This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on Jan 4 - 10, 2016.
Global stock markets have had a crazy year, resulting in mainstream sectors yielding low returns. But even in this climate, there are new and exciting trends that are gaining momentum, with the potential to provide returns to investors in 2016 and beyond.
THE WILD swings in the global economy and stock markets over the past 1½ years have given investors enough reason to be pessimistic about where they park their money. What used to be go-to mainstream industries, such as oil and gas and banking, have delivered less than desired returns. The outlook for these sectors remain bleak going into 2016.
But all is not lost. To remain invested and diversified, some experts recommend turning to alternatives such as speculative and up-and-coming sectors. These sectors reflect the evolving government policies and lifestyle trends that are already beginning to change the way we live.
While such investments may carry higher risk, they do have the potential to generate higher returns. Many of them can only be found in overseas markets, but local investors can still access them via online trading platforms and fund companies.
The alternative energy sector, for one, is seeing some headway as the result of the 2015 UN Climate Change Conference in Paris and the subsequent inking of the Paris climate agreement in December. If successful, the domino effect created by the accord could be among the greatest changes the global economy has ever seen, as it may help companies involved in renewable energy and energy efficiency by expanding their markets.
A predilection for healthier eating habits, meanwhile, has contributed to the thriving organic food industry. In the US, major food and beverage players have started to move towards organic or natural production, some by simply dropping artificial preservatives from their products and others going to the extent of avoiding genetically modified ingredients.
The growth of the sector known as the Internet of Things (IoT) has had an incredible trajectory in the last decade. While IoT stocks are common in developed markets, the sector is only beginning to become commonplace in emerging markets, pivoted by the entry of China.
Here are five ideas investment professionals recommend:
1. Low-carbon economy
The low-carbon economy is expected to perform beyond expectations in the future, following events during the Paris Climate Summit where representatives of 195 nations inked a landmark accord to keep global warming well below 2°C.
Although it is a non-binding treaty, the accord is viewed as a groundbreaking move as China and the US — the world’s two largest greenhouse gas emitters — aim to cut global greenhouse gas emissions by about half. This cooperation would stave off an increase in atmospheric temperatures which could otherwise result in devastating consequences, such as rising sea levels, severe droughts and flooding, crop failures and cyclones. The ambitious target is also expected to give companies involved in renewable energy and energy efficiency a boost.
French fund manager Amundi Asset Management, which has been at the forefront of low-carbon investments, says that with the accord, businesses that thrive on the carbon-intensive economy will eventually be impacted, implicitly or explicitly, for their higher carbon cost.
“Fossil fuel companies and utilities with a mix of fuel and coal will be penalised and they will have to pay for the legacy that they are responsible for,” says Frédéric Hoogveld, Amundi’s low carbon and smart beta strategies investment specialist.
Hoogveld says investors should be cautious about their exposure to carbon-intensive businesses as the objective of the accord is to significantly limit the emission of greenhouse gases, particularly the greatest offender, the heat-trapping carbon dioxide (CO).
He explains that the objective of the climate accord could be achieved either through explicit measures such as putting an end to polluting plants or implicitly by increasing the cost of polluting such as the implementation of a carbon tax through the implementation of a quota system for CO emissions. As such, companies in fossil fuel businesses, directly or indirectly, would take a beating.
“If you look at the fossil fuel companies, such as coal miners and oil and gas businesses, and if you were to burn all their reserves, you will emit around 3,000 billion tonnes of CO. Companies are evaluated on the basis of their reserves that they won’t be able to spend,” says Hoogveld.
In positioning their assets, investors can opt for an “offensive strategy”, which is directly financing the energetic transition, whereby investments are directly channelled into businesses that benefit from the low-carbon economy, or they can go for a “defensive strategy” by trying to reduce exposure to the companies that will be affected by the conditions of the low-carbon economy.
“Owners of large assets need high capacity or high liquidity and typically, the most aggressive investment strategies will not be able to offer an extremely high diversification. You won’t be able to push tens of billions of dollars into this type of offensive strategy because they are often not liquid enough,” says Hoogveld.
“Large institutional investors won’t divest entirely from fossil fuel because they have to some extent the duty to be invested across all sectors of the progressive economy.”
In 2015, Amundi launched an exchange-traded fund (ETF) that tracks the MSCI World Low Carbon Leaders index, encouraging institutional investors to decarbonise US$100 billion (RM430 billion) of investments worldwide. Among the top holdings of Amundi Index Equity Global Low Carbon are companies like Apple Inc and Microsoft Corp.
Apple is embarking on a mega solar project in China to build new solar grids in northern, eastern and southern China capable of generating over 200mw of power, which is expected to provide energy for more than 265,000 homes annually and help the company offset the energy used by its supply partners. It is also working with Chinese manufacturers to generate more than 2gw of solar, wind and hydropower for manufacturing processes over the next five years.
Likewise, Microsoft has made green energy its corporate responsibility. The software giant implemented an internal carbon fee in 2012 — which holds its various business groups financially responsible for the cost of reducing and compensating their carbon emissions — as part of a pledge to make all its operations 100% carbon neutral.
Hoogveld says that through these indices, investors who are concerned about their carbon risk can reduce their exposure to these businesses. “These indices will reduce emission revenue by about 50%. We started managing this particular strategy a year ago. We started with zero assets under management and now we have about US$5 billion in assets under management in these indices.”
As for determining how much of their investment portfolio should be allocated to the low-carbon movement, Hoogveld says investors with an appetite for bold exposure in the global developed markets could invest 100% of their global equity allocation on specific strategies like the MSCI Low Carbon funds.
“For investors seeking to hedge their portfolios against the financial risk of climate change, offensive strategies could be risky because there would be a bias towards certain sectors, while the MSCI Low Carbon Leaders exposures allow investors to reduce the carbon risk while maintaining a sectorial and geographical exposure similar to the parent indices,” he adds.
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