Podcast: Investing in the new industrial era

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Podcast intro

Welcome to Think Again, a podcast by Macquarie Asset Management, providing financial advisors with a fresh perspective and innovative insights designed to keep you and your clients a step ahead.
 

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Denise St. Ivany

Thank you for tuning in to Think Again. I’m Denise St. Ivany.

Today I'm joined by Chris Leslie, Senior Managing Director of the Green Investments Team at Macquarie Asset Management, and Sam Halpert, Head of Global Natural Resources at Macquarie Asset Management. Chris and Sam, it's great to have you both on the show.
 

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Chris Leslie

Hello Denise. Thanks for having me.
 

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Sam Halpert

Hi, Denise. Thanks so much.
 

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Denise St. Ivany

In the recently published “Outlook 2025: Plan for growth, prepare for volatility,” we highlight actionable ideas for investors to focus on in the year ahead.

Today we're discussing energy and infrastructure opportunities. Let's talk about the current global landscape and what's driving the long-term growth and the need for energy and infrastructure space. Chris, how about let's start with you.
 

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Chris Leslie

Sure, thanks, Denise. So, I think if our listeners have been paying attention to this sort of annual outlooks from the wirehouses and Macquarie and the big investment banks over the last few years, the three themes that keep coming up – this kind of three ‘D’s, I think they've become known as, of demographics, digitalization, and decarbonization – you know, those are persisting today, but there has been something of an inflection point with the arrival of AI. And so, I suggest now those three themes are still demographics, still digitalization, but there is a real focus on electrification in terms of the response to AI and the other two trends.

So, you know, on the demographics side, the global population is expected to continue to increase, I think forecast for something like nine billion by 2040, and all of us are using digital devices more and more every day. And the broader economy at large, you know, is increasingly reliant, as we know, on digitalization and AI. And all of this is creating an extraordinary demand for electricity.

So, if you look at the trends over the last few decades, and just focusing on the US for a moment, electricity demand has largely been flat for the last 20 years and really, with the advent of AI, the forecasts are now looking forward to sort of 3-4% growth per annum for the foreseeable future, as we deal into the rollout of AI and the continuing digitalization of the economy. There’s also the statistic you'll see in the outlook that if all the world's population continue to become wealthier, and everybody was effectively middle class on average, that would actually require three times the electricity use that we see today.

So, the big question is where is this electricity going to come from? And when you look at I think what most people will be familiar with, being the utility sector, right? The utility sector has a number of components to it. There's the poles and wires you see in the street, there’s the high voltage transmission system that carries electricity across the country, and then at the start of the whole process there's obviously the generation of electricity itself. Which has traditionally come from fossil fuels but is increasingly coming from renewable energy. And so, when you look at the generation side of electricity, there's what's known as the ‘energy trilemma’, where the constraints or the objectives of providing electricity really come down to affordability; reliability, or energy security; and, increasingly, sustainability.

So, when you look at those underlying forces, I think renewable energy is showing itself to have a really strong role to play there, both wind and solar and some emerging new technologies in that area. We'll talk a little later on about nuclear and perhaps some of the hype around nuclear, but certainly one of the key investment trends that we see is

continued investment in electricity production. And there's obviously been a lot of talk around the energy transition and the move to renewable energy but for the time being, I think that reliability element, which is top of mind particularly for data centers who are looking for what they call ‘five 9s’ power – so 99.999% reliable – you know, that isn't provided today by renewable power. The wind doesn't blow, and the sun doesn't shine 24/7/365, and so for the time being I think fossil fuels continue to have a role. Gas in particular continues to have a role. But because the cost of renewable energy is going to continue to fall, we would expect that renewables will take a larger and larger portion of that generation mix over the coming decades, right? This isn't happening tomorrow, but it is happening, and it's happening pretty steadily as we roll forward through time.

So, you know, big opportunities in that electricity generation sector. We'll talk about how you might play that a little later on. Digitalization, as I said, in our data centers, AI ultimately is about electricity as well and access to electricity. There's a huge race on around the world to find access to the grid at the moment for data centers, and, you know, that is in very short supply and very high demand. There's talk of opening up federal lands to data centers, for example, at the moment to supply some of that need. And so even the digital and data and AI growth that we see and expect around the place is constrained by grid access and availability of electricity at the end of the day.
 

