are no longer tyring to sell a one-size-fits-all solution.

Since 2016, civil aviation regulators in the US (FAA), Europe (EASA), and Australia (CASA) have become more accommodative to the idea of having drones in their airspace. Now, there are clear rules regarding registering drones, flight paths, drone-pilot licenses, and the amount of payload these vehicles can carry. Recently, the US aviation regulator issued new licenses for delivery-drones to Prime Air (Amazon), Wing (Google) and UPS. These drones can carry and deliver payloads of up to 2.25 kilogram, which significantly reduces the last-mile delivery cost for these companies.

Investing in the core drone-manufacturing sector can be tricky, as most opportunities are privately held

With an estimated revenue of more than U$3 billion, privately owned, Shenzhen-based Da-Jiang Innovations (DJI) commands more than two-thirds of the global drone manufacturing market. There are many other smaller players such as Yuneec International (Hong Kong), Parrot SA (France), 3D Robotics (USA) and AeroVironment (USA); but only a handful of these companies are listed on stock exchanges, and even fewer are trading at a reasonable valuation. An investor’s focus must constantly be on innovations that can augment existing drone products. These could be in high-definition cameras (GoPro, GRPO), soundproofing drones (Dotterel, New Zealand), chip manufacture (Ambarella, AMBA), or pilot coaching start-ups.

Gartner’s Hype Curve suggests there are more niches of growth in the drone industry

Disruptive innovations such as drones, internet-of-things and machine learning are rapidly changing the way we carry out our day-to-day business and personal activities. Frontier and emerging market countries such as China and UAE are seeing immediate benefits in these advanced technologies and are moving fast to create a conducive ecosystem for such innovations to thrive. This next leg of innovations will certainly leave a wide gap between investors who got-on-the-bus and those who missed-the-bus. At Territory Funds Management, we are constantly looking at this sector for investment opportunities that will keep our clients in-tandem with the ever-changing world over the next decade.

Updating our checklist:

• Valuation: ASX & S&P500 levels: Valuations have risen again. As at print date the S&P (26.0x) and ASX (22.49x) fwd PEs remain near record highs supported by government stimulus and near zero interest rates. We sound like a broken record, but economic stimulus will continue to trump fundamentals in the short to midterm in 2021.


• Global PMIs: With a new month we get a large hit of economic data from around the world. Despite rising infections, we continue to see manufacturing expand in Europe, Asia and the US. Interestingly at home we saw surprise growth in building approvals and mortgage applications as Australia looks poised for housing boom in 2021. This appearance is not unique as the US, and Canada are seeing similar data reads.


• Downgrades on guidance: In general, Q3 reporting continues to be strong. We have seen a few missteps ahead of Q4. Appen had a bit of a stumble, as currency headwind from a rising AUD and delays to a few products amongst their client base, caused their growth to lower. We do not see this as a trend yet in the market, but any downgrade will be subsequently punished by the market.


• Infection rates to slow globally: We mentioned earlier that the Pfizer vaccine began being administered this week in the UK. While excellent news in our fight against the virus, it is too little too late to have a material effect on the current building waves of infection in the North America and Europe. The vaccine itself is promising and our colleague from Mason Stevens, Jesse Imer pulled some key data from Pfizer’s Food and Drug Administration application, mainly that even though the Pfizer vaccine is most effective as a two-dose treatment, even one dose has an 88% effectiveness against Covid.
  
  The below charts your likelihood of developing COVID after dose 1
  
  Placebo = red (more likely, no kidding)
  Vaccine dose = blue (incredibly effective)
  
  


• Monetary and Fiscal stimulus announcements globally: Renewed optimism has been injected into the US stimulus conversation. The government is seriously considering a nearly $1trillion increase to assistance, and the central bank in the US is discussing asset purchases again in the form of quantitative easing (QE), like what was done during the 2008 GFC. As central banks expand their balance sheets with QE it is generally good for markets. As investors this is positive news.

We are fast approaching the end of calendar year 2020 and with the turning of the calendar approaching several research houses are releasing their outlooks for the year to come. Right now, figures are looking promising, with some researchers expecting 15%+ returns for the US market next year, where an average year for equities is 8-12%. Not to be out done here in Australia we will see similar equity returns on the ASX, buoyed by strong commodity pricing. For those less interested in share markets and more at home in the real estate market, we mentioned in our last piece that ANZ was expecting Australian capital city property to average 9% gains in 2021. It is shaping up to be a big recovery year. With all the positive sentiment if you do find yourself with extra capital, we do suggest you speak to one of our advisors about what they can do to help you reach your financial goals. Our financial experts are trained and equipped to assess your needs and assist you on your financial journey. Take care and we will be in touch with our outlook for 2021 in two weeks.

Regards,