Chanticleer
‘Big Short’ hero’s new big idea is one Aussie investors can ride
Famed US investor Steve Eisman says that when things are good, markets trade on stories. But there’s one theme that stands out from the rest.
Steve Eisman is famous for his due diligence.
In Michael Lewis’ seminal book and the movie about the global financial crisis – The Big Short – Eisman was portrayed as deeply sceptical of the bet against the housing market that would eventually make him famous.
Steve Eisman was played by Steve Carell in “The Big Short”. Jaap Buitendijk
It was not until Eisman (portrayed in the movie by Steve Carell) and his team went and did the groundwork – visiting cities central to the US housing boom, and meeting borrowers and mortgage brokers – that he launched his version of the big housing short.
For the past few years, Eisman, now a managing director and portfolio manager at Neuberger Berman, has been on another due diligence mission. And he’s found a long-term bet he believes can run for a decade: infrastructure.
“In bad times, people focus on balance sheets and credit quality and in good times, they focus on stories,” Eisman told Bloomberg’s Odd Lots podcast. “And there are three, I think, great stories of our time right now.”
The first is artificial intelligence; Eisman is a believer, but says it’s way too early to pick the second and third-order beneficiaries that he sees will win from the new AI apps that are eventually developed.
The second is crypto, which he describes as “just another way that people like to speculate, because they like to speculate. That’s its only use – that and money laundering”.
But with infrastructure, Eisman sees four tailwinds that can potentially transform typically cyclical stocks.
“For the first time since I can remember, this whole group now has a real secular story,” Eisman says. “Not that they’re not cyclical. They are cyclical, but they have secular tailwinds that they’ve never really had before. And those tailwinds are going to last quite a long time.”
The first of the four tailwinds is the trend towards onshoring, as companies rebuild their supply chains following the pandemic disruptions. Executives caught out by the pandemic were given a free pass by investors, but CEOs now know that the market won’t be so forgiving next time.
In the US particularly, the building of new factories and facilities – requiring vast amounts of concrete and steel and other components – is being turbocharged by what Eisman says is America’s first real industrial policy in 40 years.
The second trend is AI, which Eisman says will add to the demand for data centres and associated infrastructure, including the energy, water and cooling required to run power-hungry generative AI chips.
This AI boom leads to Eisman’s third tailwind. Because of the increased demand for power from data centres, electricity grids will need to be expanded and upgraded.
Push towards greener power
Demand for grid upgrades will also be boosted by Eisman’s fourth tailwind: renewable energy. The push towards greener power will have long-lasting implications for infrastructure spending, boosted (for now at least) by policy initiatives such as the Inflation Reduction Act.
What struck this column was how well Eisman’s thesis applied to Australia. Not only are the four tailwinds in place here but there are also plenty of opportunities to play them on the local market.
While our small army of building materials players has been thinned out by takeover offers for Boral, AdBri and CSR, companies such as BlueScope and James Hardie Industries provide a level of exposure to the infrastructure theme.
Data centre stocks are surprisingly rare in the US, according to Eisman, but Australia has several candidates, although they’ve been well bid in the past year: NextDC, Macquarie Technology and Goodman Group, which is making an ambitious push into this sector.
Companies with exposure to electricity grid upgrades and green infrastructure more generally include engineering giant Worley and utilities AGL Energy and Origin Energy.
Investment in utilities, Eisman says, needs to be approached carefully, given it is their large and growing capital expenditure budgets that are driving much of the spending in renewable energy and grid upgrades, making this transition a cost rather than a benefit.
But he believes “some of the utilities that are more on the greener side, have an interesting opportunity.”
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