Context
The original FAANG acronym represented the tech powerhouses (i.e. Facebook, Amazon, Apple, Netflix, and Google) that enjoyed tremendous growth over the last decade as the economy became increasingly digitalised and thrived during the pandemic. But on 7 March 2022, Merrill Lynch and Bank of America Private Bank (BAML) published a report to push a new set of FAANG stocks in an era of high interest rates, high inflation, and low growth. We will briefly explore what the new FAANG stands for and the investment opportunities available.
F = Fuels
Geopolitical tensions, strong demand, constrained supplies, and severe underinvestment in oil production hint that energy prices will remain elevated over the medium term. Energy is often seen as a good inflationary hedge since the demand for gas and electricity remains largely the same regardless of price albeit academic critics would be quick to suggest it is a volatile relationship. But be mindful that energy prices are often depressed during recessionary periods since demand for oil evaporates. BAML also notes that despite the outperformance of the energy sector since 2022, ‘the sector accounts for just 3.7% of the S&P 500 market cap, well below a 13.4% weighting in 1990’.
If you are interested in gaining exposure to the sector, you can mimic Warren Buffet who has been a long-time supporter of the sector having accumulated significant stakes in Chevron (CVX) and Occidental (OXY). Otherwise, you may wish to gain a broader exposure by investing in well-established ETFs such as iShares U.S. Oil & Gas Exploration & Production ETF (IEO, expense ratio 1.62%) or Invesco Dynamic Energy Exploration & Production ETF (PXE, expense ratio: 0.63%).
A = Aerospace & Defence
Geopolitical tensions have been rising in recent years. Russian’s invasion of Ukraine in February has fuelled increased military spending in countries across Europe and the Americas. Tensions between China and Taiwan have led to increased military spending in the Asia Pacific region. In light of the heightened geopolitical tensions and consequential increases in military spending, aerospace and defence stocks have outperformed the broader market in 2022 and may continue to do so if tensions continue to rise. But it is also important to note that a government’s defence spending is no longer used solely for the purposes of aircrafts and battleships. In an increasingly digitalised world, much of the wars are being fought are in the invisible space online. As such, it is expected that spending on cybersecurity will continue to increase substantially in the foreseeable future.
The best way to invest in aerospace and defence may be to invest in well-established ETFs such as iShares U.S. Aerospace & Defence ETF (ITA, expense ratio 0.39%) or Invesco Aerospace & Defence (PPA, expense ratio: 0.61%). The best way to invest in cybersecurity may be through ETFs such as iShares Cybersecurity and Tech ETF (IHAK, expense ratio: 0.59%).
A = Agriculture
I will be the first to admit that my knowledge of agriculture is sparce and in between. But according to the World Resource Institute, the planet will ‘need to produce more food in the next four decades than in the past 8,000 years’ to feed the growing population and expanding middle class. When discussing agriculture, it quickly becomes apparent that the vendors along the supply chain all play a critical role. Accordingly, investments consideration must extend beyond just food take into account agricultural machinery, fertilizers, chemical pesticides, crop producers, and high-end seed producers.
The best way to invest in agriculture may be to invest in the part of the value chain that has the highest barriers of entry and provides strong food yields.
N = Nuclear and Renewables
With Russia curtailing gas supply to Europe, the bloc is amid a gas and energy crisis. This has spurred Europe and the rest of the world to strongly reconsider their plans in shutting down their nuclear power plants. The fact is that ‘nuclear energy has the highest capacity factor of any energy source, providing reliable carbon-free power more than 92% of the time – twice as reliable as coal (40%) or natural-gas (56%)’. Moreover, both nuclear and renewable energy are both carbon free and would contribute strongly to helping participating nations achieve the UN climate goals.
The best way to invest in nuclear energy may be through well-established ETFs such as Global X Uranium ETF (URA, expense ratio: 0.69%) or Sprott Uranium Miners ETF (URNM, expense ratio: 0.85%).
G = Gold and Metals / Minerals
Little explanation needs to be extended to gold as a safe-haven for investment when difficult times such as inflation and war are evident. But BAML believes mineral commodities are also worth investing since the EV transition will be mineral-intensive. According to the International Energy Agency, ‘a typical EV requires six times the mineral inputs of a conventional car’ requiring cobalt, rare earth elements, lithium, and graphite, amongst others.
The best way to invest in gold may be through well-established ETFs such as iShares Gold Trust ETF (IAU, expense ratio: 0.25%) or SPDR Gold Shares ETF (GLD, expense ratio: 0.4%). The best way to invest in critical minerals may be by investing in VanEck Rare Earth/ Strategic Metals ETF (REMX, expense ratio: 0.53%).
Concluding Remarks
Whilst it is unlikely that FAANG 2.0 will generate the rocket ship returns we saw with FAANG 1.0, FAANG 2.0 provides a more diversified and defensive approach to investing. It offers lower beta, and lower volatility exposure through aerospace and defence, agriculture and gold. It is also clear that FAANG 2.0 does not place a great weight on leading edge technologies such as Web 3.0 or the metaverse. It is a bet on increased geopolitical tensions, climate initiatives, and persistently high inflation. So if you think the world is going to become more complex and volatile, FAANG 2.0 may an investment approach that warrants your consideration.