2022 Investment Views: UK sustainable equities

Stay strong

In a potentially turbulent UK, investors should prize resilient companies. Qualities to look for include pricing power, competitive advantages, smart capital-allocation and a focus on sustainability.

23 Nov 2021

2 minutes

Matt Evans
In a potentially turbulent UK, investors should prize resilient companies. Qualities to look for include pricing power, competitive advantages, smart capital-allocation and a focus on sustainability.

The fast view

  • UK investors should be wary of volatility ahead, but there are opportunities for those with a longer-term focus.
  • Businesses that have survived the shake-out in consumer-focused sectors, like health & fitness, could be in a strong position next year.
  • Look also for companies that have continued to spend on R&D. Businesses developing solutions to global sustainability challenges in particular may be well-positioned for longer-term growth.
  • We are focusing on companies with sustainable competitive advantages and pricing power, which should make them more resilient in an uncertain market and with inflation picking up.
Q&A with Matt Evans

UK sustainable equities

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.

QMarket conditions are tough. Are businesses still focused on sustainability?

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.

QHow do you see the near-term outlook for companies?

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.

QWhere do you see the opportunities in 2022?

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.

QWhere do you see the opportunities in environmental sectors?

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.

QHow is your portfolio positioned heading into 2022?

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.

Specific risks

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.

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.

Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.

Authored by

Matt Evans
Portfolio Manager

Important Information

This communication is provided for general information only should not be construed as advice.

All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One.

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