Semiconductors as the next oil
A pronounced global chip shortage suggests that a large capex cycle is underway, but which aspects of the production chain look attractive?11 minutes
23 Nov 2021
The opportunity set is widening for sustainable investors. But as Co-Head of Multi-Asset Growth Michael Spinks explains, investors increasingly need to be able to distinguish between the truly sustainable and those who merely talk a good game.
The opportunity set for sustainable investors continues to widen. First, we see huge demand for capital to finance solutions for both climate mitigation and adaptation. Our primary focus is on opportunities relating to renewables, resource efficiency, and the electrification of transport and more. Another focus is companies listed in emerging markets whose growth is driven by domestic growth trends, particularly social dynamics such as financial inclusion. Thirdly, in fixed income we are seeing more governments come to market with green, social and sustainable bond issues, which in emerging markets help to finance the net-zero transition and are increasingly offering a compelling risk premium.
Sustainability disclosures are improving all the time, so it’s increasingly possible to measure, track and price sustainability issues. We analyse both the negative and positive externalities generated by an investment, and the increasing availability of sustainability information is clearly helpful in this regard.
We believe strongly that negative externalities will increasingly be valued and priced. This is already happening with carbon emissions, for example, and also – quite rapidly, in fact – with negative social externalities. Conversely, I think that companies and countries that operate to the highest standards, from an externalities perspective, are increasingly being rewarded. One consequence of these trends is that there are more opportunities for investors to make an intentional and measurable impact via their portfolios.
We would group impact broadly into the categories of environmental and social, with the key criteria for investors to consider being the intentionality and measurability of the impact. On the social impact side, there are some terrific opportunities in fixed income; there are also a number of companies in emerging markets that are making a valuable social impact. On the environmental side, the growing number of companies that are enabling decarbonisation, be that via renewable energy, electrification or resource efficiency, is expanding that opportunity set in equities. So there are plenty of potential impact investments. The key thing is to define a framework that enables you to identify what is truly sustainable and impactful. I think true sustainable and impact investing requires an in-depth understanding of the sustainability characteristics of the investment.
The pressure to act on climate change is intensifying, and it will be increasingly important for investors to distinguish between credible net-zero commitments and mere platitudes. Because of this, I think there is a big opportunity to invest in companies with the potential to benefit from environmental drivers of structural growth. Biodiversity is also coming increasingly into focus, which makes companies offering solutions in this area interesting. From a social perspective, the areas I’m looking at include companies that contribute to financial inclusion and that generate health and education benefits, particularly in emerging markets.
Of course, from a nearer-term perspective, investors must be mindful that we’re heading into an uncertain macro backdrop. Central-bank policy is shifting in the US, the interest-rate environment is changing, growth is weakening and the ramifications of the pandemic – not least disrupted supply chains – will rumble on for some time yet.
About 50% is in equities. We also hold some government bonds, with a strong focus on socially orientated issuances. Then we have just over 20% in cash, all of which is US dollar-denominated because we think that will give us some protection as global financial conditions tighten. This is a high cash rate for us, and it reflects the fact that we are expecting volatility. We anticipate opportunities to re-risk the portfolio over the next few months, when we will aim to deploy this cash in areas such as credit.
Default: There is a risk that the issuers of fixed income investments (e.g. bonds) may not be able to meet interest payments nor repay the money they have borrowed. The worse the credit quality of the issuer, the greater the risk of default and therefore investment loss. Interest rate: The value of fixed income investments (e.g. bonds) tends to decrease when interest rates rise. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Sustainable Strategies: Sustainable, impact or other sustainability-focused portfolios consider specific factors related to their strategies in assessing and selecting investments. As a result, they will exclude certain industries and companies that do not meet their criteria. This may result in their portfolios being substantially different from broader benchmarks or investment universes, which could in turn result in relative investment performance deviating significantly from the performance of the broader market.
All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests.
Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.
With Western central-bank policy normalising, economic growth rates diverging and global trade still readjusting to life after lockdown, investors have a complex environment to navigate in 2022.
Ninety One’s portfolio managers assess the outlook across their asset classes and regions.
Our team also takes a deep dive into the outlook for emerging markets, as well as into how sustainability will drive investment outcomes next year and beyond.