Hamish Chamberlayne, Portfolio Manager within Janus Henderson’s Global Sustainable Equities Team, discusses recent developments affecting the world of Sustainable & Responsible Investment.
The first quarter of 2018 saw contrasting fortunes, with the MSCI World Total Return Index reaching all-time highs near the end of January, before falling back to mid-November levels. Although US tax reform and broad economic strength aided corporate earnings, investors sold stocks following tit-for-tat trade tariff moves between the US and China and over troubling news about Facebook, which triggered a sell-off in the technology sector. Facebook data on up to 87 million people may have been improperly shared with Cambridge Analytica.
Technology – optimistic about ‘the cloud’ and semiconductors
A central processing unit. Source: iStock
Despite this news, we remain optimistic about the outlook for selected technology investments. We believe we are at the early stages of both cloud computing adoption and broader semiconductor usage. Enterprises are being forced to digitalise to remain competitive and digitalisation is now considered a top priority for senior management. Companies such as Microsoft, Adobe, Salesforce.com, Autodesk, and SAP offer cloud-based software solutions that can be quickly deployed and offer a way for customers to improve efficiency, customer service, and reduce their carbon footprints (due to cloud computing typically being run on carbon neutral datacentres). Additionally, we view semiconductors as a fundamental building block in the digitalisation of all sectors. Semiconductors are being adopted in a wider array of applications as we transition to a smart and connected world.
One such example of semiconductor usage is the auto industry, where the shift to electric and autonomous vehicles is resulting in a significant increase in the amount of semiconductor content required. The first quarter of 2018 saw further evidence of the magnitude of this transition, with Volkswagen (one of the world’s largest auto manufacturers) announcing a €20bn battery technology investment. We also witnessed further encouragement at the government level, with China adjusting electric vehicle (EV) subsidies to only include vehicles with over 150km range (from 100km previously). At the civic level, German cities now have the legal authority to ban diesel cars and it appears that Stuttgart and Dusseldorf may be among the first to do so. This list of cities committed to combatting air pollution and climate change continues to grow, joining Paris, Madrid, Rome, Mexico City, and Athens, which have all pledged to ban diesel vehicles by 2025. We expect rapid technological improvements combined with government support for a low carbon transition to result in further disruption to incumbents who are slow to change.
Solar vision: Saudi to progress its renewable energy plans
While our long-term bearish view on the oil price is in part due to EV growth displacing demand for gasoline, we have also seen further progress in renewable energy development. Late in the first quarter, SoftBank’s Vision Fund announced a plan to support a $200bn 200GW solar power development in Saudi Arabia. When completed this site will be 100 times larger than the next largest proposed solar development and produce double the energy the whole global photovoltaic industry supplied in 2017.
Interestingly, the Saudi Government is one of the largest backers of the SoftBank Vision Fund and this move, combined with the looming Saudi Aramco initial public offering adds further support to the country’s ambition to diversify away from oil. Aside from the environmental benefits of solar energy, growth of the solar industry is expected to save the Kingdom up to $40bn annually by obviating the need to burn domestically produced oil to generate power. This 200GW solar investment will generate the power equivalent to more than 200 nuclear power stations. We think the world’s largest oil economy so visibly diversifying away from oil strengthens the case for a low carbon investment approach.
Plastic floats among the coral. Source: iStock
Following the success of the BBC’s Blue Planet II series, the spotlight has firmly fallen on society’s obsession with plastic and the subsequent impact it is having on our oceans. Scientists estimate that if current production and management trends continue, there will be roughly 12 billion tonnes of plastic waste in landfills or the natural environment by 2050. With the global population forecast to grow to almost 10 billion people by 2050 and the ocean being a key food resource, action must be taken today.
Encouragingly, governments seem to be taking modest steps evidenced by the banning of microbeads and taxes on plastic bag and bottle usage. As oil is a primary raw material in plastic, a global shift away from plastics and towards recycling will be an incremental negative for the long-term oil price. We plan to engage with company management teams to better understand what they are doing to reduce plastic usage and waste in their businesses.
Carbon neutral = making or resulting in no net release of carbon dioxide into the atmosphere.
Cloud computing = the practice of using a network of remote servers hosted on the internet to store, manage, and process data, rather than a local server or a personal computer.
Central processing unit (CPU) = also known as the processor, the CPU is responsible for executing a sequence of stored instructions called a program.
Digitalise = reengineer a business using contemporary technologies, built to suit the modern customer and delivered, at least in part, through digital experiences.
Gigawatt = a unit of power equal to one billion watts.
Initial public offering (IPO) = an act of offering the stock of a company on a public stock exchange for the first time.
Semiconductors = used extensively in computer chips, semiconductors have a unique structure that allows their conductivity to be controlled by stimulation with electric currents, electromagnetic fields, or even light.
These are the manager’s views at the time of publication and should not be construed as investment advice. The opinions expressed do not necessarily reflect the views of others at Janus Henderson. References made to sectors and stocks do not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase them. Examples are intended for illustrative purposes only and are not indicative of the historical or future performance, or the chances of success of any particular strategy.