Themes we are keeping our eyes on…
When considering themes and megatrends which we believe are likely to make a material difference to the investing world over the coming years, the three key developments we are reviewing:
1) Inflation & Interest Rates.
2) Ethical investing.
3) A commodity ‘supercycle’.
Inflation & Interest Rates
A word which you may have read hundreds of times since the beginning of this year and especially over the past quarter, ‘inflation‘ even more so ‘transitory inflation‘.
Another tool for combatting unwanted inflation is technology.
Technology has historically acted as a significant deflationary power, as is set out in Moore’s law, technology becomes more powerful, and less expensive over time. Democratising assets, professions, and industries which were once reserved for the few e.g. access to knowledge, and the ability to influence (or be influenced) and community.
However, those who wish to combat inflation using interest rates may harm the technology industry.
The reason raising interest rates may harm technology firms is many high-growth, early-stage tech companies depend on inexpensive debt to fund innovation and progress, raising interest rates will make the debt more expensive and potentially threaten their existence.
Ethical investing has multiple confounding factors which we believe will play a significant role in its increasing usage and normalisation:
1) The millennial generation and the largest wealth transfer in generations. (Push-Demand)
2) Regulatory pressures (Supply-Pull)
3) Product availability
Demand for ethical investing
A study conducted by FE fundinfo reported that 73% of advisers report their clients are more interested in ESG investing compared to last year. Additionally, the interest for “ESG” has continued to climb over the past decade as Google Trends shows us.
There are two regulatory-related pressures.
First, regulatory pressure is being pushed by retail clients, financial planners, and institutions alike. This is the pressure for clarity.
At present, unless an individual spends a considerable amount of time delving into and decyphering a fund’s Key Investor Information Document (KIID), it is difficult for people to understand precisely the definition of ‘ESG’, and this leaves room for dissatisfaction and not delivering on what the individual thought they were investing in. Moreover, this issue is compounded by the fact that ESG disclosures at present are not standardised, that is the information companies can provide related to ESG issues is required to be like for like as is this case with accounting standards.
Networks like the United Nation’s Principles for Responsible Investment (PRI) have been fighting to change the above, and have been gaining considerable support with around 4,000 signatories representing $120 Trillion Assets under Management.
The second regulatory pressure links with the first, in that regulators like the Financial Conduct Authority (FCA) which regulates financial services firms operating in the U.K. is and has conducted consultation papers related to the need for clarity on ESG and climate-related disclosures from asset managers, pension providers, and listed companies. For example CP21/17.
A decade ago, if investors wished for their investments to consider more than returns the products available were rather minuscule. Today, there are over 2,500 funds that consider ESG principles which hold over $2 Trillion in assets.
Over the past 18 months, and specifically post-pandemic, there have been increasing discussions around potential price surges across multiple commodities e.g. copper, crude oil, corn, coffee etc.
Investors in favour of a commodity supercycle, point towards:
1) Massive financial stimulus packages focused on infrastructure spending (which will require significant amounts of raw materials and goods).
2) Energy transition, which again, will require a significant amount of raw materials and goods to support the transition.
While detractors, lean on:
1) Presently high prices lead to increased supply, subsequently leading to falling prices.
2) Slowing demand from China as their economic growth slows.
3) Potential power rationing across Europe and China.
The World Bank’s latest ‘Commodity Markets Outlook‘ suggests while energy prices are and have surged in 2021 and are expected to continue to rise in early 2022, they will start to decline in the later part of the year, as are agriculture and metal related commodities.
It is important to note, ‘commodities‘ is a catchall phrase for a wide spectrum of sub-assets which consists of industrial metals, agriculture and livestock, and energy.Back to blog