Institutional investors have been warned that fundamental consumer changes and the global race to net zero will have a transformative impact on market volatility.
Emerging from the pandemic was “similar to war,” according to chief investment officer for Vaughan Nelson Investment Management, Chris Wallis.
Speaking at Investment Magazine’s Equities Summit, Wallis said the world would discover a lot of permanent damage had occurred during Covid. “I think investors believe we’re going to go back to a pre-canned, pre-pandemic world. And that’s not what happens after war,” Wallis said.
Wallis warned of growing volatility in US markets into next year and beyond. Higher valuations dominated the large-cap space but these narratives would fall away into 2022, he said.
“We overstimulated from goods consumption, which led to supply chain issues, and we’re going to work through those and really look at the properties of inventory shortages at [the] retail level,” Wallis said.
“It doesn’t mean there’s not great opportunities that are very attractive to absolute valuations, but you’re probably going to find that in the small and mid cap space, there’s probably going to be more on the value side.”
The impact of constrained supply is also playing out in Australia, general manager of growth assets at HESTA, Steven Semczyszyn said.
He predicted continual upward pressure on prices in the short term, which would cultivate better incentives to push more capital into renewables and less carbon intensive assets.
“I think it’s going to be a bit of a bumpy ride… because these are big industries that we are very reliant on to keep the lights on. But directionally, we need to stay focused on that. The big prize is decarbonising the world,” he said.
Semczyszyn noted that Australian investors are used to a concentrated market heavy in banks and miners: “In Australia, you’ve got to be a bit careful with a concentrated index, because the benchmark is already concentrated. Offshore markets are somewhat concentrated, but nowhere near to the same extent as Australia.”
“Adding a concentrated portfolio on top of that isn’t necessarily always winning the strategy. Even more diverse market buys in Australia can do well, as long as they’re not hugging around the banks and the big mines,” he said.
Head in the clouds
The pandemic has also fuelled massive growth in AI cloud services and digital transformation around the world, which is impacting investment decisions globally.
Tokyo-based portfolio manager of Nomura Asset Management, Rika Naito highlighted German company Hello Fresh, which uses deep customer location and profile information to data-match and meet market needs around the world. This sets it apart from its competitors, she said.
Cloud based healthcare services and platforms for big pharma present strong opportunities, while streaming services such as Netflix will remain strong post-Covid, Naito, of the multi-theme fund said.
JP Morgan Asset Management’s portfolio manager, emerging markets and Asia Pacific equities Ayaz Ebrahim said his firm had reduced some weightings amid market pressures in China against the backdrop of the strained regulatory and geopolitical environment.
Despite these downgrades, many companies look very attractive in the ecommerce and internet space, he said. He added China is reinventing itself as a technology and innovation-led powerhouse capable of much higher value areas, shedding its image as a low-cost manufacturer.
“Patent applications from China in the 1990s was essentially zero, compared with around 70,000 applications today, driven by demand from the consumer on the back of strong innovation and growth,” Ebrahim, based in Hong Kong, said.
Broad issues around communication in China isn’t impacting the thriving entrepreneurial landscape the nation has built over the past few decades. “We see a lot of opportunities here. Our modelling shows very attractive opportunities despite our downgrades,” he added.
Ebrahim also noted growth in the tech sector in the broader Asia region. Ecommerce, social media, fintech, healthcare and hardware component manufacturers are thriving, while electric vehicles is a big theme for companies in China and Korea.
Investment managers are eyeing Vietnam because leaders there mandate strong regulations around ESG, attracting foreign investment from the likes of Nike and Adidas. Both companies are building plants in Vietnam, complete with their own power generation capabilities, Ebrahim said.
Korea has made strong progress in the biotech and healthcare space, along with ecommerce and gaming. The shipbuilding sector there has been revived by a push into cleaner energy, he said. And India’s fintech and ecommerce sector is growing, opening up investment products for private sector banks into more rural areas, providing more prosperity to the regions.
Investment managers spoke about their own bespoke tools built in-house to decipher credible ESG risk and opportunities in their bid to build net zero global portfolios.
Alphinity Investment Management aggregate carbon indicators into leading, lagging or moderate categories to identify which companies are tracking their transition and compare their journeys.
abrdn has constructed a climate scenario analysis tool to provide investors with a forward-looking quantitative assessment of the impact on an asset allocation to identify climate winners and losers, taking into account all of that uncertainty.
abrdn’s investment director Camille Simeon explained that the tool also allowed for flexibility as information came to light and new ESG targets were announced and met.
While these tools were helping investors tiptoe through the material risks to identify climate winners and losers, deep conversations with companies on their internal decarbonising targets and long term net zero goals are also common.
Simeon raised the problem of transition-washing, which has been weeded out of abrdn’s portfolio. Cherry-picking assumptions around gas and fuel transition was leading to decarbonisation inertia, so abrdn pulled the pin.
“When it comes to decarbonisation of the world (not just a portfolio), as asset allocators, we have an important role to play here,” Simeon said.
“Companies need to move now to respond to the climate change challenge before it’s too late and the challenge becomes even bigger. We want to see that management teams are taking appropriate steps to mitigate the risk,” she added.
Aside from Google (which has been climate neutral since 2007), tech players are struggling with ESG targets. Many lag in governance measures, and fund managers and sustainability measures take an all or nothing approach, Alphinity’s portfolio manager Mary Manning said.
Meanwhile, some Australian institutional investors are embarking on reverse engagement, opening the door to have conversations with companies by demonstrating their expertise in areas such as the prevention of modern slavery, which has resulted in the strengthening of climate goals and investment targets.