In many ways, 2019 was a year that confounded expectations. It was a year of very weak economic growth, a year of earnings downgrades across the market, a year with a high degree of political uncertainty, and a year that saw a power struggle between the world’s two biggest economies via a trade war.
And yet, the moves from the US Federal Reserve earlier in 2019 to lower the risk-free rate ultimately supported markets throughout the year. As a result, seemingly against all odds, it was a strong year for equity markets.
The main lesson for investors was that interest rates really, really matter.
The big question for 2020 is whether equity markets can continue to perform. I think the answer to that is, like 2019, it’s probably going to be okay. It’s likely that we’ve experienced a slowdown but that ultimately growth has bottomed.
There are a few reasons for this positive outlook.
Firstly, a trade deal has been agreed which – if it holds – removes a significant cause of business uncertainty. Secondly, interest rates continue to be very low and the positive benefits will continue to flow through to the economy. This is further supported by the Federal Reserve having stated that it intends to let inflation run ahead of target before making any adjustments. Finally, much of the poor data, such as the Purchasing Managers’ Index (PMI), has already been priced into market expectations.
As a result, it looks like a fairly benign outlook for equity markets at the start of the year.
The bigger challenge for investors is identifying the companies that can grow at a faster and more sustainable basis than their peer group in this kind of macroeconomic environment.
One of the most significant themes in 2020 is climate change and sustainability.
While it’s an area that has been on our radar for many years, we believe that a tipping point has now been reached and that this theme is coming to the fore this year and will extend well into the 2020s.
The reason for this is that the world’s leading companies are stepping up and taking action proactively - because their employees, customers and shareholders care about it – rather than waiting for governments to enact legislation.
ZERO CARBON EMISSIONS
A noticeable shift is the increasing number of corporates that are committing to a zero carbon target by a set date, including major global companies such as Starbucks, Walmart and Vodafone.
This is in addition to countries like the UK and France, and US states including California and New York, also committing to zero carbon targets in law. To date, 37 countries and 155 companies have adopted ‘net zero’ emission targets by 2050, representing 16% of global gross domestic product (GDP).
Achieving zero emissions is a laudable goal, but it’s going to cost a lot of money which could well run into trillions of dollars.
As stock pickers, we are seeking to invest in the beneficiaries of this trend – companies that are leveraged to clean energy; batteries; storage supply chain; more efficient transportation, as well as other businesses that are catching on to consumer trends such as food, packaging and sustainable buildings.
The initial area of focus for us is in renewable energy. There’s no point having an electric car if it’s powered by a coal power station so clean energy is key. We’ve identified a number of companies that we believe will benefit from this trend shown at the top of Chart 1.
The second key area is transportation. Transportation is clearly one of the key emitters in the world and there are some very interesting opportunities.
The obvious investment is Tesla; however we are also focussed on companies like Infineon, which is a key semiconductor player within the transportation industry.
The other areas of focus are in building efficiencies as well as in packaging and waste. These companies will benefit as consumers, businesses and governments institute sustainability programs including schemes around single use plastic and growing awareness of waste management. We have also highlighted some businesses at risk of disruption or that are in industries which have considerable structural headwinds to growth.
We see significant opportunities in companies that can navigate the climate challenge, where strides are being made regardless of government subsidies. We have been increasing our investments in this area and will likely continue to do so over the course of 2020 as more opportunities develop.
The key point for investors is that this shift is going to happen. Regardless of political, scientific, or other views, investors will seek to benefit from this shift in 2020 and beyond.
Nick Griffin is chief investment officer at Munro Partners.