UK Sustainable Equity strategy - January 2023

Central banks look set to continue increasing interest rates, but the pace and size is hoped to moderate

• Developed nations agreed to pay $30bn a year by 2030 to protect 30% of the planet for nature
• We had an engagement meeting with SSE to understand how they will achieve their energy targets
• Microsoft agreed to buy a 4% ($2bn) stake in London Stock Exchange Plc

What’s happening?

November’s rally faded out in December as Central Banks continued their interest rate hikes with commentary highlighting the need for more, which overshadowed the benefit of China ‘opening up’ from Covid restrictions. The FTSE All Share (-1.42%1) and its constituent parts (the FTSE 100 -1.49%¹ , FTSE 250 ex-Investment Companies -1.60%1) lost some ground with only the FTSE Small Cap ex-Investment companies (+1.26%1) posting a modest gain. For 2022 overall, the returns for the FTSE All Share Index (+0.34%1) entered mildly positive territory but the divergence of performance between the FTSE 100 (+4.70%1) driven by Oil & Gas, Defence, Basic Materials & Tobacco sectors and the Mid and Small cap indices (-18.44%1 and -17.31%1 respectively) was pronounced and created a significant headwind for the Fund in 2022.              

Portfolio positioning and performance

Within our People theme, the holding in Oxford Nanopore was increased as the valuation on a relative basis to peers was starting to look more attractive, especially considering its potential future prospects.

The strategy reduced its position in Astrazeneca (People), Rentokil (People), Legal & General (People) and SSE (Planet) for risk management purposes, but they remain high conviction holdings.

In corporate news, December is a quiet month but there was news from Ashtead which delivered record profits alongside a confident outlook statement. RWS & Hollywood Bowl also put out reassuring statements. In addition to this, Microsoft agreed to buy a 4% ($2bn) stake in London Stock Exchange Plc and the judge presiding over the Zantac federal multi-district litigation (MDL) in Florida ruled in favour of the drug manufacturers (GSK read through) stating that plaintiff claims were not backed by “sound science”.

However, ATG’s ‘cautious’ double digit growth rate for 2023 alongside flat margins was taken poorly as it was accompanied by a higher tax and interest charge than forecasted. As a new company to the listed market, investor and analyst expectations are somewhat sensitive to company commentary but overall, their payments offering and the continued move online of the Industrial & Commercial division is encouraging for future earnings expectations. Moonpig also highlighted deteriorating recent trading conditions impacted by strikes at Royal Mail.

From an Environmental, Social & Governance (ESG) point of view it is pleasing to note that an agreement was reached for developed nations to pay $30b a year by 2030 to protect 30% of the planet for nature and restore 30% of the planet’s degraded terrestrial, inland water, coastal and marine ecosystems. In the same month, it was also exciting to learn of the breakthrough in nuclear fusion energy, the holy grail of energy production whereby more energy is produced than the amount put in to make it work.

During the month, we conducted engagement meetings with SSE to understand the regulatory backdrop to their clean energy investments and what could potentially stand in their way to delivering on their promises of generating a fifth of the UK’s target of 50GW of offshore wind by 2030 (planning permission needs to be granted at Berwick Bank and for Scot Wind). In addition to this, ESG analysis was undertaken on Prudential & GSK. The portfolio consists of 71% in companies that are deemed as ESG leaders and 29% that are ‘in transition’ and cash.

Outlook

The main driver of equity markets is still the action in the world’s bond markets, as yields have rallied sharply in response to rising inflationary concerns. Central banks look set to continue increasing interest rates, but the pace and size of the increases is hoped to moderate as the balancing act of slowing the economy to reduce inflation, but not to over tighten, becomes more finely balanced from here.

This could become a more beneficial environment for investors in quality growth portfolios, but headwinds do still exist. Increasing rates at a time when consumers are also grappling with higher energy bills and increased taxation creates a challenging operating environment. Higher levels of taxation and interest payments on debt and a potential reversal of the beneficial weakening in Sterling all create added complexity.

While the outlook for equities may be finely balanced, our approach remains centred on owning good quality businesses that can reinvest and compound their returns over time. We continue to believe that understanding longer term structural trends and identifying responsible, reliable and ultimately sustainable companies, in a targeted, focused and active approach, remains the key to longer-term success.

Examples are provided for informational purposes only and  should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalised recommendation to buy or sell securities.

No assurance can be given that the UK Sustainable Strategy will be successful. Investors can lose some or all of their capital invested. The UK Sustainable Strategy is subject to risks including: Emerging markets; ESG; Global Investments; Impact; Investments in small capitalisation and/or micro capitalisation universe and Investment in specific sectors or asset classes.