SUMMARY
Global equities posted another strong month of growth in October of +3.3%, and once again it was driven by technology sectors, and in particular the very large “mega cap” technology names, which are not qualified for our sustainable investment universe. Third-quarter earnings reports for those companies included further ambitious expansion targets.
The Fund rose +2.9% in the month, largely matching broader equity markets. Responding to encouraging news on drug pricing from the US Administration, the Health theme gave the strongest positive contribution. Cleaner Energy has enjoyed some stronger growth in recent months as part of the data centre buildout.
COMMENTARY
Market Review
Global equities posted another strong month of growth in October of +3.3%, and once again it was driven by technology sectors, and in particular the very large “mega cap” technology names which are not qualified for our sustainable investment universe. Third quarter earnings reports for those companies included further ambitious expansion targets.
Although October’s performance was largely driven by the large “mega-cap” technology companies, there was some volatility in their share prices as investors digested the implications of this unprecedented capital expenditure on datacentres. The total spend on these facilities is now measured in the hundreds of billions or even trillions over the next few years. As a result of the extreme growth of these companies, the concentration of global stock markets has reached unprecedented levels, with the top ten companies now accounting for a record 42% of the total capitalisation of the S&P 500.
Exuberance in the technology sector, and the buildout of datacentres, is not matched in other sectors of western economies. Due in part to inflation data, the US Federal Reserve cut interest rates for the second time in two months, as concerns linger over slowing growth. Data outside the US continues to also paint a mixed picture. However, optimism ahead of the meeting between US President Donald Trump and his Chinese counterpart Xi Jinping at the end of the month, further boosted equity markets.
October also saw mixed news in sustainability-related sectors. On the environmental side, global leaders began to prepare for the upcoming 30th Conference of the Parties (“COP30”) in Brazil in November. Some proposals and commitments ahead of these meetings, such as EU’s 2040 emissions reduction plan, and New Zealand’s commitment on methane emissions, disappointed some observers as being insufficiently ambitious. Other commentators observed that these targets create more room for international agreements to be reached.
Meanwhile in the healthcare industry, President Trump announced an agreement with leading pharmaceutical company Pfizer to reduce US prices of certain drugs. This was well-received by healthcare equity investors as potentially removing a major overhang, around concerns for stronger price control actions by the administration.
Fund Review
The Fund rose +2.9% in the month, largely matching broader equity markets.
Responding to the encouraging news on drug pricing, the Health theme gave the strongest positive contribution. Pharmaceutical company AstraZeneca rebounded after a weak September, after adding impressive clinical trials data to the renewed mood of optimism around the sector. Life sciences tools company Thermo Fisher was another significant positive contributor after solid earnings. Peer company Agilent was also strong, as it is seen as a major beneficiary of reducing trade tensions as a result of its large business in China.
For a second successive month, the Cleaner Energy theme was also a strong positive contributor. Solar tracker and systems manufacturer NEXTracker reported good earnings and a positive outlook, continuing its strong run this year. Enthusiasm for the sector, and its role in powering the datacentre buildout, also lifted US solar panel manufacturer First Solar.
The largest thematic detractor came from the Environmental Services theme. Packaging company Smurfit Westrock in the theme continues to struggle against a weak demand environment in the Americas. Good progress is still being made on extracting synergies from the combination of Smurfit Kappa and Westrock, but difficult markets are making this more challenging.
Outlook
As so often over the last five years, the extremely outsized contribution of a small number of very large technology companies is very notable in current stock market conditions. There is an increasing amount of commentary about the possibility of a bubble in artificial intelligence. However, a feature of most bubbles is the absence of negative commentary, so there is still scope for the current market concentration to push higher. In the longer term, these very high levels of concentration have always unravelled.
Meanwhile, sustainability sectors remain comparatively unloved, although Cleaner Energy has enjoyed some stronger growth in recent months as part of the data centre buildout. We see a good possibility of the economic confidence in that sector spreading more broadly in the coming months, and potentially lifting other environmental sectors. The Health theme, too, looks likely to continue its slow return to broader investment appeal.
With expectations very low, there is also scope for better news from COP30 to lift global sustainability markets. In the longer term, we continue to see a significant investment opportunity as sustainability challenges become increasingly intense.