I want to double back today to some recurring themes I’ve discussed on this blog, starting with why the next decade may spring a surprise on we cynical types.

Could we be setting up a repeat of the Roaring Twenties??

Technology milestones in 2020

Much of the debate around the possibility of a Roaring Twenties links to a wider area of analysis by academic economists called Progress Studies. This fascinating sub-discipline looks both into the past – at what powered the Great Divergence between Asia and Europe in the modern era for instance – and into the possible future to identify drivers of improved economy-wide productivity.  One of the blogs within this space is called Agglomerations which is run by Caleb Witney. A recent posting – https://www.agglomerations.tech/cracks-in-the-great-stagnation/ – is worth mentioning in passing. It reminds us that 2020 has seen a number of stunning technological advances, not least the development of a number of vaccines to control a disease no-one knew about this time last year. The article also notes that Waymo is moving fast on self-driving cars – “their long-running pilot program in Arizona is going to be open to the public without any safety driver in the front seat”.

In passing the article notes that the ho-hum daily progress in “solar, wind, and battery technology where prices have fallen 90, 70, and 87 percent”, before then pointing to David Robert’s deep dive into geothermal energy and the promise of advanced geothermal (whereby water pumped into the ground through a closed-loop reaches a high enough temperature that it becomes “supercritical” and can carry 10x more energy per unit mass). Then there’s also new AI techniques “now being deployed by NVIDIA to increase video fidelity while cutting bandwidth transmission for video calls by a factor of 10”. The blog finishes with Apple’s new M1 chip – “By miniaturizing the whole system architecture and integrating it onto a single chip (no discrete RAM, graphics card, etc.) Apple has managed to pump out massive efficiency gains both in processing power and in battery life.”

One enabler of this possible spurt in innovation is low real interest rates. Lots of explanations have been advanced for this increasingly pervasive global phenomenon, starting with central bank policy and QE.

US policy commentator Matt Yglesias on his Slow Boring blog on Substack fingers what I think is an increasingly obvious suspect – low population growth. Again, it’s an argument have I made before on this blog – we need more people, not less to live in the UK (and the US).

Slow population growth by contrast might produce low-interest rates, possibly via the related aging process.

One fascinating indicator Yglesias quotes is from a tweet by David Beckworth (Senior Research Fellow at Mercatus and former U.S. Treasury Economist).

The graphic below shows what I think is a clear relationship between low yields and population growth rate. Correlation isn’t causation but it is a striking relationship, nonetheless.

A short primer on Stenprop

I’ll finish with two practical investment observations.

The first is that I am still bullish on industrial REIT , Stenprop.

The fund’s research team at Numis have just this week published a useful short primer on why this fund in transformation might be worth investing in.

I’ve pasted in the short version of this primer below….all the usual caveats apply, not least that Numis is house broker. Also, just to repeat, Stenprop is my alternative funds trading list.

Stenprop (STP) is an experienced, long-established property business which is transitioning to be 100% invested (by 2022) in the dynamic UK Multi-Let Industrial (MLI) sector. Management is seeking to revolutionise the space with a unique serviced offering to be delivered from its growing operating platform. The team has concluded almost £500m of profitable disposals, over £200m of earnings accretive MLI acquisitions and repaid more than £300m in debt during the transition phase. The portfolio is currently 64% invested in MLI, and on track to reach a target of 75% by Mar-21. We believe the transition is significantly de-risked and the shares offer value given the attractive supply/demand dynamics of the asset base evidenced by increased occupancy and impressive rental growth in 2020 to date. Moreover, we believe the portfolio can continue to support the historic dividend rate of 6.75p (5.3% yield) through the transition, underpinned by solid rent collection, and a healthy cash balance from profitable disposals. With interim results due out in the coming weeks, we anticipate a neutral to positive NAV result, as well as dividend guidance for the current financial year ending Mar-21.

Why invest in Multi-Let Industrial? The attractions of MLI are two-fold, and reflect both strong occupier/investment market dynamics resulting in stable valuations and above inflation rental growth, as well as Stenprop’s ability to add value to the granular asset class via its operating platform. STP believes that it can revolutionise the space, providing a service-based model for its tenants, which should facilitate superior returns over the long-term.

Unique serviced industrial approach: We believe this will be a key differentiator of the investment case compared with more traditional MLI /Industrial landlords. An efficient operating platform has proven transformational in other real estate sectors such as self-storage, student accommodation and hotels, in reducing and managing letting risk, increased efficiencies and improved valuations.

Sustainable and growing income: STP seeks to deliver a sustainable and growing income for shareholders. We believe a 100% portfolio of MLI assets would be capable of delivering at least 7.5p of EPS at current occupancy levels. Sustainability will come from operating platform efficiencies and growth through active management and the potential to earn additional revenue streams.

Attractive valuation: STP shares currently trade on a discount to NAV of c.8.5%, and yield 5.3% compared with premiums for its closest Industrial peers. With an increasing proportion of the portfolio benefiting from similar market dynamics, we expect the ratings to continue to converge.

Share price catalysts: Notwithstanding Brexit and Covid 19 headwinds, we believe further transition progress, and confirmation on sustainable dividend levels offer potential positive share price catalysts in the near term.

Digital Whiskey

Last but by no means least, how about investing in some digital whiskey from the states?

Yep, you read that right.

Wave Financial Group (Wave) has just announced that it intends to list a fund on the INX Platform.

According to a PR note out today, “Wave has signed a Letter of Intent to list its WKW20 Digital Fund on INX’s regulated security and crypto platform. This will be one of multiple venues that will allow investors to buy and sell holdings in the fund via a tokenized form. Currently, investments in the WKW20 are not tradable for the first year, but will then be tradable should investors seek to exit whilst the whiskey is still ageing in barrel.”

I’m sure we can all be a tad cynical about linking two very alternative asset classes together but in truth I think this is actually pretty interesting. I’ve long thought that tokens for instance linked to digital exchanges could be a great way of in effect securitising ‘illiquid’ (!) asset classes. In effect one could tokenise everything from a painting to a rare violin. Whiskey in that sense makes absolute sense. And the precious spirit is itself an interesting niche. According to Wave the investment case is strong (though they would of course say that):

– “Historically high performing asset class

– Growing global demand for American whiskey with expected growth of market at 9.9% CAGR, 2019-20251

– Whiskey is typically resilient in economic downturns; during the 2007–2009 crisis, YoY Whiskey sales by volume decreased only once by less than 1%2

– Focus on the value appreciation in the first few years of the whiskey lifecycle

– Securing production capacity in a tight market, as distillers are aware of the value of their aging whiskey, so they typically elect to age the whiskey themselves”