“Buy the rumour, sell the news” goes an old saying, and is a good description of global stock markets this month. Markets broke record after record in the second half of 2020, on hopes of a vaccine rollout to combat COVID-19. Nevertheless, when the actual rollout came this month it failed to sustain the rally. It has also been a dramatic start to the year in both markets and politics. In this month’s commentary fund manager, Ted Franks, ponders the connection between price bubbles and riots, and the implications for sustainability.

We recently hosted a webinar covering the year that was 2020 as well as an outlook for sustainability over the coming year. Financial planners may also complete a short questionnaire available HERE for CPD points.

Top Holdings (alphabetically)

Ansys United States Information Technology

Cerner United States Health Care

CSL Australia Health Care

Danaher United States Health Care

Intertek Group United Kingdom Industrials

Keyence Japan Information Technology

Koninklijke DSM Netherlands Materials

Orpea France Health Care

Steris United States Health Care

Thermo Fisher Scientific United States Health Care

“Buy the rumour, sell the news” goes an old saying, and is a good description of global stock markets this month. Markets broke record after record in the second half of 2020, on hopes of a vaccine rollout to combat COVID-19. Nevertheless, when the actual rollout came this month it failed to sustain the rally, and our benchmark MSCI World index declined -0.4%. Concerns over the scope and the timing of fiscal stimulus in the US also served to dampen enthusiasm.

The Fund outperformed the benchmark this month returning +0.2%. This was due to the strong performance of our defensive Health theme, followed by Environmental Services. On the other hand, our Resource Efficiency theme continued its recent weakness. The Water Management theme also underperformed.

Our Health theme was the best performer in the period. Both our leading life sciences tools manufacturers Thermo Fisher and Danaher were the best contributors. Their product portfolios not only contribute to the development of COVID-19 tests, but also the development of vaccine and therapies which will be rolled out throughout this year. Their recent guidance also helped alleviate investors’ concern that there might be a sharp drop-off in COVID-related sales in 2021.

Environmental Services was another outperforming theme this month. Horiba shares did well. Horiba specialises in the manufacture of analytical and measuring equipment for the environment, health, and safety fields. This includes instruments used for testing vehicle exhausts, environmental monitoring and medical diagnostics. The company also sells equipment to the semiconductor industry, which has been one of the few bright spots during the pandemic. Recent chip shortages have pushed up the share prices of related companies in the supply chain.

Our Resource Efficiency theme underperformed this month. Daifuku shares were weak. This Japanese company is a leading provider of warehouse automation solutions. Its solutions help improve manufacturing efficiency and reduce energy and resource use. Keyence was another underperformer in the theme. It manufactures sensors and measuring instruments for factory automation. Its products help achieve energy-savings, improved material utilisation and reduced wastage. Both companies benefited hugely during the pandemic as others scrambled to improve supply chains through automation technologies. Having risen sharply last year, there was some profit taking this month for these stocks.

Water Management was also weak, driven by poor performance from Xylem, a leading water technology provider. It provides innovative water and wastewater management solutions to utilities and commercial sectors. Its share price was under pressure as investors worried about the impact of the pandemic on the financial strength of utilities.

We have seen increasing market concerns over the valuation of the stock markets. Parts of the stock markets are clearly in bubble territory. A correction at some point this year should not come as a surprise. With a diversified portfolio, and an urgent need for the products our companies sell, the Fund should be able to weather any potential short-term volatility.

The online mob and the sustainability transition

Very few will mourn the passing of 2020. But those hoping for a calmer new year were swiftly disappointed.

2021 was only six days old when the US Capitol was stormed by a group of people who were unwilling to accept the election outcome. This perplexing event met its financial markets equivalent in the very same month. GameStop shares soared 1,745% in the first 17 trading days of the year.

GameStop is a physical retailer of computer games in the USA. It is not a promising business: gamers now buy their games online. That surge took its market capitalisation above that of half of the companies in the S&P500. The peak price of $347 was short-lived though; it has since lost 85% of that value.

These two January dramas share common features. They were both orchestrated online by thriving, self-defined communities – which in these two cases, may have some overlap. Those communities are bound by shared views which are deepened by their virtual interactions. And they are enabled by an ecosystem of service providers and commentators who are not living up to their responsibilities.

Moreover, in both cases, the outcomes for different members of the community are strikingly different. The “winners” are the early influencers who incite the dramatic actions, and then get safely away. The losers are the slower, biddable followers. They are now nursing heavy losses (in the case of GameStop) or meaningful criminal charges (in the case of the insurrection in Washington).

Unfortunately, there is something else that unifies these two absorbing events. They both really matter for the cause of sustainability. If we are to transition to a more sustainable economy, we need good decision-making. We also need functioning capital allocation. The challenges are big enough on their own that they will be insurmountable without these key tools.

This is where we can draw a distinction. The Capitol insurrection was straightforwardly bad. Despite its flaws, democracy remains by far the best system of government. It is the only plausible way to unite all the stakeholders in the transition to a zero carbon, sustainable society.

The GameStop ruction and the arrival of chatroom retail investors is different. It is clear that the shift to a sustainable economy will rely on creative destruction. Through one lens, this apparent market mayhem is just part of that.

Capital markets are always richer for more participants, with more diverging views. Heel-dragging incumbents are challenged. Visionaries can bring their brilliant new ideas to the stage. The tumult eventually ensures that something approaching the best idea, wins.

But there are reasons to worry that the GameStop phenomenon does not exactly fit that bill.

The GameStop move was a long way from a fundamental argument about a stock’s prospects. Even the most bullish turnaround (an end to online game downloads?!) would come nowhere near justifying the price it reached. Instead, the moves just generated enormous excess volatility. Which goes against the messy-but-reliable price formation process any good market needs.

In any period and any market, this is important. But for sustainability in 2021, it is quite acute. And that is because the same retail investment phenomenon has powered a related surge in renewable energy stocks (the WilderHill Clean Energy Index has, relative to the MSCI World, risen by 251% since mid-March 2020).

Cleantech, alongside info tech and biotech, now has a valuation-agnostic thematic following.

Our investment strategy is one of the few survivors old enough to remember the last time this happened, in 2007. The crash that followed that peak was deep enough that even this recent run is still some way off recovering its heights.

It was hugely, hugely damaging to the clean energy industry and slowed the deployment of renewable energy. Cleantech became a synonym for losses. It was impossible to attract new capital, and things got worse when the oil price surged above $100/barrel a few years later. Investment flooded into fossil fuels instead. It is not too much to talk about a lost decade in sustainability investing.

Happily, there are some major differences between now and 2007. Clean energy is now the lowest cost form of generation in most markets. And 2020’s net zero carbon commitments from around the world represent a seismic shift in political support.

Less happily, we do not really have another decade to spare. Coronavirus-induced lockdowns aside, global emissions are not likely to peak until the mid-2020s. The task ahead remains mountainous. Another crash could be a real crisis.

So we have to hope that, in this newly-febrile atmosphere in stock markets, there are enough players with a long-term view. And that the best companies can repay this faith, while the weaker ones fade without taking the market with them. Interesting times indeed.