This article is part of Morningstar's Guide to Alternative Investing. Here, as part of the Perspectives series, Charlie Thomas, manager of the Jupiter Ecology Fund, reveals the themes that will provide a focus for environmental investors in 2017.
What could follow 2016, a year of upheaval and one that in the main defied popular expectations? With our focus on investing in the environmental solutions space, this question has most recently been put to us along with reference to the President-elect, Donald Trump, and what his administration might mean for the momentum we have seen in areas such as tackling global climate change.
Heading towards my fifteenth year of managing the Jupiter Ecology Fund, experience tells me not to lose sight of exactly this – momentum. As well as a year of political disruption, I will also remember 2016 as a year of a quite startling acceleration of disruption from low-carbon technologies and sustainable infrastructure.
Take for example electric vehicles. The global automotive industry came into 2016 under a cloud of suspicion in the wake of the Volkswagen diesel emissions scandal, and heads into 2017 with the largest players doubling down on full vehicle electrification. Add to this the rapid progress seen in the field of vehicle automation and it confirms that an industry that has not fundamentally changed since the era of the Model T is firmly in a state of flux.
This is symptomatic of the times we live in, when weak signals of change can quickly ring loud and clear. While undoubtedly good news for active investors seeking exposure to companies geared to capitalising on these trends, this comes with its challenges. Although expectations for inflation in 2017 have notably picked up, we are mindful that expectations for global growth remain subdued. With this as our backdrop, sources of growth in a low-growth world can at times display signs of over-exuberance when it comes to valuations.
Trump: Good News for Sustainable Infrastructure
As we look ahead then to 2017, we expect that our multi-thematic approach to investing will play an important role, providing us with the investment flexibility in different themes with attractive opportunities and valuations. For example, Trump’s victory has added weight to the sense that fiscal stimulus measures are back in vogue. With shovel-ready projects focussed chiefly on areas such as water infrastructure and sustainable transport systems – natural territories for environmental investors – we anticipate that companies in these areas will continue to be heavily sought-after in the market and may surpass what we deem to be reasonable valuations.
2017 could also see a pivotal changes in the market for electric vehicles with a significant step up in model announcements from multiple mainstream manufacturers and more product acceptance. The EV industry could see continued more than 50% growth, albeit from a low base but symbolically marking a permanent long-term disruption in transportation.
We also see evidence that the inexorable march of renewable energies competing with mainstream power will continue at pace, although it is not unreasonable to expect the rate of growth to temper. Investors seeking predictable cash flows in a low-rate environment have helped to underpin the capital deployed in renewable energy projects in recent years.
With renewable energy reaching technological maturity and investment scale, we are clearly seeing the formation of a new forms of asset classes in environmental investment, such as fixed income and infrastructure. Such diversifying assets can play a valuable role for active investors seeking exposure to these themes.
