As always, world markets make for an interesting landscape. Ed Read Cutting, Director of The Fry Group Belgium, explores some key areas of interest for investors in 2021.
Bank interest rates are low and I’m worried about the stock market. I feel like I’m caught between a rock and a hard place!
There’s no doubt that the rise in technology, pharmaceutical and supermarket company share prices has helped to push stock markets in an upward trajectory but there are other areas that provide real ‘value’. Value in investing terms means undervalued and, with Covid-19 vaccines starting to be rolled out, we’re already seeing headlines of ‘a vaccinated over-50s spending spree on travel holidays’. But there are other areas where we see even more spending that can provide long term returns:
- Sustainable companies
- Infrastructure companies
Sustainable investing: 2020/2021 as the great inflection point
It’s clear that we were currently at an inflection point where many stakeholders are in agreement that we need rapid change. Regulators, asset managers (and the companies into which they invest) and investors are all looking to move from a wasteful society to one that is much more thoughtful, mindful of the way we live, and with a focus on using and reusing. Brussels is the leader in this area with the Green Deal, a plan to make the European economy more sustainable by turning climate and environmental challenges into opportunities. The Covid-19 pandemic seems to have magnified that inflection point as the world takes a collective breath and reflects on the increasing impact of climate change. President Biden’s entry into the White House increases the pressure on global leaders to meet renewed and ambitious targets that are being set. You may have noticed that many investment firms are promoting sustainable investing. Whilst, for some, this may be a slight smokescreen (known as greenwashing) for the areas into which they invest, for others it’s a real passion. Market leaders such as Triodos based in the Netherlands and Liontrust in the UK are two such companies.
It’s clear that once this pandemic is over governments will want to try and spend their way out of recession. The announcement of large infrastructure projects will certainly be one of the areas that will attract a significant amount of capital. And it’s certainly possible for us as investors to ‘ride’ this infrastructure wave. Not only does infrastructure provide capital growth but it’s also very good at providing a steady income, a must-have asset in many pension portfolios. Asset managers such as M&G are market leaders in this area. To make things even more attractive the M&G Global Listed Infrastructure fund has an Environmental, Social and Governance (ESG) overlay which means that they are looking to invest, where possible, in those projects which will aim to look after the environment (E), society and their employees (S) over the long term with clear and transparent reporting (G). For a lot of investment firms, the UN Global Compact principles on human rights, labour, environment and anti-corruption are also considered in the analysis of companies.
Is this going to be all plain sailing?
The answer is invariably no. Vaccine roll out has presented some initial challenges and of course the world is a big place in which to get everyone protected. Conflicts in trade will continue – the UK’s exit from the European Union and East (China) versus West (US & Europe) tariffs on imports remain. We mustn’t also forget the damage done to the wider economy; small and medium size businesses along with larger companies in certain sectors have been decimated and reliance on governmental assistance is critical for many. But from the ashes many a phoenix will rise, and investment managers are certainly searching for best value options.
Rock or hard place?
It seems that with a need for governments to borrow large amounts to keep economies afloat, interest rates will remain low for the foreseeable future. Inflation will be allowed to take a certain hold without the interest rate rises we may have seen in the past. As a result, the low interest rate ‘rock’ looks likely to be around for some time. And it’s, of course, absolutely the right place for low-risk short term cash. For those with a longer time frame, the stock market ‘hard place’ still offers a potential upside. Value is abundant and opportunity for returns, admittedly with some risk, in certain sectors remains high.
In conclusion, let’s not forget what has gone before. Headlines of a repeat of the ‘roaring 20s’ can perhaps give us cause for an optimistic glow in what is invariably one of history’s most recent darkest hours.