23 Nov 2021
UK Sustainable Equity’s Matt Evans says we may get a rocky ride in 2022. Resilient companies that invest in a sustainable future may be best placed to prosper.
There are clearly near-term concerns, like rising inflation and interest rates, and COVID remains a challenge for everyone. But through all of that, it has been encouraging to see the companies in our portfolio continue investing in research & development for solutions to global challenges – not only for climate change, but issues like water scarcity and waste, as well as social challenges like access to healthcare, finance and education. I think that positions them well for longer-term growth.
There are some serious headwinds, particularly inflation and supply-chain disruptions. Regarding the latter, investors need to monitor carefully whether these supply problems could lead into a demand shock. The UK economy looks reasonably solid at the moment, but there could well be volatility in different sectors as we move through 2022. But even in uncertain times, there are plenty of opportunities for investors with a three to five year horizon or longer.
The past two years have been incredibly tough, and unfortunately not all businesses survived. But in consumer-focused areas for example – such as gyms and even some retail businesses – those that have made it through could find themselves in strong positions. It helps that, because conditions have been so challenging on the high street, rents have come down – not just because of COVID, but also because of the shift to e-commerce. So we expect select companies to capitalise on these opportunities.
There’s clearly a major focus on renewable energy at present, and we’re seeing some interesting developments in hydrogen and fuel-cell technologies. Investors can expect more progress in these areas over the next 12 months, and we should learn more about the role that these technologies may play in the transition to a low-carbon economy – although they are still longer-term prospects from an investment perspective. Other interesting areas include sustainable infrastructure and construction, including building-materials that are less carbon intensive, as well as solutions that make the operation of buildings and infrastructure less energy intensive. We are also looking at industrial products that help make industrial processes more efficient and greener. More broadly, hopefully developments next year will spur further spending in these areas and accelerate progress in tackling climate change.
Given the headwinds, we are focused on companies with sustainable competitive advantages and pricing power, which will make them more resilient in an uncertain market and with inflation appearing to be picking up. As part of our investment process, we also focus a lot on how companies allocate capital, and I think that will also be particularly important next year. As the world continues to progress towards a sustainable future, those that invest for tomorrow will be best positioned to win market share and thrive.
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.
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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.