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Denise St. Ivany

Well, Sam, let's also get your thoughts on this.
 

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Sam Halpert

Yeah. I think Chris has really covered it well and certainly focused on a lot of the key demand drivers. I just think one of the things we tend to focus on at a very high level, is something actually we're looking backwards. And so we think that when you look at energy demand over time, as a society we actually never reduced the use of a single fuel, save whale oil, which we only recently managed to phase out. So we think that, as there's this increasing pull on electricity, on traditional fuels, and [with] demographics, as we have more people improving their quality of life, we think there are tremendous challenges in meeting those energy needs. And with those challenges come some really great opportunities.
 

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Denise St. Ivany

So let's switch it up and talk more about the investment opportunities that you're both seeing across public and private markets that really every investor should be thinking about. How about we start with Sam.
 

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Sam Halpert

Yeah, so, Denise, there are myriad opportunities. We think gas, nuclear, solar, and then obviously Chris has touched on this, the power side of things driven by everything going on in data centers and AI. And so, we see tremendous short-term and long-term opportunities. For example, solar and renewables in public markets have had a very difficult two years, or two and a half years. And so, we think now actually there is value emerging. We think that there's been a lot of rhetoric around changes to policy, but we actually think that economics will end up sort of ruling and that, Chris has mentioned this as well, that the cost of renewables will continue to come down and solar is an area we think could be really benefiting as we go forward here.

Nuclear obviously has had a lot of hype, with the ‘Magnificent 7’ signing up contracts. And the thing that we would point out is, there is quite a bit of hype. These contracts are for 2030 and beyond, typically. And so, the short term, we don't see that really driving nuclear. What's interesting about nuclear is that uranium has been such an unloved sector for years, until sort of two, three years ago, that that's more the interesting side of it for us. There are significant increases in nuclear generation in China, India, etc., and so long term, we like the uranium side more than sort of the power-plant side.

And gas, we think, is really interesting because the US has plentiful gas. It’s a relatively clean short-term solution and it's reliable. So we think that's an area that going forward has plenty of opportunity.
 

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Chris Leslie

And I'm obviously focused more on the private side of things, where a number of our funds and private investors in general tend to invest more at the asset level and the project level, rather than perhaps the more diversified corporate level. So we're continuing to see significant opportunity in renewable energy, as I mentioned before. Wind, solar. Here in the United States, obviously, offshore wind is taking a little bit of a pause, but certainly onshore wind and solar opportunities are still an important

investment opportunity for us around the country and around the world. And obviously, policies elsewhere in the world are not the same as they are here in the US, and in particular the European market continues to be a very strong area to support.

You might imagine with more of a project mindset and a focus on energy that nuclear would be something that we're looking at. But, like Sam, we think is there is a lot of hype around that at the moment. And if you look at the history of nuclear projects, you know, traditional nuclear being fission reactors, they have a history of massive cost overruns.

One of the most recent examples here in the US was the Vogtle nuclear facility down in Georgia that had an original cost estimate of something like $14 billion, ended up overrunning by $16 billion to be somewhere north of $30 billion. Just extraordinary amounts of cost overrun in that industry, and one that may not necessarily meet the investability thresholds particularly for private funds. Fusion, which gets a lot of attention, we think is probably still decades away before that's investable, certainly for infrastructure investors, if it ever indeed comes to technical fruition. And then things like small modular reactors (SMRs), which again are sort of a project-based modular solution to the nuclear opportunity. Again, the experience there has been, the bugs aren't really ironed out yet, the costs are still overrunning. The one project again in the US, which was new scale in Idaho, was shut down by the developers because of cost overruns. So perhaps that isn't quite ready for prime time just yet.

