A thematic time

If change is the only constant, how can we prepare for what’s to come? Technological innovation, social frictions and environmental imperatives all have the potential to unwind the thread of portfolio performance.  Here we look at a few climate-related themes that may be key to turning disruption into opportunity.

“Sell in May and go away” is an old investment adage. It is thought to have been a phrase borne from the custom of aristocrats and bankers who would leave the city of London and escape to the country during the hot summer months. Its meaning hasn’t changed too much. This is the time of the year when, traditionally, stocks are traded less than normal. As such, some believe this means fewer opportunities, but is this time different?

In 2020 it was. Just months after the global Covid-19 pandemic caused global markets to crash by an average 34% (in US dollar terms), markets worldwide reportedly recouped the losses by 23 August.[1]

But while no one knows for certain whether summer 2021 will be a hotbed or a holiday for trading, the climate does appear to be influencing some future investing trends.

Time for vegetables?

One of these is the question of climate change and how it could affect sustainability in food.  According to the Intergovernmental Panel on Climate Change (IPCC), between 21% to 37% of global CO2 emissions result from food production, while 50% of the world’s habitable land is given over to the same.[2] With the global population expected to exceed 10.9 billion by 2100, the question of where our food comes from and how it’s produced is an increasingly urgent one, say analysts at Newton.

In developed countries, consumers have already begun to alter their shopping preferences as they become more conscious about the origins and environmental impact of their food, the team at Newton say. This is spearheading trends in clean labelling and environmentally friendly plant-based proteins.

“The way people consume their food has evolved significantly in the past decade,” say the team. “Wider global trends centred on convenience-based consumption are driving growth in food retail and distribution, with online platforms gaining share.”

A further trend within the food retail and distribution area is the emergence of online food delivery platforms. From China to the US, consumers armed with smartphones can now have groceries or restaurant products delivered to their door with a few simple clicks.

“The case for food delivery in China is particularly compelling, with penetration rates for on demand food delivery set to triple by 2023,” the team say, adding a tripling in an economy as populous as China is quite significant.

Time for zero

Achieving net-zero carbon status by 2050 has become a more realistic prospect lately, according to Newton’s head of sustainable investing, Andrew Parry – and this is another area where new thematic trends are influencing investors. Parry believes the rebound from the Covid-19 crisis is likely to be the most environmentally friendly economic recovery on record. Investors are increasingly interested in renewable energy, electric vehicles, plant-based food, social inclusion and the circular economy, he notes.

Investment flows into these areas are expected to bring enduring economic benefits: from reduced waste production, to cleaner and cheaper energy, to more resilient and climate-friendly agricultural practices. But innovation alone is not going to solve the planet’s most pressing problems.

Sustainable investing requires a pragmatic approach. Investors need to embrace companies able to successfully implement sustainability solutions into their current business practices.

Time to transition

Energy is another focus of many discussions and debates today. From how our cars will run to how our homes will be powered, governments the world over are targeting lower emissions. To meet such demands, companies are changing. Innovative vehicles to reduce our carbon footprint are being created alongside new energy alternatives.

According to Walter Scott, the need to consider the impact of fossil fuels is probably only eclipsed by the complexity in measuring that impact. Its investment team notes “It is easy to cast oil companies as villains and divest (sell). But what if those same companies were taking steps to lower their current carbon footprint while at the same time investing in technology to meet tomorrow’s energy needs in a much more environmentally appropriate way?”

Newton’s global analyst Laura Sheehan says the energy sector has undergone a fundamental shift over the past year. Much of this is a result of the Covid-19 lockdowns. “We witnessed a sudden change in mindset; the commitments we had sought from energy companies for years were manifesting themselves in the space of just a few months. At times, it seemed like I was listening to entirely different management teams and it was soon abundantly clear meaningful change is finally afoot.”

Sheehan says she is now seeing capital expenditure at energy companies focused on energy- transition solutions. “Bigger oil names are looking to adopt broader integrated energy models, while others are focusing on key end markets and product solutions, including renewable power generation.”

Time for the environment

Current levels of global consumption are putting us on a collision course with calamity, according to Newton analysts looking at the impact of climate change. They say the theme of how environmental protection can fundamentally rearrange the outlook for returns is stronger today than ever before. But how does that equate into investment opportunity?

According to Newton there are four areas where potential future winners – and losers – reside: clean energy, efficient infrastructure, electric vehicles, and resource management.

These areas encapsulate everything from urbanisation trends to renewables; recycling to technological innovation – and much in between.

“It makes sense for investors to gain targeted exposure to those companies offering innovative products and services to address the resource and environmental challenges we’re facing,” they conclude.

[1] CEO Magazine: How the world’s stock markets fared in 2020. 22 December 2020.

[2] IPCC: Special Report: Climate Change and Land, 2019 and  Our World in Data: Half of the world’s habitable land is used for agriculture, 11 November 2019.

Doc ID: 646808

Related reading