Is FAANG 2.0 What You Need Now?

Is FAANG 2.0 What You Need Now?
Theodora Lee Joseph, CFA

over 1 year ago6 mins

  • The FAANGs of the next decade are Fuels, Aerospace and defense, Agriculture, Nuclear and renewables, and Gold and minerals.

  • FAANG 2.0 offers a more diversified and defensive approach to investing compared to FAANG 1.0 with mainly low beta, low volatility exposure.

  • Overall, FAANG 2.0 is really a bet on climate change, increased geopolitical tensions and persistently high inflation.

The FAANGs of the next decade are Fuels, Aerospace and defense, Agriculture, Nuclear and renewables, and Gold and minerals.

FAANG 2.0 offers a more diversified and defensive approach to investing compared to FAANG 1.0 with mainly low beta, low volatility exposure.

Overall, FAANG 2.0 is really a bet on climate change, increased geopolitical tensions and persistently high inflation.

Mentioned in story

If the past decade in investing has been defined by the tech sector’s booming superstar “FAANG” companies – Facebook (now Meta), Amazon, Apple, Netflix, and Google (now Alphabet) – what’s the next decade going to look like? Strategists at Merrill Lynch and Bank of America Private Bank (BAML) have helpfully reassigned the letters of that hard-used acronym, and come up with FAANG 2.0, for the high-rates, high-inflation, low-growth era. And I’ve looked to see if there’s merit in there, and found some assets that can help you invest in it…

F is for fuels

The Russian-Ukraine conflict has ignited new worries about energy security. Those geopolitical tensions, constrained supplies, underinvestment in oil and gas production, and continued strong demand are going to keep energy prices elevated for some time.

What’s the opportunity here?

The energy sector has been a bit of an investment pariah of late, as funds have shifted away to “greener” assets. It’s not surprising then that the ESG-led increase in cost of capital for the sector has resulted in years of underinvestment in oil production. According to Goldman Sachs, oil producers are only currently incentivized to develop new projects at $90 a barrel, but would be incentivized at $57 a barrel if the costs of capital were lower. And that has kept oil supply constrained and oil prices higher for longer.

But there are good investments here: Warren Buffett is a fan of the sector, having accumulated huge stakes in two of the largest oil producers – Chevron (CVX) and Occidental (OXY). Oil is also a good inflation hedge, but you should be aware that if there’s a recession, it’ll likely drive down the price of oil and oil companies, at least for a little while. You can invest in the energy sector by buying individual stocks, or, for broader exposure, you could consider the iShares U.S. Oil & Gas Exploration & Production ETF (IEO, expense ratio: 0.39%) or the iShares Global Energy ETF (IXC, expense ratio: 0.40%).

A is for aerospace and defense

The latest rise in geopolitical tensions has coincided with increasing defense budgets. Russia’s invasion of Ukraine has prompted increased military spending in countries across Europe. And further tensions between China and Taiwan have led to increased military spending in the Asia Pacific region.

What’s the opportunity here?

Since defense projects tend to have multi-year timetables, it’s unlikely that you’ll see an immediate boost to revenues. But you’ll likely get greater stability and visibility on medium-term earnings. Defense spending is also no longer just for battleship or tank building. Rather, since wars are increasingly being fought online governments and industries are spending more on cybersecurity. To gain exposure to the sector, you can consider the iShares U.S. Aerospace & Defense ETF (ticker: ITA, 0.39%), Invesco Aerospace & Defense ETF (PPA, 0.61%), SPDR S&P Aerospace & Defense ETF (XAR, 0.35%), or cybersecurity ETFs like the SPDR S&P Kensho Future Security ETF (FITE, 0.45%).

A is also for agriculture

There won’t be enough food to feed everyone. According to the World Resources Institute, food production will need to increase by 69% by 2035 to feed the growing population and expanding middle class.

What’s the opportunity here?

The global agricultural complex is massive. It’s not just food: it’s agricultural machinery, fertilizers, chemical pesticides, crop producers, and high-end seed producers. Not everyone along the value chain will reap similar benefits from increased demand and higher prices of food. So, if you’re keen to invest in this letter A, it’s worth thinking about the parts of the value chain that have the highest barriers to entry and that help improve food yields the most – seed producers. Vertical farming is also an interesting way to invest with key players in the industry: (Reda wrote about them here).

N is for nuclear and renewables

Nuclear energy is seeing a resurgence years after falling out of favor, as governments seek out dependable, low-carbon power sources. High gas and electricity prices in Europe, brought on by Russia’s curtailment of gas, is forcing Europe and the rest of the world to reconsider their plans to shut down their nuclear power plants. Both nuclear energy and renewables are carbon free and critical in helping nations meet the UN climate goals.

What’s the opportunity here?

Europe is in the midst of an energy crisis, as Russia cuts gas supplies to the bloc. It’s filling its storage tanks when it can and turning to other energy sources, such as liquified natural gas (LNG), to supplement its needs. But buying pricey LNG from the US isn’t a long-term solution. And nuclear energy might be. To invest in nuclear energy, consider the Global X Uranium ETF (URA, expense ratio: 0.69%), or invest in uranium itself through the Sprott Physical Uranium Trust instead.

G is for gold and metals/minerals

Gold is seen as the ultimate safe-haven asset: investors want to hold it for security when things get bad. But there are other reasons to invest in minerals: the transition to electric vehicles, for example, is going to be mineral intensive. According to the International Energy Agency (IEA), building EVs requires six times the “critical” mineral inputs that a conventional internal combustion engine (ICE) car requires, with copper, nickel, manganese cobalt, rare earth elements, lithium, and graphite being the most important.

What’s the opportunity here?

In the short term, interest rate hikes aren’t going to help gold’s performance. After all, gold provides zero yield, compared to Treasury bonds, whose yields just keep going up. However, gold can still perform well as a hedge if inflation persists and geopolitical concerns mount. The best way to invest in gold is through ETFs like the SPDR Gold Shares ETF (GLD, expense ratio: 0.4%) or the iShares Gold Trust ETF (IAU, expense ratio: 0.25%). The EV supply chain is complex, just like agriculture, but one of the most direct ways to invest in its take-up is through investing in critical minerals like the VanEck Rare Earth/Strategic Metals ETF (REMX, expense ratio: 0.53%).

So should you invest in the latest FAANG?

Your FAANG 2.0 returns aren’t likely to be as sexy as the ones you got with the OG FAANG, back in the day. FAANG 2.0 gives you a more diversified and defensive approach to investing, with mainly low beta, low volatility exposure through aerospace and defense, agriculture, and gold. It might require more patience – themes in aerospace and defense, agriculture, nuclear and renewables, and gold can take years to play out. But if it helps put your mind at ease, both Elon Musk and Warren Buffett agree on at least two of the themes – fuels and nuclear, as Russell recently explained.

FAANG 2.0 isn’t a bet on the metaverse or the latest consumer gadget. It’s a bet on climate change, increased geopolitical tensions and persistently high inflation. So if you think this world is going to get a lot more volatile, then it just might be the approach for you.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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