Hamish Chamberlayne, Head of Global Sustainable Equities, explains why investors should not be wrong-footed amid increased volatility in 2022.

Key takeaways:

• We anticipate heightened market volatility in 2022 as the global economy contends with inflationary pressures associated with the COVID-19 pandemic.
• We believe that inflationary pressures will benefit long term secular growth trends associated with efficiency, clean technology and renewable energy.
• The outcomes of COP26 should further accelerate the transition to a low carbon economy and we are excited by the range of opportunities in 2022 and beyond.

As was the case for much of 2021, we expect the 2022 market environment to be characterised by ongoing tensions between secular growth companies and the post-pandemic ‘reopening’ trade. To our mind, we believe that the powerful secular growth trends of digitalisation and electrification should dominate the market narrative over the next decade as decarbonisation of the global economy gathers pace. We expect heightened volatility, however, as the global economy contends with inflationary pressures stemming from the dislocations caused by the COVID-19 pandemic.

Inflation acts a tailwind for efficient businesses

When we consider the opportunities to sustainable equities in this environment, it is very important to remember that inflation often contains the seeds of its own destruction; higher prices incentivise businesses to invest in efficiency, substitution and technology. This can often make the economics of clean technologies, electric vehicles and renewable energy more attractive. We believe, therefore, that an inflationary backdrop will act as a tailwind to many of the businesses we invest in. In addition, we generally seek out companies with strong franchises which offer a compelling value proposition around their goods and services; because these types of companies should have pricing power which enables them to pass on higher input costs.

Do not be wrong-footed amid the volatility

It is important to remember that inflation is not synchronised. Rather, it tends to ripple through markets, creating volatility as different companies are impacted at different times and then recalibrate themselves. As such, we expect to see market gyrations between value and growth from quarter to quarter as sectors are hit by inflation at different times. In the midst of this volatility, we urge investors not to be wrong-footed by the inevitable and short-term flip-flopping of growth versus value. In our view, the long-term secular trends associated with the transformation to a more sustainable global economy will be the most important determinant of investment returns.

So, we believe a period of inflation will ultimately be beneficial to the growth of many of the names we are invested in as it makes the economics of sustainable businesses more compelling and accelerates the level of investment into the low carbon energy transition.

Alignment for a sustainable global economy is accelerating

Keeping to the theme of the low carbon transition, we take a positive view on the outcomes of the recent COP26. The climate pact has secured greater ambition in emissions reductions from key countries including India and China. Importantly, all countries have agreed to revisit their nationally determined contributions (NDCs) annually rather than every five years. With countries held to greater account, we expect the process of emissions reduction to speed up. In fact, we anticipate that the transition to a low carbon economy may be faster than individual national net-zero timelines as innovation and clean technology cost reductions enable governments to press harder on the policy accelerator.

From an investment perspective, we are most interested in the direction and rate of travel than we are of the snapshot view, and COP26 has clearly signalled global alignment on the necessity of accelerating decarbonisation. In 2021 alone we saw significant progress in the low carbon transition, with electric vehicle (EV) sales markedly higher in the first half of 2021 versus 2020 (chart 1), highlighting the quiet rate of progress that we are making towards a decarbonised economy. We do not anticipate this trend slowing, with higher oil prices and government initiatives further boosting demand for EVs. In addition to the above, COP26 has seen great progress on carbon trading markets and transparency for the accounting and reporting of targets and emissions, and commitments to finance developing countries’ transitions. These developments will be a powerful incentive for change.

Chart 1: Electric vehicles sales across major regions in 2020 vs 2021

Source: The global electric vehicle market overview in 2022: statistics & forecasts, Virta, data as at end June 2021. Electric vehicles comprising of Battery electric vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs).

We remain focused on the digitalisation, electrification, and decarbonisation trends as they become the driving features of our global economy, and this continues to guide our investment decisions and portfolio construction. Our approach is all about identifying the companies that are aligned with long-duration sustainable development investment themes, and that are playing a positive role in the transformation of the global economy towards a more sustainable footing. We spend our time looking for the companies that will have exciting growth opportunities as a result of this, that have cultures of innovation, and have built-in financial resilience. We are as excited as ever by the range of investment opportunities we see in 2022 and beyond.

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