Brenton Saunders: Three mid-cap themes that ASX investors should consider

Amid the noise from earnings season, long-term mid-cap trends continue to provide opportunities for investors. Pendal PM BRENTON SAUNDERS explains

• Beyond the earnings cycle, long-term mid-cap trends provide opportunities
• Data centres, decarbonisation and transition fuels, EVs worth considering
• Find out about Pendal MidCaps Fund

MOST equities investors know they need to look beyond the ASX50 get better exposure to the fastest-growing industries.

We consider the ASX’s midcap space to cover companies in the ASX51-150 – where market caps can typically range from around $1 billion to $10 billion.

These medium-sized companies tend to offer higher earnings growth than large-cap companies, often with less risk than small caps, says Pendal portfolio manager Brenton Saunders, who manages Pendal MidCap Fund.

Three enduring mid-cap themes that offer opportunities for investors over time are data centres, transition fuels and decarbonisation, and electric vehicles, Saunders says.

“These trends are creating high-quality growth metrics that are investable,” he says.

Here’s a quick overview of the three themes:

Data Centres

“Whether we are speaking to software-as-a-service companies or corporates, the whole notion of data migration into the cloud and trying to integrate AI into processes at a meaningful level is ubiquitous,” Saunders says.

Data-centre operators are an integral part of the shift, which provides opportunities for companies like NextDC (ASX:NXT) and among small caps, Macquarie Technology Group (ASX:MAQ), he says. (Pendal holds NXT and MAQ).

“We continue to see inflections in already high rates of adoptions for incremental storage from all the big players in the market like Microsoft, Amazon and Apple.

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“On top of that you have demand from governments and corporates.”

The rise of artificial intelligence has accelerated demand for data centres.

“Somebody that might have been looking for 10 megawatts a few years back is now looking for 20 to 25 megawatts.”  

Outside of pure storage and processing of data companies, there are investment opportunities among more progressive users of the available infrastructure, Saunders says.

Pendal-held imaging group Pro Medicus (ASX:PME) is an example, he says. It relies heavily on moving large quantities of data to the cloud, and then being able to access the information quickly.

“The platform that Pro Medicus is using to do that didn’t exist five or ten years ago,” he says.

Other local players using data-centre infrastructure in innovative ways include Wisetech Global (ASX:WTC), Altium (ASX:ALU) and Technology One (ASX:TNE) — all held by Pendal.

Transition fuels and decarbonisation

There is a mismatch in Australia — and globally — between the necessary ramping up of renewable power sources and the planned decommissioning of old forms of generation, Saunders says.

“Annually in Australia, we should be aiming for between four and five gigawatts of renewable power growth every year. At the moment we’re generating a little over one.

“Yet we still plan to decommission a lot of the baseload carbon-based generation.

“From an investment perspective, that fact will continue to create volatility in power markets. The good generators have an opportunity to take advantage of the volatility in markets.

“Companies like AGL Energy (ASX:AGL) and Origin Energy (ASX:ORG) could benefit.”

“There are also the refiners in the market that are priced as if they are going to be defunct in ten years time,” Saunders says, nominating Pendal-held Viva Energy (ASX:VEA) and Ampol (ASX:ALD).

“But we probably won’t reach that point for 15 years or more.

“Their earnings will remain higher for longer. That gives them more opportunity to return capital to shareholders and diversify their businesses in a meaningful way.”

Electric vehicles

“The sector finds itself in all sorts of pain because of over-investment in a group of raw materials, particularly lithium,” Saunders notes.

“But there is absolutely no going back on it.

“It’s going to be cyclical in nature and we are experiencing that now, but it is a thematic that will have duration and opportunity for investors.”

Saunders notes that the shift to electric vehicles is one part of the decarbonisation roadmap on schedule, particularly in China and Scandinavian countries.

“It’s easy to ignore investing in raw materials for EVs because the prices of commodities like lithium, cobalt and nickel are low.

“But we think it’s another thematic that has plenty of durability.”