Hamish Chamberlayne, Head of SRI and Portfolio Manager, discusses recent developments affecting the world over the past three months.
2020 so far
Global stock markets declined sharply in the second half of the quarter as economic activity was negatively impacted by the coronavirus pandemic.
Social distancing measures and travel restrictions were enacted in many countries, with some governments going even further and forcing closure of non-essential commercial activities. The extent of the upheaval is illustrated by the drop in commercial air traffic, which declined by over 60% in the last week of March1. Not since World War 2 has there been such a synchronised dislocation to the global economy.
But this is a very different sort crisis to a war. Everything is quiet. Cities are becalmed, there are few cars on the roads, and skies are empty of planes. One noticeable consequence has been a dramatic decline in pollution. Carbon dioxide and nitrogen oxide emissions have declined dramatically in recent weeks. Some people have commented that we have been given an accidental glimpse into a low carbon future but, while there may be clear environmental positives, it is a pyrrhic victory given the human costs of this crisis. The social impacts are multi-faceted and governments are struggling with how to weigh the consequences of different policies.
The silver lining
There have been some positives, however, in the midst of all this turmoil. It has highlighted the benefits of the technological progress that has occurred over the last decade. The digital economy has enabled many people to continue day to day life with only modest inconvenience. Some businesses have fared very well over the last few months, seeing an increase in demand for their services. One of the big questions we are asking ourselves is the extent to which there will be lasting change as a result of this crisis. Will there be a new normal and what will it look like? We believe this crisis will accelerate digital trends and we are hopeful there will be lasting environmental positives from changes to the way we organise our economies and lead our lives. We are investing in companies that are aligned with this type of future.
Disruption or resilience
Given the scale of government interventions there are few parts of the economy which have not experienced disruption. All main market sectors have recorded negative returns, however, there has been wide dispersion in relative performance with some companies being more resilient than others. The businesses most severely affected have been those exposed to the travel, transportation, heavy industrial, commodities and finance sectors. Cruise liners and airlines have been hit particularly hard with share price declines of as much as 80%-90%. The energy sector, which is dominated by oil and gas companies, was the worst performing sector, falling by more than 40% as oil prices crashed due to combination of weak demand and a breakdown in OPEC relations with regard to curbing excess supply.2
Finance was the second worst performing sector, falling more than 25%, as banks came under pressure as result of regulatory interventions by governments over credit forbearance and interest rate cuts by the central banks. The traditionally more defensive sectors of healthcare, consumer staples and utilities performed relatively better, albeit each still declined by 5%-15%. The information technology sector also declined by less than overall market as demand many digital services increased.2
There is considerable uncertainty over the duration of Government policies around the coronavirus pandemic. In addition to this many people are starting to ask whether this crisis will precipitate lasting changes to the way we lead our lives and organise our economies. We do not profess to know the answers to these questions, but we do believe there are some future paths that are clearer than others, and that our sustainable investment approach will aid us.
In response to this crisis many governments around the world have responded with gigantic fiscal stimulus packages, some representing as much as 20% of a country’s GDP. This stimulus will have to go somewhere and, while some sectors may take time to recover, there will be parts of the economy that are likely to come back strongly. Our sustainable investment approach helps us to focus on long term trends that we believe will not change. In fact, we believe some may even accelerate as a result of this crisis which has underlined the fact that some things need to change.
Digitalisation is one trend that we see accelerating and we have many investments exposed to this across business productivity, communication, health, entertainment, infrastructure and connectivity. The resilience of the digital economy thus far, with many companies seeing increasing demand for their services, has served to underline the idea that many people and businesses can lead lower carbon lives. The whole point of digitisation is that enables greater productivity and more efficient use of our precious natural resources.
We also believe the transition to a low carbon economy is a trend that will continue, and possibly even accelerate. A common question we get is around the potential for low oil prices to derail sustainable investment or slow down the pace of the transition to the low carbon economy. We believe this is unlikely. In fact, the volatility of the oil price is itself a negative from an investment perspective, whereas the stability of returns in the renewable sector is highly attractive. It is the unstoppable momentum in clean technology, combined with the rising regulatory burden associated with carbon that is making investment in fossil fuels less attractive. And we expect a continuation of the regulatory support for the transition to clean energy.
Lost amidst all the news around the pandemic there was a significant step forward in the European Union's (EU’s ) commitment to a net zero carbon economy with the release of the draft European Climate Law on 4 March by the EU Commission. We would also not be surprised to see allocations from the large fiscal stimulus packages towards the clean energy sector. An increasing number of companies across the power generation, transportation and manufacturing sectors have now committed to multi-year investment plans aligned with the transition to a low carbon economy. In the coming decade we will see an enormous increase in renewable generation capacity, breakthroughs in battery technology and broad consumer uptake of electric cars.
We believe this will be the decade in which we will see clearly the prospect of peak oil demand. We have used the recent market volatility to increase our investments in renewable power generation, where we see stable and growing dividends, and also in companies providing the technology for the electrification of transport.
There are many other areas where we expect little change – the need for essential health services, driven by ageing populations, has only increased due to this crisis. There remains a great need for insurance and risk management services; population growth and urbanisation will continue and with it the need to invest in sustainable infrastructure, public transport, energy-efficient buildings, and water technology. Innovation will advance in respect of the circular economy and there will still be demand for many consumer goods and services in relation to sports and leisure, entertainment, and healthy eating.
Instead of undermining this crisis, we are hopeful that it will serve to underline the attractiveness of sustainable investing and how it leads to better outcomes, not only for investors but also for the environment and society. We invest for profit, people and the planet. We believe the best investment returns will be generated by companies with resilient, compounding growth characteristics; and these attributes are more often found in companies that are on the right side of sustainability trends.
1 Flighttradar24.com, as at 2 April 2020.
2 Factset, Janus Henderson Investors, in sterling terms as at 31 March 2020.
Unless otherwise stated, all sources are from Janus Henderson Investors, as of April 2020.