Market Review

June was a positive month for global equities with the MSCI World returning 3.1%, driven primarily by US equities. The rally in the US continues to be unusually concentrated, driven by a handful of mega-cap tech companies: Apple, Amazon, Microsoft, Nvidia, Alphabet, Meta and Tesla. Markets were volatile though, as investors weighed up whether the US Federal Reserve would pause on US rate hikes.

European equity markets also ended higher in June, although again notwithstanding some volatility in the month.  There was a mixed read on inflation, with the headline rate cooling but core measures less so. The European Central Bank raised rates by a quarter of a percentage point and signalled that more tightening is to come.

Despite this, general optimism for a weaker-than-feared contraction lifted stocks. The UK was a notable point of weakness, with weak oil prices, rising interest rates and stickier than expected inflation all weighing on sentiment.

Consumer Discretionary and Industrials were the best performing sectors while Utilities and Communication Services were the weakest in the global market during the month.

Fund Review

The Fund delivered positive returns in June of 2.7%. Safety and Water were the best performing themes driven by MSA Safety and Advanced Drainage Systems, respectively. MSA Safety reported a strong set of results, benefiting from growth across several of its end markets, as well as significant new contract wins. Advanced Drainage Systems (ADS) had strong results in May and has been able to secure pricing increases. An inflationary environment should also favour plastic-recycler ADS, relative to its competitors who use concrete. These features have given investors renewed confidence in the company’s business model.

Our Sustainable Transport theme also performed well. Aptiv rebounded from last month’s weakness as management reiterated their confidence in full year guidance while noting an ongoing improvement in market conditions.

Cleaner Energy was the weakest theme over the month with negative contributions from First Solar and Vestas. First Solar has benefitted dramatically from the new policy in the US (notably from the Inflation Reduction Act (IRA)), which has driven the share price to historic highs. In the past month, the share price retreated as some investors ponder the next phase of growth. Vestas underperformed due to disappointing new orders for wind turbines. We believe momentum in new orders will improve when we receive further clarity relating to the IRA.

Outlook

Sentiment around global equities remains finely balanced. Expectations are for a further economic slowdown, and the debate is around its pace and duration. Markets also expect further rate increases before the current tightening phase ends.

While there is uncertainty in the short term, we remain confident in the long-term positioning of our holdings.

From sepsis to sperm counts: why plastic pollution matters and how WHEB’s companies help

It is now nearly six years since Sir David Attenborough and the BBC debuted Blue Planet 2. The series was the catalyst for a worldwide campaign to reduce the amount of plastic waste entering natural ecosystems and particularly the world’s oceans. With a Blue Planet 3 series now in the offing, how much progress has been made in reducing plastic pollution?

While it was the footage of plastic bags and sanitary product-clogged seas that fired public action on plastic pollution, the science that followed the series has been, if anything, even more horrifying. Plastic waste, often in the form of micro-plastics, has been found in every corner of the globe from the deepest marine trenches to Arctic sea ice.

From sepsis to sperm counts

Plastic pollution has direct negative impacts on nature as well as on human health. Microplastics can be particularly insidious, penetrating deep into biological organisms and disrupting core biological processes such as reproduction and growth as well as causing damage to internal organs. Research has suggested that humans may be consuming as much as 300 microplastic fragments per day. The science is not yet conclusive on the damage this does, but there are major concerns that microplastics and the chemicals they contain may be impacting everything from an increased incidence of sepsis¹ to reductions in sperm counts.²

Action to reduce plastic waste

Public and scientific concern has resulted in dramatic action from many regulators and businesses. Readers can’t fail to have noticed the removal of plastic straws. Over 170 countries have made pledges to significantly reduce the use of plastics by 2030³. 70% of 23,209 people surveyed across 34 countries in 2022 support stricter global rules to eliminate plastic pollution⁴.

In June this year, more than 165 nations agreed to publish, before the end of 2023, a global treaty to end plastic pollution. The treaty is expected to include bans and control measures to reduce and eliminate the production and consumption of plastic products and materials. These measures have been complemented by countless initiatives at corporate and community levels to replace, reuse or recycle plastics.

Plastics industry carries on regardless

These moves are on a collision course with the plans and expectations of the petrochemical industry. 70% of petrochemical feedstock oil is used to produce plastics. Forecasts from BP and from the International Energy Agency (IEA) have typically seen petrochemicals as the largest driver of future expected oil demand. The IEA see this lead stretching in its recent scenarios⁵. According to analysis from Carbon Tracker, the petrochemical industry is planning for 4% annual capacity growth in petrochemicals, backed by US$400bn of investment⁶.

WHEB’s strategy

At WHEB, we believe efforts to reduce the amount of plastic being used in short-lived single-use applications such as packaging will continue. This will be driven by clearer evidence of the damage plastic pollution – and particularly microplastics – do to human and environmental health. We see several dimensions to policy action and consequent opportunities for companies providing solutions to this problem.

Substitution of plastics with more sustainable materials: Wherever possible and particularly in short-lived applications like packaging, the focus has been on finding alternative materials. In WHEB’s strategy, we have backed the wider use of recycled cardboard as an alternative to plastic in packaging applications. Highly recyclable – and widely recycled – cardboard is a lightweight, biodegradable material that can substitute for a wide range of packaging applications⁷. Smurfit Kappa is our principal investment in recycled cardboard which has developed cardboard alternatives to plastic in everything from packaging for cans to clothing. We are also pushing portfolio businesses that use plastic packaging to find alternatives. HelloFresh, for example, has reduced plastic packaging per meal by 34% since 2020⁸.

Creating markets for recycled plastic: Alongside reducing plastic packaging, we also see opportunities to create lucrative markets in recycled plastic. Several WHEB portfolio companies including Advanced Drainage Systems (ADS) have tapped into the glut of plastic packaging waste as a valuable raw material. ADS is the US’s largest plastic recycler, accounting for 28% of all recycled HDPE and turning it into long-lived stormwater sewers and other water treatment and management products⁹.

Developing recycling infrastructure to support radically higher reuse and recycling rates: Finally, almost half of the world’s population lives in areas where plastic waste generation exceeds the capacity to manage it. Tomra is the market leader in supplying recycling equipment to enable radically higher rates of recycling. The company supplies reverse-vending machines as well as sorting equipment that is used in municipal recycling centres.

Progress has clearly been made in tackling plastic waste over the past six years. The scale of the problem though remains daunting. We very much hope that should Sir David Attenborough be able to present the third Blue Planet series, he will be able to report on real progress in tackling this most pernicious of environmental threats.

¹ https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9993231/
² https://www.ft.com/content/f14ab282-1dd3-46bf-be02-a59aff3a90ed
³ https://www.weforum.org/agenda/2020/10/canada-bans-single-use-plastics/
⁴ https://www.ipsos.com/en/global-advisor-plastic-pollution-2022
⁵ https://iea.blob.core.windows.net/assets/830fe099-5530-48f2-a7c1-11f35d510983/WorldEnergyOutlook2022.pdf
⁶ https://carbontracker.org/reports/the-futures-not-in-plastics/
⁷ https://www.printindustry.news/story/37431/study-shows-corrugated-cardboard-could-replace-21-of-plastic-packaging
⁸ https://ir.hellofreshgroup.com/download/companies/hellofresh/Annual%20Reports/ENG_HelloFresh_Non-Financial_Report_2022.pdf
⁹ https://www.adspipe.com/the-ripple-effect/industry-news/ads-now-number-one-plastic-recycling-company-in-north-america