Just as Europe is hunkering down for Lockdown 2.0 two pieces of news come out in very swift succession. Both signify change to a world we have almost become used to. Firstly, it seems as though Joe Biden has surged past the rather complex electoral college process to win the race to the White House. Secondly, American pharma giant Pfizer, in collaboration with European firms, has produced a vaccine for COVID-19 which has significantly surpassed usual drug efficacy expectations. On both fronts much is still yet to be done. Mr Trump needs to concede victory, and global healthcare systems need to ramp up production and very challenging storage solutions for mass vaccination efforts. However, both in our view are good news. A Biden presidency represents a more conciliatory attitude, and definitely a more environmentally aware and trade friendly stance. The vaccine is an amazing feat of technological and scientific progress.
So we are not surprised that the markets are moving. And they are moving fast. A lot of pundits have a lot to say that this marks a point in time where the technology and healthcare stocks which have driven performance will cede their leadership to more cyclical industries which have been largely ignored by investors. We firstly would point out that our investment process tends to focus in on the more quality premium end of the market, where companies with strong franchises, strong management teams and unencumbered balance sheets, able to fund growth from internally generated cashflows have excelled and led the march, especially since March. If this so-called sector rotation does happen, then we are likely to face a certain amount of return volatility in the funds in the short term. We are absolutely confident in our B.E.S.T investment process and believe that it will continue to provide long term benefits for our clients in a world where sustainability issues more and more come to the fore.
We often get asked why markets continue to rise in the current environment of economic activity plunge, (remember when oil prices went negative as crude storage capacity ran out, so low was demand) geopolitics (Trump refusing to concede and a more divisive world stage as his legacy) and a new work model which could very easily spell a huge period of disruption for commercial property. The answer is simple. Markets continue to rise due to the fact that risk capital has not ‘left the game’. With interest rates (low risk instruments) at such historic low points, the only sensible option is to remain invested. The acronym TINA (There is no alternative) is something we hear again and again.
We want to remain invested as we continue to find excellent companies whose share price doesn’t yet reflect the underlying earnings power of the future of the business. We don’t invest in fossil fuel energy, or in mining companies. We don’t think they represent sustainable business models. We look for companies who share our goal of a more sustainable future. It’s not easy to analyse such companies and we are pleased to find opportunities away from the bellwether stocks of yesteryear. Our job as analysts is to try to understand what’s going to happen in 10 or twenty years and to take conviction positions in companies, we feel are in the best position to emerge as future leaders. We appreciate that oil and dirty cyclicals may well play a bit of catch up in the near team. If this does happen, we will stick to our principals. We will not compromise our long-term horizon for short term risk arbitrage. We know that markets go up even when the economy falls because investors are looking through the current noise to the future. We believe in a future without fossil fuels, low carbon buildings and a more sustainable society. COVID has proved how fast we can adapt (and how governments can finance the emergency). Our future will need to look very different from the past. We want to invest in that future to give our clients a more sustainable long-term return profile on their assets.
Written by Rory Hammerson
This article is provided for information purposes only. The opinions contained within it are that of the author and are conducted at the author’s judgement. It does not constitute a personal recommendation or inducement to invest.