Alex Rowe, manager of the Global Sustainable Equity Fund, Nomura Asset Management, looks at the macro, potential risks and the opportunities for sustainable investing in 2023.
The most recent inflation data releases have taken some of the pressure off central bankers particularly in the United States, but also in Europe. However, stickier core components remain very high, and the Fed has been vocal that they remain concerned by the level of these and expect the Federal Funds Rate to remain elevated over the next two years in order to fully stamp out inflation. However, there does now appear to be more consensus and stability around expectations, and an increasing focus on the impact of a global recession on corporate earnings.
Within this environment we strongly believe ‘Quality’ will outperform as a result of the typical characteristics these businesses exhibit – such as lower earnings variability, higher quality management teams and lower levels of debt – which will support riding out any economic downturn.
Furthermore ‘Quality’ has underperformed materially over the past two years and there are exciting opportunities to invest in high quality business at attractive valuations.
Value as a style factor has also strongly outperformed over the past two years, in part due to an extremely strong Energy sector. We believe it is very unlikely such outperformance of Value and traditional Energy will continue and expect on balance that this is more likely to reverse in 2023.
We are also very positive on the potential for markets to refocus on sustainability and the huge environmental and societal challenges faced globally. In 2022 the focus of the investment community on ‘sustainability’ megatrends took pause as concerns over huge spikes in energy prices following the invasion of Ukraine and spiraling inflation dominated. However, the events of 2022 have only served to strengthen the need to reduce reliance on fossil fuels and catalyse energy efficiency megatrends.
There has also been a huge increase in government funding and support for investment in energy security, climate change and water resiliency through for example the $738bn Inflation Reduction Act (IRA) and $1.2trn Infrastructure Investment and Jobs Act (IIJA). The benefit from the huge increases in funding through these multiple Federal Acts introduced by the Biden administration will start to feed through into company revenues this year and provide long term structurally higher demand.
