The start of 2016 has seen exceptionally volatile trading across many of the world's stock markets, much of it triggered by concerns over China's economic growth. However the recent spate of selling needs to be viewed in the wider context of the strong bull market period which has followed the credit crisis. To some extent what many investors are currently experiencing is the return of market volatility following a long period of almost uninterrupted asset price inflation. The very low returns afforded by sovereign bonds (Government debt) and cash still make equities an attractive long-term proposition but at the moment markets simply have less appetite for the risk that equities entail.
With this in mind what might 2016 hold for investors with an interest in sustainability? Late in 2015 I asked some of the UK's brightest responsible investors to share their thoughts on where they would be focusing their attention during 2016.
1. Putting Paris into practice
December’s ambitious climate agreement in Paris has given fresh impetus to green investments such as the renewables sector. Massive new solar farms are being built in China and the US, and renewables are becoming more cost competitive (though in some markets this is often due to subsidies). That makes stocks such as US listed solar cell manufacturer Sunpower, which both WHEB and Alliance Trust funds hold, a good bet. Leading from the front in the solar cells market, Sunpower could generate more energy and better investment returns. Wind developers such as Enel Green Power and EDP Renovaveis (listed in Italy and Portugal) also provide attractive options as they are developing farms in locations such as the US, where long term contracts for the power they produce reduce the risks of losing money if power prices fall.
Other winners may include those companies that enable their customers to use energy more efficiently – a theme closely followed by Alliance Trust. Companies involved in energy efficiency include Kingspan (building insulation), Acuity (efficient LED lighting) and Novozymes (producers of enzymes that enable you to wash your clothes at lower temperatures).
On the other side of the climate coin large-emission generating industries such as power generation, steel, cement, oil & gas and perhaps aviation look set to have a difficult year. For fossil fuels and coal in particular the debate about ‘stranded assets’ (see last year’s blog) is only likely to intensify.
2. Automotive investors can fast track smarter cars and cleaner emissions
The car world in 2015 was dominated by the VW emissions scandal (not to mention the Jeremy Clarkson scandal!), but 2016 is likely to see a new direction with the self-driving car industry firmly on the radar for many savvy investors. Investors such as Quilter Cheviot are looking closely at those companies that might make more autonomous cars a reality – including companies offering smart electronics that improve safety, fuel efficiency and reduce pollution levels.
In the wake of the VW scandal, the car industry is likely to come under increased scrutiny during 2016 and beyond. Such scrutiny will likely benefit companies such as Johnson Matthey or BorgWarner who specialize in automotive equipment to reduce pollution and improve efficiency. In particular we can probably expect hybrids rather than full electric cars to experience the most growth in the near to medium term. This is more good news for Johnson Matthey which has strong exposure to pollution reducing catalytic converters, and for Belgium-based materials company Umicore who are likely to benefit from more electric battery vehicles. To quote Stephen Porteous, Investment Manager at Alliance Trust, let’s hope that in the 2016 automotive market we see, “less smoke and no mirrors”.
3. Will 2016 be the year of social impact investment?
Impact investing grabbed the headlines at the end of 2015 when Facebook founder Mark Zuckerberg announced he will use 99% of his estimated $45 billion wealth for philanthropic causes1, notably through impact investments.
Social and impact investments are likely to continue to grow in appeal to investors this year. Particularly if the EU approves the UK Treasury’s request to boost ’social investment tax relief (SITR)' this year – helping fund managers such as ‘Resonance’ to expand their SITR funds across the UK.
Globally, the announcement of the UN’s new Sustainable Development Goals combined with the COP21 agreement is likely to catalyse a lot of work from asset managers and companies in this area and we are likely to see an increase of larger, liquid green bonds coming to the market.
Innovative ideas like ‘blue bonds’ (investments connected to protecting our oceans) and the Social Stock Exchange (the world’s first exchange for companies delivering a positive social and environmental impact through their activities) may also help make 2016 a breakthrough year for social investments.
4. Opportunities in emerging markets
Emerging markets had a bad time through most of last year so might be a place to look to for strong growth in 2016. For example despite all the new year turmoil in China – it still looks set to continue its transition to a consumer-led growth model, boosting consumer-exposed sectors and particularly those emerging markets that are have good trading relations with China.
The power sector in emerging markets is also a good place to find green growth. For example in wind, a company like Spanish wind turbine manufacturer Gamesa is looking to develop wind farms in countries such as India that are short of power and looking to plug the gaps with renewables2. As a maker of good quality turbines they can expect impressive growth that responsible investors can benefit from.
This article is authored by John Ditchfield (Partner, Castlefield Advisory) and the views expressed are not necessarily shared by other individuals within the organisation.