Then, of course, we're talking about infrastructure more broadly, and I think a theme to bear in mind there is just sort of networks in general. OK, we've got the globalization kind of going into reverse over recent years, you know nearshoring, onshoring, reshoring, all kinds of shoring, but if you think about the logistical underpinnings of those changes, we're rerouting and reprogramming networks that have been in place for decades, right? So, we're running transportation, trucks, logistics over different networks, we've got different sources of supply. All that requires infrastructure. Data centers require fiber optic networks around the country, as they spring up all over the place, to get the connectivity they need. And behind it all, the electric grid was built for a different era of electricity generation. And the wind is blowing, and the sun is shining in different locations, requiring the buildout of that network. So there’s a lot of network opportunities beyond just energy, into the broader infrastructure landscape.
 

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Denise St. Ivany

So, because of all these challenges, are there new technologies emerging that you find even more exciting?
 

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Chris Leslie

Yeah, there are. You know, in terms of energy transition in particular, and I think this is an area where the private markets can give you perhaps a more direct way into some of these opportunities. So, things like batteries for the storage of renewable energy are really coming into their own, particularly around data centers where they're key to providing that reliability that particularly the big tech hyperscale data center tenants are looking for. So batteries is a very interesting area.

Sustainable aviation fuel is increasingly being demanded by corporations and airlines around the world. There are some European standards which are coming in this year, called ReFuelEU. So, if you take off from European soil, you’re going to need 2% sustainable aviation fuel in the tanks of those aircraft. That's going to go up to 6% by 2030 and as much as 70% by 2050. Nobody knows where this sustainable aviation fuel is going to be coming from just at the moment, and so there is a massive demand-supply imbalance there, so that's a very interesting opportunity.

And then areas that are of interest to broad industry, I think, things like carbon capture and sequestration, which is the process whereby carbon is captured either at the point of the emissions or captured from the atmosphere and either stored long term or in some cases reused and turned into sustainable fuels. That is also a very interesting area and again probably an area you can only really access today through the private markets.
 

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Denise St. Ivany

Sam, how about you, anything to add in this area?
 

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Sam Halpert

Yeah, actually, I think the opportunities that Chris mentioned are all areas that we like to focus on. The one thing, and Chris has touched on this, is that in public markets it's difficult to isolate. Frequently these are small pieces of larger corporations. Occasionally you can buy a battery-specific company, a company that’s new scale, which Chris mentioned produces SMRs, but that's way down the road, so it's highly speculative.

Sustainable aviation fuel is something that Valero, which is a traditional US refining company, produces. There are processes that are being improved on. Aluminum is a very energy-intensive process, and so Alcoa is working on a process that would reduce the carbon intensity of that significantly. But, again, it's something that's way down the road, it's a very small portion of what they do.

Public companies are increasingly trying to find new technologies to lower costs, to improve their process. And so ultimately you end up seeing it in the bottom line. It's just difficult to isolate the actual process.
 

00:16:21 - 00:16:31

Denise St. Ivany

So, Chris, I'd love to get your thoughts on, again, we've covered a lot of ground here, what would be the one couple of takeaways you want our listeners to walk away with from this conversation?
 

00:16:32 - 00:17:24

Chris Leslie

I think listening to the podcast, you probably come to the conclusion that there's a number of challenges out there in the world that we're all facing that’s stemming from all this demand that we're placing on our systems. But actually, if you think of those problems as opportunities for investors, then perhaps the complexion changes. We really have to rewire the networks that have been built to serve society over the last 100 years or so, and bring them up to a standard which is fit for modern purpose and modern demands. And so, you know, the electricity network that we spend a lot of time talking about, the transportation network, the digital network that we all rely on have tremendous opportunities for investment and growth over the coming years and decades, and it's an area that we think is extremely interesting for investors.
 

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Denise St. Ivany

Well, thank you both for being on the podcast today. I think it's a really timely, important conversation for our audience to hear. So, thanks again.

Don't forget you can read all the insights and analysis from our investment teams in the “Outlook 2025: Plan for growth, prepare for volatility.”

You'll find a link in the episode show notes, and don't forget to join us next time on Think Again, where we will discuss another topic for investors to consider.
 

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Podcast outro

Thanks for listening. Check out the show notes for more information on topics from this episode and be sure to subscribe to Think Again wherever you get your podcasts.