ASX mid caps: Keep the faith in dominant trends says Pendal’s Brenton Saunders

For ASX mid-cap investors, three mega-trends remain central to markets, says Pendal portfolio manager Brenton Saunders

• AI accelerates demand for data centres
• Gold an opportunity, up 20 per cent in AUD terms
• Find out about Pendal MidCap Fund

THREE major trends continue to underpin ASX investing in 2024, says portfolio manager Brenton Saunders, who manages Pendal MidCap Fund.

“The first one is international and ubiquitous – data centres and artificial intelligence,” he says.

“Demand for data centres has been a trend for a long time and AI has accelerated that demand.”

“More recently, we’ve seen a very tangible escalation in demand for data centres among big and small corporations.

“There’s a land grab going on and there’s limited availability that meets all the criteria corporates want.”

New supply isn’t meeting demand, making established players like NextDC (ASX: NXT) attractive investments, he says. (Pendal holds NXT).

But investors should keep an eye on data-centre power requirements, which continues to present a growing challenge.

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“Data centres are very power intensive and in the brave new world of decarbonising baseload energy, power is becoming harder to access, more volatile and more expensive.

“The advent of AI and its adoption and commercialisation has focused the minds of the bigger corporations on procuring data, storage space, and finding areas where they can train large language models for AI,” Saunders says. “Power is part of that.”

Decarbonisation

The second big trend is around the ongoing decarbonisation of the mainstream electricity supply and the length of time it is taking.

“Renewable generation capacity is continuing with reasonable success, but there have been delays in terms of both timing and capacity.

“That means a range of sectors — from coal and gas producers to electricity producers and even refiners — have benefited, even though some thought demand for their fossil-fuel-generated power would be downscaling by now.

“This is enabling many of these companies to generate good profits for longer.”

Whitehaven Coal (held by Pendal) has benefited, Saunders says.

In regard to coal, because many corporates are no longer investing in the sector, the coal companies are able to buy good assets at cheaper prices. Whitehaven’s purchase of two mines from BHP last year is an example.

The trend has also benefited uranium stocks.

“Uranium has belatedly been recognised and accepted as part of the decarbonisation of the grid.

“Several OECD countries are reversing plans they had to reduce their reliance on uranium and have recommissioned old facilities and are contemplating new ones.”

Electrification

The third trend is around electric vehicles and battery-aided power, as well as the inputs needed for the sector.

“The performance of some stocks in the sector, particularly lithium companies, has been disappointing.

“High prices stimulated new lithium production faster than the growth in market demand. A similar issue has plagued the market for rare earth elements.

“There is also the maturing of the electric vehicle market globally alongside a softer macroeconomic environment. We have seen a notable shift away from battery electric vehicles towards plug-in hybrids.”

While these ripples have arisen in recent times, the electrification trend remains intact.

Gold

Gold is an investable thematic in 2024, though possibly not as long-lived as the other three trends, Saunders says.

“We’re now seeing a number of developed markets cut interest rates and gold has reacted.

“It is up more than 20 per cent year-to-date in AUD, allowing the gold producers to more than offset the high cost inflation of the past two years,” Brenton says.

“Margins have expanded, and companies have been able to generate more cash. They are paying down debt and there’s been more M&A activity, making the sector more buoyant.

“It’s a thematic we think will play into next year.”