When the future looks increasingly uncertain, investing in quality growth companies with financial flexibility is our preferred strategy.
Resilience will be an important differentiator as companies and governments continue to focus on addressing supply-side disruptions.
The transitions to more local supply chains and a green economy are inflationary but beyond central bank control, so policymakers are unlikely to hike rates aggressively.
The war in Ukraine could and should
accelerate investment in cleantech.
Reducing reliance on fossil fuels
can mitigate geopolitical risks.
Technology improvements across
all themes are speeding up every year,
and shocks like Covid and the Russia/Ukraine
war could accelerate disruption.
The European and US CHIPS act, America COMPETES acts, EU Industrial Strategy and Made in China 2025 all highlight the concerted effort by governments to diversify supply chains and reshore strategically important industries. The list of areas covered is broad but generally includes cybersecurity, semiconductors, pharmaceutical ingredients, hydrogen and energy. Additionally, given ongoing supply-chain bottlenecks, this is happening at a time when companies are shifting away from the just-in-time inventory systems, synonymous with the ultra-efficient supply chains of the Japanese auto industry, to just-in-case. This is a model that incorporates diversity of suppliers, higher working capital and in-built resilience across supply chains.
In line with the headlines, our analysis of how much companies expect to commit to capital expenditure (Capex) for 2022- 2024 shows that businesses are putting their money where their mouths are. After almost a decade of slowing Capex, there is an expectation of a stepwise increase in Capex spend across the next few years. Governments have also pledged billions of dollars to support industry, which should provide a countercyclical buffer in a world of moderating growth.
Policy rates have been lifted off their record lows (by the Fed and BoE) or may be lifted later this year (ECB). Inflation, while still high, is likely to start moderating as the policy stance becomes more ‘normal’, demand slows and supply expands. Markets are expecting aggressive amounts of tightening, but we think policymakers will eventually take a more cautious approach. In part, this is because ‘killing the cycle’ by crushing demand would be a ‘policy mistake’, as it doesn’t repair supply chains or solve the input shortages.
One of the reasons is that Covid-19 and geopolitical uncertainty are resulting in a faster transition towards energy and production self-reliance. Structurally, while this can be inflationary, it’s arguably something central banks shouldn’t lean against, as it meets broader policy objectives. Emerging markets too, after having front-run the Fed hiking cycle, seem likely to slow the pace of tightening, in some cases even halting or beginning to reverse it (Brazil).
Long-term history and the outlook over many years are more important considerations for investing in the future of energy than decisions based on short-term shocks.
Over the last decade, fossil fuel equities underperformed broader markets, and cleantech outperformed fossil fuel equities. Clean energy equities have outperformed the markets since the Paris Climate Agreement was adopted in 2015. This decade, the divergence between fossil fuels and cleantech could be even more pronounced.
Rapidly improving technologies in renewables, electric vehicles, batteries, hydrogen, interconnectors and efficiency working in combination could have a huge impact. Fossil fuels will still be used during the transition to net zero, but demand is likely to be chipped away from many directions.
The US mega-tech companies benefit from strong ecosystem moats and long- term demand drivers. Given their financial strength, their long-term ability to offer new products and services remains strong.
Sales growth expectations over the next two years for companies in the Nasdaq 100 index remain in a similar range to recent history (around 9% per year compared to an 8-10% long-term average). Robust private markets also support the march of technology, despite some recent cooling.
This document is designed as marketing material. This document has been composed by Quintet Private Bank (Europe) S.A., a public limited liability company (société anonyme) incorporated under the laws of the Grand Duchy of Luxembourg, registered with the Luxembourg trade and company register under number B 6.395 and having its registered office at 43, Boulevard Royal, L-2449 Luxembourg (“Quintet”). Quintet is supervised by the CSSF (Commission de Surveillance du Secteur Financier) and the ECB (European Central Bank).
This document is for information purposes only, does not constitute individual (investment) advice and investment decisions must not be based merely on this document. Whenever this document mentions a product, service or advice, it should be considered only as an indication or summary and cannot be seen as complete or fully accurate. All (investment) decisions based on this information are at your own expense and at your own risk. It is up to you to (have) assess(ed) whether the product or service is suitable for your situation. Quintet and its employees cannot be held liable for any loss or damage arising out of the use of (any part of) this document.
All copyrights and trademarks regarding this document are held by Quintet, unless expressly stated otherwise. You are not allowed to copy, duplicate in any form or redistribute or use in any way the contents of this document, completely or partially, without the prior explicit and written approval of Quintet. See the privacy notice on our website for how your personal data is used (https://group.quintet.com/en-gb/gdpr).
The contents of this document are based on publicly available information and/or sources which we deem trustworthy. Although reasonable care has been employed to publish data and information as truthfully and correctly as possible, we cannot accept any liability for the contents of this document.
Investing involves risks and the value of investments may go up or down. Past performance is no indication of future performance. Any projections and forecasts are based on a certain number of suppositions and assumptions concerning the current and future market conditions and there is no guarantee that the expected result will ultimately be achieved. Currency fluctuations may influence your returns.
The information included is subject to change and Quintet has no obligation after the date of publication of the text to update or inform the information accordingly.
Copyright © Quintet Private Bank (Europe) S.A. 2022.All rights reserved. Privacy Statement