Sustainable investing in 2017: megatrends transcend political cycles



What did you learn from 2016?
Similar to last year, underlying market conditions have been anything but stable - unexpected outcomes from political events have resulted in abrupt sector and style rotations. Year to date, quality has underperformed value, with the materials, energy, financial and industrial sectors outperforming more defensive sectors such as healthcare, utilities, consumer staples and telecoms. This was not the case in the first half of the year, however, when three of the strongest performing sectors were utilities, telecoms and consumer staples as low interest rates, and concerns over global growth, drove investors into equities with bond-like characteristics. The shock Brexit result was a risk-off event, while the shock US Presidential election result ended up being the opposite, as markets reacted to Trump’s reflationary rhetoric. If there has been one overriding lesson in 2016 it is that, in the short term, the capriciousness of markets has no limits.
What key themes are likely to affect markets in 2017?
In the near term, the policy direction adopted by President-elect Trump and his administration will have significant bearing on market direction. Market movements since the election have reflected an expectation that US policy will become more reflationary, that is, lead to a pick-up in inflation and economic growth. This should be positive for many of our industrial and information technology holdings, where the strategy has an overweight sector stance. Trump’s anti-trade rhetoric during the campaign was concerning but we are hopeful that his administration will adopt a more pragmatic approach.
Next year, one of the many areas where we expect further progress is in recognition of the positive impact from more ‘intelligent’ machines. We are living in an age where machines are starting to harness the power of computing. For this to progress, more analog semiconductors will be required, which has positive implications for portfolio holding Analog Devices. Infrastructure projects also benefit from smart construction equipment interacting seamlessly with digital project plans, and this should benefit portfolio holding Trimble, the global leader in GPS*-based productivity tools. Additionally, hyper-efficient fibre lasers are being integrated into factory automation equipment and this is transforming industrial manufacturing processes. Portfolio holding IPG Photonics is the world leading provider of these lasers.
We still think we are in the early stages of an energy transition towards a low carbon economy. We do not think the Trump administration will stop the global momentum on climate change mitigation efforts. There is an enormous amount of commitment from states, cities and businesses to take action. Even more importantly, the costs of clean technologies have continued to decline to levels where they are competitive with fossil fuels on an unsubsidised basis in many parts of the world. In the next few years we expect breakthroughs in battery technology, and this should boost the penetration of renewable energy generation and the electrification of transport. We think long-term investors should continue to be mindful of the investment risks from having too much carbon exposure in their portfolios. OPEC (Organisation of the Petroleum Exporting Countries) recently made the forecast that it expects oil demand to peak within the next 15 years. We think it could happen sooner.
*GPS = Global Positioning System formed of satellites and ground stations that allows for easier measurement and navigation

Does the US election result alter your positioning for 2017?
We have not changed the positioning of the strategy as a result of the US election. As a sustainability-themed strategy we have a long-term approach, focusing on the investment implications of megatrends that transcend political cycles. Rising populism will not change the inexorable trends of population growth, ageing demographics, resource constraints and climate change. Productivity is the key to addressing these issues and companies that offer solutions will continue to see growing demand for their products and services. We use a thematic framework to identify those businesses that are strategically aligned with these four megatrends and by virtue of this offer the potential for sustainable revenue growth. We think the portfolio holdings are attractively valued given the confidence we have in their long-term growth prospects.

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.

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