Nov 27, 2023
In contrast to this year's narrow market which was dominated by artificial intelligence stocks, we expect businesses with sustainable structural growth drivers to return to the fore in 2024.
The market is likely to broaden in 2024 in favour of active bottom-up stock pickers as investors focus on businesses that can grow through macro volatility. This is particularly pertinent for sustainable investors, who see drivers such as financial inclusion, healthcare impact, and climate adaptation emerging across sectors.
Businesses that tackle underserved needs with products and services are likely to build larger total addressable markets and, when combined with pricing power, should deliver sustainable, attractive returns.
The Inflation Reduction Act (IRA) is an important piece of legislation that reached its one-year anniversary in August 2023, and we are starting to see its ramifications for the transition to sustainable decarbonisation. For instance, I recently met with a large American utility company that also is a leader in renewable energy and is a key player in moving the US grid towards a greener future. The company confirmed that the IRA is beginning to positively impact its earnings and outlook, and I believe we will see this trend more broadly, including in sectors such as waste management.
A key point is that the IRA has bipartisan support. Democrats see it as a vital step towards a greener future, while Republicans recognise its potential to boost economic investment and create employment opportunities in many of those rural areas that perhaps have been impacted by the transition away from fossil fuels. We expect to see the continuation of broad political support for this transition.
Sentiment on sustainable investing and climate investing, in particular, has shifted from peak positive to deeply negative, driven by a variety of factors, including rising interest rates, anti-ESG sentiment, and broader economic challenges in emerging markets. However, I think we are beginning to move past this.
I think there is a contrarian opportunity to put capital behind businesses that have access to growing markets, pricing power, and the ability to deliver products and services that address the urgent sustainable challenges we face today. I see this as an exciting time to think about allocating capital to sustainable investing, an area that was out of favour in 2023 but I believe should perform well going forward.
We have done research on a variety of topics, including biodiversity and corporate culture which we have highlighted in a podcast series called Sustainability with Substance. For instance, with biodiversity, we explored the idea of nature’s balance sheet being something that companies should think about when they allocate capital. We looked at culture and explored the different ways that companies can organise themselves and decentralise decision-making to ensure that they can innovate and meet the demands of climate change.
We believe that 2024 is likely to be a pivotal year for sustainability and hope to continue to highlight important areas in this space.
General risks. 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. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.
Specific risks. Concentrated portfolio: The portfolio invests in a relatively small number of individual holdings. This may mean wider fluctuations in value than more broadly invested portfolios. Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems. 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.