Continuing ESG Clarity‘s outlook series looking at various asset classes from an ESG perspective and trends in the wider responsible investment industry, here global equity investment managers share their forecasts and positioning for the year ahead.
While financial inclusion, preventative healthcare, renewable energy, the new US President and the digitalised economy are viewed as positives for global stockmarkets and portfolios, the managers flag concerns around recessions, return of inflation, Covid resurgences and an ‘ESG bubble’.
Abbie Llewellyn-Waters, head of sustainable investing at Jupiter and manager of the Global Sustainable Equities Fund
As we navigate the new year, we continue to believe that durable businesses with strong capital foundations are favourably positioned to survive challenging market conditions and to recover well when crises have passed.
A long-standing structural theme in our strategy, and one we will continue to pursue in 2021 is ‘preventative healthcare’, which has been a key contributor to outperformance of the Jupiter Global Sustainable Equities Fund and has formed the bedrock of the portfolio exposure since inception.
Preventative healthcare includes companies which make vaccines, disinfectant, diagnostics and testing as well as hospital and laboratory equipment manufacturers. There is clear market support for companies that are in some way helping towards the elimination of the coronavirus. For example, CSL, one of the fund’s largest holdings produces viral vaccines and the share price has been particularly resilient during the market turmoil. Ecolab, is the global supplier of hospital disinfectant, Omron manufactures thermometers and Danaher, Mettler Toledo and Agilent are diagnostic, testing and equipment companies.
Financial inclusion continues to be an important structural allocation in the fund, and never more so than in the wake of a global pandemic. We view it to be critical in reducing poverty and achieving inclusive economic growth. This is particularly urgent given the most marginalised have carried the greatest Covid-19 toll in both fatality rates but also economic effect.
There are five key fundamental benefits which we believe should ultimately support the long-term trajectory of this investment opportunity: lower costs, greater transparency, more products, greater female economic empowerment and proven poverty reduction impact.
Decarbonisation will also continue to accelerate as we move into this pivotal year for the race to net zero. To stay within a 1.5C climate scenario, companies need to start decarbonising now. With COP26 in Glasgow at the end of the year, this will set new levels of embedding climate into investment portfolios.
More broadly we see the digitalised economy, where coronavirus has served as a catalyst for change, accelerating both innovation and disruption. From our perspective, we seek to invest in those companies that are well positioned to support and enable this transition, investing in companies across the supply chain from sensors to semiconductors, from machine vision to cloud computing.
Yuko Takano, manager of the BNY Mellon Sustainable Global Equity Fund at Newton Investment Management
We believe the outlook for global equites in 2021 is positive and that the stars will align for the asset class towards the second half of the year. Following further lockdowns and persistent negative sentiment around Covid-19, during spring/summertime we will see the vaccine rolled out to the wider population, which is when we can expect a stronger economic recovery.
This recovery, coupled with economic stimulus and lower interest rates, will be positive for global equities and we’ll see a widening of the sectors experiencing a rebound.
The tech sector has always been a cornerstone in our funds, and we believe it continues to be attractive, even after its recent rally. Many of the big names in the sector have pledged net carbon neutral targets, which are especially meaningful given their large-scale impact on the environment. The sector continues to be attractive with companies continuing to invest in areas such as remote working and cloud computing.
We also continue to see attractive opportunities within consumer staples that offer stability in earnings and resilience against pandemics. The investible universe for sustainable portfolio managers is larger because these stocks often manage supply chain issues better than discretionary stocks, like fast fashion, do.
In 2021 and beyond, we see the oil and gas sector as increasingly less attractive. It’s unlikely the oil price will rebound to previous levels with renewables becoming more affordable. There are also serious concerns about the impact of stranded assets if these companies aren’t able to adapt their business models to a 1.5 or 2 degree world as carbon emissions regulations get tighter.
Investors should also be wary of the ‘ESG bubble’ that is forming in the market when considering some of the more popular ESG-labelled stocks. We continue to find attractive growth opportunities in transition names, which are companies that don’t currently have high ESG scores but have concrete plans in place to improve going forward.”
Amy Clarke, co-founder and chief impact officer at Tribe Impact Capital
2021 will be the year of impact where the mainstream embraces the principles of net positive investing and we start to see a real system shift. While 2020 was the year the mainstream really embraced ESG, it was also the year the inherent weaknesses in an ESG-only approach were exposed. With an approach to investing that focuses on impact, we will see a primary focus on core products and services and how additive they are to the world we need to create.
We foresee greater focus on ‘future fit’ leaders, or those looking to pivot and transition to become future fit. This ultimately will favour a growth biased investing strategy.
During 2021, we expect to see continued earnings momentum among the Covid-19 ‘winners’, such as technology and healthcare, many of which we believe will continue to refine their impact investment theses and further enhance their businesses as solutions providers to the challenges we face. Growth stocks and those already emphasising their environmental and societal impact should benefit from direct policy support and continued consumer choice trends.
We also expect to see businesses involved in food production in the spotlight, both as opportunities and risks, with the rise of biodiversity and soil health, alongside nutritious food and human health, as major narratives that will emerge in equities markets.
We remain sanguine on the risks of a material rise in inflation expectations in the short term; investors should guard against this risk with a strong focus on increasing diversification within, for example, alternatives with exposure to index-linked revenues.
We continue to be cautious around big tech, both due to valuation concerns and the potential we see for increased regulatory scrutiny in the face of ongoing data security, privacy and content accuracy issues. The rise of AI is set to become a much larger focus for many tech and impact investors as we collectively seek the best solutions to the innovations and efficiencies required to help deliver the UN SDGs.
By geography, investors should be wary of the risks posed by a potential strengthening of sterling and encouraged by a greater number of impact opportunities in China as the country announces its next five-year plan in March. This will offer some indication of how they plan to reach their carbon neutral commitment by 2060. As with any emerging market further opening up, investors will need to exercise caution and ensure robust due diligence and engagement strategies are in place to mitigate potential ESG and impact risks.
Geir Lode, head of global equities at Federated Hermes
We are starting the year with a moderately cautious outlook. Though equities and risk assets remain in demand, sentiment will continue to see short-term challenges with ongoing Covid resurgences. For the third wave (which will come, the only question is how big) we will be much better prepared. Unemployment numbers remain a cause for concern and while many economies escaped a technical recession during 2020, fiscal support will be required alongside continued monetary supply to stave off a US 2021 recession which could have a profound impact globally.
At present, liquidity concerns are lower on investors’ long list of hurdles. The US election should bring more stability to global trade, improving sentiment towards those companies caught in the dispute, however short to medium term fears over the pandemic and the longer term tension between the US and China combine to cast a shadow over corporate outlooks.
Earnings and growth expectations for 2021 and beyond remain optimistic at levels predicted at the start of 2020. The pandemic has led to positive behavioural changes, which will persist long-term, as corporate resilience and the wellbeing of employees have become crucial issues. While interest rates are low, access to debt is cheap, allowing investment in transformational business opportunities. Innovative and disruptive businesses bring rapid growth regardless of the economic environment.
The ongoing case for sustainability continues to strengthen. Strong brands and premiumisation continue to deliver market leading profitability and more businesses are looking to benefit from this dynamic. The rescheduled COP will uncover more ambitious plans from countries on how they plan to decarbonise their economies. We continue to focus on quality characteristics alongside valuation, growth, momentum and good or improving ESG characteristics, identifying solid companies, well positioned for the future. With the ongoing volatility in equity markets, remaining balanced in our exposure to themes and styles remains our favoured approach to delivering the consistency of outperformance.
To view ESG Clarity’s outlook series, click here.