The events of 2016 highlighted the perils of forecasting election outcomes and their investment consequences. We are all now adjusting to the new political landscape and trying to ascertain the implications of Brexit and President Trump. Economically we are also entering a different regime, with rising interest rates and fiscal intervention replacing monetary stimulus. Equity and corporate bond markets have thus far broadly welcomed these changes as supportive of economic growth and profits for shareholders.
For the Sustainable Future strategy we are cognisant of the political and macro economic backdrop, however the themes which underpin the investment approach are of far more significance. The question we have been asking is whether and to what extent the political and economic changes of 2016 affect the long term persistence of these themes [see below table]. Our answer is that very little has changed and that the themes continue to identify areas of the economy with strong long-term growth.
We start with a theme that seems to be well down the list of Trump favourites: ‘Accelerating the transition to lower carbon fuels’. Much has been made of President Trump’s pro-coal stance and the implication that a political switch can be thrown to reverse the decline in coal-fired power generation and curtail the strong growth in renewable energy. Our view is that the shift is driven more by economics now than by political impetus. Take as evidence the data from BP Energy Outlook showing both wind and solar being more cost effective than coal (with gas neck and neck with wind) in the US now and even more so in 2035. A similar picture is presented for China. So while the political uncertainty may produce shorter term volatility, this theme remains very much intact. The growth in renewable energy is predicted to rise by ~8% pa for the next 18 years. This is a very healthy tailwind to our investment in Gamesa and The Renewable Infrastructure Group.
Turning to another area which has seen some contention, such as healthcare and medicine pricing in the US. Our themes here are Providing Affordable Healthcare Globally and Enabling Innovation within the Healthcare System. We have long recognised the pressures the healthcare sector faces. On the one hand a growing share of Developed Nations’ GDP is spent on health, and on the other an ageing population with higher levels of obesity and other ‘lifestyle diseases’ demands yet more treatment. None of these broad trends have changed with the Trump administration. They persist. There are still predicted to be 642m people with Diabetes in 2040 – up from 415m in 2015.
The companies which will succeed are those developing medicines and treatments for genuinely unmet medical needs, and those finding ways to deliver and enhance the standard of care in a cost effective manner. This leads us to holdings such as Alexion with its focus on devastating and rare diseases; or Roche the leading oncology company.
We also maintain exposure to Delivering Healthier Foods – a way of preventing these lifestyle diseases in the first place.
Thirdly in the Safer and More Resilient category themes such as Enhancing Digital Security will continue to see growth in excess of 10% pa as cyber security becomes as prevalent as a lock on your front door. Companies such as Sophos will continue to do well. Equally the continued improvement in auto safety with the advent of autonomous driving, and the globally agreed decrease in exhaust pipe pollution will not see a U-turn. So companies such as Infineon and Valeo will continue to experience strong growth.
All this to say that while political and short term economic predictions are hard to get right, and drove much of the volatility in markets in 2016; we can have a great deal of confidence predicting that the 23 themes which underpin our investment strategy will persist and guide us to superior long term investments over the coming years.
1BP World Energy Outlook 2016, https://www.bp.com/content/dam/bp/pdf/energy-economics/energy-outlook-2016/bp-energy-outlook-2016.pdf
2Internal Diabetes Foundation estimate, http://www.idf.org/about-diabetes/facts-figures
3Morgan Stanley Investor Map on Cybersecurity, 2016
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