SustainAbility: Reasons to be cheerful

As we have often noted, to be a successful journalist you need to be a pessimist, and to be a successful investor you need to be an optimist. Investment markets are serial monogamists, moving from one crisis to another.

In the last 15 years, since the Great Financial Crisis of 2008, we have seen multiple events, such as the eurozone crisis, Brexit, a pandemic, and more recently soaring inflation. Yet investors have been handsomely rewarded for remembering that it is often time in the market, not timing of the market which ultimately brings the greatest rewards. Each of these events, except for the high inflation, which is ongoing, subsequently proved to be a great buying opportunity for investors who could take a longer-term view than the next few months.

We are reminded of the need to be of a positive disposition when investing as, once again, we are surrounded by the negativity of the media and market commentators who, given the recent events in the banking sector, have a notable passion in describing what could go wrong and why the future looks worse than the past. There is some logic in this. Pessimism always sounds wiser and more prudent that optimism. Most commentators wish to be remembered as the one who predicted the next crisis. Few remember the names of those who in March 2020 expressed optimism on Covid vaccine developments. Or those who in the financial crisis of March 2009, highlighted that this was perhaps the best opportunity to buy equities in our lifetimes. Within investing, history remembers the pessimists, not the optimists.

Offering an optimistic view of the future in the face of the war in Ukraine, inflation at generational highs and significant uncertainty as to the future path of interest rates and economic growth seems unwise. Being balanced and keeping an open mind are important characteristics to adopt as an investor though, so accepting there are reasons to be concerned, here are some reasons for optimism that are perhaps under reported:

• The first quarter of 2023 was a strong one for investment returns. The US S&P 500, a key global market, was up 7%. Bond yields fell (and therefore bond prices rose) with the US 10-year treasury yield falling from 3.87% to 3.47%. The former confounded concerns of a recession, the latter that inflation was out of control. Some markets did even better, with Nasdaq up 16.7%.
• The global economy is proving to be resilient in the face of higher interest rates and a cost-of-living crisis. At the core of this resilience is low unemployment rates. For example, in the US unemployment is only 3.5%, which is very low in a historical context. In the UK the unemployment rate is only 3.7%. Alongside this, major economic regions such as China (which is re-opening from Covid), and Europe (which has avoided an energy crisis – that word again), have proven to be stronger than was expected just a few months ago.
• Innovation in the real economy continues apace. This comes in many forms: Space X and the James Webb telescope igniting a new generation’s interest in space exploration; Novo Nordisk providing the first medicine to fight the obesity epidemic; Microsoft developing new versions of artificial intelligence which can enhance productivity; or SSE building record amounts of renewable energy.

There is a risk that investors miss the wood for the trees. Financial markets and the real world do ultimately correlate, but at any point in time one can overly dominate the narrative. Since 1 January 2022, macro, negative, top-down stories have dominated micro, positive, bottom-up ones. When this changes, there may be some surprise at how much progress has been made by society, and the companies who operate within it.

The UK investment market

We have recently observed something of a crisis (yes, another one) of confidence in UK investing. We have read several well written pieces discussing whether investors should be global, and if the UK is a market which will serve UK investors well in the coming years and decades. We manage both UK and global assets, across both equity and debt, so do not need to have any inherent bias in our views. This puts us in a good position to make observations about UK investment markets.

Since I started my career in the UK equity market in the late 1990s, I have not witnessed any discernible deterioration in the opportunities available to UK investors. Quite the opposite in fact. In my opinion there are more world-leading companies listed in the UK now than there were back then. There has of course been huge change. Vodafone was the biggest company in the UK market back then, now it is AstraZeneca. Looking at the UK holdings of our sustainable strategy from 1999 reveals many companies that no longer exist, as they have been bought by others – but our view would be that we own a superior collection of businesses now than we did back then.

The UK has some inherent benefits to it that have served it well for centuries. Geographically the UK sits between the US and Asia, and next to Europe, the three big economic regions of the world. Its language is the most commonly used in business, even if Chinese and Spanish are spoken by larger populations. Rule of law also exists to protect the rights of those who operate and live here. This trifecta of location, language and law, is a powerful one and has created, in London, one of the largest financial centres of the world. These advantages may ebb and flow, but they will continue to exist.

What has changed is the allocation of investors to UK funds and holdings. Global investing did exist back in the late 1990s, but it was harder to enact due to the time delay of information flows and a smaller number of funds doing it. These impediments have gone, and it is possible to invest globally in the same way as investing in the UK. This has resulted in many individuals and entities, not unreasonably, moving from portfolios dominated by UK assets to ones more reflective of this changed opportunity set. This process has been going on for over two decades and isn’t new. At some point, perhaps sooner rather than later, it will come to an end.

To end this blog as we started then, let’s show optimism rather than pessimism about UK investing. Which is the leading cancer drug developer in the world? AstraZeneca. Which company is building the most offshore wind generation in the world? SSE. Which company has bought a major US company, consolidating its world leading position in pest control? Rentokil. Which company provided critical chemistry expertise to allow Pfizer to deliver its Covid vaccine to hundreds of millions of people? Croda. One of the largest providers of data to the global financial sector? London Stock Exchange. We could go on, but it doesn’t change the underlying point; these are all UK businesses winning in a global context.

Of course, there are always things that could be improved. Political instability has not helped the UK. It may also be possible to improve the attractiveness of the UK to earlier stage businesses needing access to capital. We are optimistic these things can be improved. I think we may look back soon and realise that the demise of the UK investment market has been greatly exaggerated.

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.