Hamish Chamberlayne, Portfolio Manager for the Janus Henderson Global Sustainable Equity strategy discusses recent developments affecting the world of Sustainable & Responsible Investment (SRI).
In the second quarter of 2019 global stock markets advanced to new highs for the year, with the MSCI World index rising 6.7% in sterling terms*. There was another spike in volatility during the quarter as markets fell in May due to escalation in the US-China trade war and further evidence of a slowing global economy. The sell-off was short lived, however, with markets rallying sharply in June as the US Federal Reserve (Fed) gave a strong signal that it could soon cut interest rates.
*Souce: Refinitiv Datastream, 31 March to 30 June 2019, total returns, in UK sterling.
Information technology again was one of the best performing sectors. While technology has been a key battleground in the US–China trade war, many companies are exposed to secular growth drivers that, to date, have not been derailed by the political environment. Perhaps counterintuitively, the political tension between the US and China could actually be supportive for technology companies, to the extent that it might precipitate an innovation ‘arms race’. The real estate sector also responded positively to the shift in direction in monetary policy. Underperforming sectors were healthcare and energy, the former remaining under pressure due to negative political rhetoric from Democratic Presidential candidates around large scale reforms, and the latter due to weak oil markets in the face of slowing economic growth.
It is too early to confirm but, six months into 2019, it appears that extreme weather events are on the rise. To highlight a few, there have been record summer temperatures in Australia, Alaska, and Europe, months of floods and tornadoes in the US Midwest and heavier than usual monsoons in India. Encouragingly, records are also being set in renewable energy. In the UK this year zero-carbon energy will overtake fossil fuels as the largest electricity source over a full calendar year. And in April, renewable energy overtook coal fired power generation for the first time in the US.
When considering greenhouse gases, most people think of transportation and power as being the largest polluters but in fact agriculture is a greater contributor. What we eat has the biggest impact on the environment, and this is why we include criteria on intensive farming, along with meat and dairy, in our investment principles. Reducing global meat consumption is an important factor in achieving environmental targets and, in this respect, it is interesting to see the growth in ‘fake’ meat. One of hottest initial public offerings (IPOs) this quarter was Beyond Meat, a manufacturer of plant based burgers and sausages, which has risen more than fourfold from its listing price. We have not invested because we find the valuation too high and we are not yet convinced of its sustainable competitive advantage.
In other news, there has been a step up in regulatory scrutiny of some of the big technology companies. The US Justice Department is preparing an anti-trust probe of Google and it has also been given jurisdiction over Apple as part of a broad review into potential anti-competitive behaviour. Meanwhile, the US Federal Trade Commission has assumed oversight of Amazon and Facebook, looking at how they could potentially be harming competition. Facebook also continues to be beset by controversies over the governance of its social media platform. Following its handling of the recent Christchurch attacks, New Zealand’s Privacy Commissioner branded the company "morally bankrupt pathological liars". We have never invested in Facebook because of its weak stewardship in respect of social concerns.
With global stock markets having delivered strong returns, we are receiving lots of questions about valuation levels. There is also much nervousness around global politics and slowing economic growth. How could stock markets go higher from these levels?
Certainly, we are mindful of these risks and, for this reason, we have been working hard to shift the risk balance in the strategy. Our trading activity has been focused on reallocating capital away from stocks exposed to global industrial production towards more defensive growth. While it is true that valuations are less attractive than they were at the end of 2018, we still see reason to be constructive. With the Fed signalling a move towards looser monetary policy, we see the potential for significant valuation upside in companies that are growing.
We always like to remind investors of the need to differentiate between valuation and value. We still see value in companies that are growing.