For financial professionals in Finland

Sustainable equities: maintain focus on long term secular growth

Hamish Chamberlayne, CFA

Hamish Chamberlayne, CFA

Head of Global Sustainable Equities | Portfolio Manager


1 Dec 2021

Hamish Chamberlayne, Head of Global Sustainable Equities, explains why investors should not be wrong-footed amid increased volatility in 2022.

Key takeaways:

  • We anticipate heightened market volatility in 2022 as the global economy contends with inflationary pressures associated with the COVID-19 pandemic.
  • We believe that inflationary pressures will benefit long term secular growth trends associated with efficiency, clean technology and renewable energy.
  • The outcomes of COP26 should further accelerate the transition to a low carbon economy and we are excited by the range of opportunities in 2022 and beyond.

As was the case for much of 2021, we expect the 2022 market environment to be characterised by ongoing tensions between secular growth companies and the post-pandemic ‘reopening’ trade. To our mind, we believe that the powerful secular growth trends of digitalisation and electrification should dominate the market narrative over the next decade as decarbonisation of the global economy gathers pace. We expect heightened volatility, however, as the global economy contends with inflationary pressures stemming from the dislocations caused by the COVID-19 pandemic.

Inflation acts a tailwind for efficient businesses

When we consider the opportunities to sustainable equities in this environment, it is very important to remember that inflation often contains the seeds of its own destruction; higher prices incentivise businesses to invest in efficiency, substitution and technology. This can often make the economics of clean technologies, electric vehicles and renewable energy more attractive. We believe, therefore, that an inflationary backdrop will act as a tailwind to many of the businesses we invest in. In addition, we generally seek out companies with strong franchises which offer a compelling value proposition around their goods and services; because these types of companies should have pricing power which enables them to pass on higher input costs.

Do not be wrong-footed amid the volatility

It is important to remember that inflation is not synchronised. Rather, it tends to ripple through markets, creating volatility as different companies are impacted at different times and then recalibrate themselves. As such, we expect to see market gyrations between value and growth from quarter to quarter as sectors are hit by inflation at different times. In the midst of this volatility, we urge investors not to be wrong-footed by the inevitable and short-term flip-flopping of growth versus value. In our view, the long-term secular trends associated with the transformation to a more sustainable global economy will be the most important determinant of investment returns.

So, we believe a period of inflation will ultimately be beneficial to the growth of many of the names we are invested in as it makes the economics of sustainable businesses more compelling and accelerates the level of investment into the low carbon energy transition.

Alignment for a sustainable global economy is accelerating

Keeping to the theme of the low carbon transition, we take a positive view on the outcomes of the recent COP26. The climate pact has secured greater ambition in emissions reductions from key countries including India and China. Importantly, all countries have agreed to revisit their nationally determined contributions (NDCs) annually rather than every five years. With countries held to greater account, we expect the process of emissions reduction to speed up. In fact, we anticipate that the transition to a low carbon economy may be faster than individual national net-zero timelines as innovation and clean technology cost reductions enable governments to press harder on the policy accelerator.

From an investment perspective, we are most interested in the direction and rate of travel than we are of the snapshot view, and COP26 has clearly signalled global alignment on the necessity of accelerating decarbonisation. In 2021 alone we saw significant progress in the low carbon transition, with electric vehicle (EV) sales markedly higher in the first half of 2021 versus 2020 (chart 1), highlighting the quiet rate of progress that we are making towards a decarbonised economy. We do not anticipate this trend slowing, with higher oil prices and government initiatives further boosting demand for EVs. In addition to the above, COP26 has seen great progress on carbon trading markets and transparency for the accounting and reporting of targets and emissions, and commitments to finance developing countries’ transitions. These developments will be a powerful incentive for change.

Chart 1: Electric vehicles sales across major regions in 2020 vs 2021

Hamish_oulook2022_chart_1

Source: The global electric vehicle market overview in 2022: statistics & forecasts, Virta, data as at end June 2021. Electric vehicles comprising of Battery electric vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs).

We remain focused on the digitalisation, electrification, and decarbonisation trends as they become the driving features of our global economy, and this continues to guide our investment decisions and portfolio construction. Our approach is all about identifying the companies that are aligned with long-duration sustainable development investment themes, and that are playing a positive role in the transformation of the global economy towards a more sustainable footing. We spend our time looking for the companies that will have exciting growth opportunities as a result of this, that have cultures of innovation, and have built-in financial resilience. We are as excited as ever by the range of investment opportunities we see in 2022 and beyond.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

 

Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

 

The information in this article does not qualify as an investment recommendation.

 

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Important information

Please read the following important information regarding funds related to this article.

The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Henderson Management S.A. Henderson Management SA may decide to terminate the marketing arrangements of this Collective Investment Scheme in accordance with the appropriate regulation. This is a marketing communication. Please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions.
    Specific risks
  • Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
  • The Fund follows a sustainable investment approach, which may cause it to be overweight and/or underweight in certain sectors and thus perform differently than funds that have a similar objective but which do not integrate sustainable investment criteria when selecting securities.
  • The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share/unit class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • When the Fund, or a hedged share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency, the hedging strategy itself may create a positive or negative impact to the value of the Fund due to differences in short-term interest rates between the currencies.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
  • The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Henderson Management S.A. Henderson Management SA may decide to terminate the marketing arrangements of this Collective Investment Scheme in accordance with the appropriate regulation. This is a marketing communication. Please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions.
    Specific risks
  • Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.
  • The Fund follows a sustainable investment approach, which may cause it to be overweight and/or underweight in certain sectors and thus perform differently than funds that have a similar objective but which do not integrate sustainable investment criteria when selecting securities.
  • The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share/unit class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • When the Fund, or a hedged share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency, the hedging strategy itself may create a positive or negative impact to the value of the Fund due to differences in short-term interest rates between the currencies.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
  • The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.