Aegon Asset Management
Sustainable investing: Why cycles don’t mean structural shifts
Iain Snedden, Senior Investment Product Specialist at Aegon Asset Management
Progress and change are rarely linear. Sometimes stock markets can forget that. However, it’s important to frame the short term challenges faced by some sustainable themes over the past couple of years in context of the compelling economic arguments for taking a longer term view.
Interest rates have been a well-publicised drag on many sustainable investment themes but on top of this, several industry-specific factors have combined to create something of a double whammy for share prices. These industry-specific factors can largely be attributed to two root causes: (i) supply chain imbalances and (ii) constraints in company budgets. Both are classic examples of cyclical, rather than permanent, forces.
To give an example of the former, many industries in the renewables space have been subject to supply chain imbalances. Some of this is a hangover from the COVID period, when customers built up large inventories due to uncertainty. As lead times have normalised, customers have run down these inventories, meaning they need to order less from their suppliers, even though end market demand remains strong.
Electric vehicle chargers are a prime example and we’ve seen several producers announce lower sales as a result. This seems to be at an end now though and, in the past few months, producers have been noting a positive inflection in sales. When you consider that Morningstar forecasts global EV sales to reach 40% of all vehicle sales by 2030 (five times its 2022 level), there is clear visibility of growth for companies in this space and, with sales inflecting higher again, this could be a powerful driver of upward share price moves.
And what about the constrained budget category? This has affected areas like biotech and IT services. Many large pharma companies have cut back on research spending with smaller, early stage biotech players. Similarly, many IT services firms have been impacted by end customers cutting back on discretionary IT project spending to preserve margins, which has meant tougher times for a sector that was growing at pace.
Again though, it’s important to contrast these cyclical challenges with the long term opportunities. For instance, the immuno-oncology market is expected to grow at a compound annual growth rate of 21% out to 2028 and digital transformation spending is expected to increase at 16.1% per annum out to 2027. The need to continue to innovate in health care and to ensure companies’ digital infrastructure keeps pace with the modern world will not go away and most industries could only dream of these projected growth rates.
Whilst these issues have affected some sustainable themes, others have enjoyed a much more fruitful time of late. One of those is cyber security, an area with clear societal benefits.
More and more aspects of our daily lives are now facilitated by technology and online applications. This brings a great many advantages but it also brings threats. The trove of data, personal information and financial transactions that are now stored and processed online are a juicy target for criminals and cybercrime is growing at an alarming rate.
Source: Statista Market Insights, as of September 2023. Data shown is using current exchange rates.
So, the threat is very real. Alarmingly so in the UK, in fact, which has the highest density of cybercrime per number of users globally. Clearly, we need cybersecurity firms that are just as sophisticated as the criminals to protect everything from our personal details to national infrastructure.
That’s where firms like CrowdStrike* come in. CrowdStrike offers a cloud-based cybersecurity platform which secures endpoints, cloud workloads and data. Its products use machine learning and AI to continuously evolve, analysing data to spot the difference between normal user behaviour and malicious activity. Despite this advanced technology, it is easy to install and runs in the background without consuming a lot of processing power. All in all, it provides a step change in detecting and responding to threats, helping to keep the digital ecosystem we all depend on safe.
So, what does this mean from an investment perspective? Is CrowdStrike just a hyped up tech company that doesn’t make any money? In short: no. CrowdStrike has been hugely successful in gaining market share and growing its revenue exponentially but it has also demonstrated an ability over the past couple of years to do so profitably. It now boasts a market cap of over $75bn, not bad for a 13 year old company, and although it may not look ‘cheap’ on traditional valuation metrics, the structural growth of the cybersecurity market, its market leading proposition and its expanding profitability are just some of the reasons why it looks well placed to continue its success for years to come.
*Crowdstrike is held across Aegon Asset Management’s range of global sustainable equity portfolios.
Almost all industries and types of investment face cycles and its unrealistic to expect all sustainable themes to be in vogue at any one time. This speaks to the importance of diversifying your exposure. In our view, the market has been overly myopic in the treatment of some of these cycles and has mistaken short term weakness as a sign of long term investment cases being fundamentally compromised. The tide will turn for areas like renewables and biotech - the structural need to address sustainability challenges will ensure that. In the meantime, there are other exciting and profitable areas like cyber security that investors can take advantage of when looking for stocks that are making a positive contribution to society.
Each month the team behind our sustainable equity funds tackle questions on sustainability issues, new stocks and the impact of market conditions in our Five in Five series.
Disclaimer:
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Responsible investing is qualitative and subjective by nature and may not reflect the beliefs or values of any one particular investor.
Opinions represent our understanding of markets; they are not investment recommendations or advice.
Aegon Asset Management UK plc is authorized and regulated by the Financial Conduct Authority.
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