James Sym, Head of European Equities at River and Mercantile says that 2022 will be the year that the industry stops playing at ESG, and starts doing it properly.
“I see three investment conclusions to be expressed in portfolios in 2022:
- First, two years after the economic nadir we are moving from early-cycle to mid-cycle. This means we are more cautious on early-cycle stocks and those most at risk from an inventory correction, which we view as a distinct possibility in H2 2022 as supply chains normalise. However, cyclicals in the broadest sense should be okay, especially where they are exposed to areas such as tourism which are still depressed through covid policies.
- Secondly, if inflation does prove to be more stubborn and capital more discriminating, which we think is likely, beware excessive valuations – by which we mean the over 10x sales, 50x earnings variety.
- Thirdly, stick with the preeminent theme of this cycle, which is the opportunity afforded by decarbonisation. This is precisely where an investment boom – borderline mandated by governments in Europe, is most likely to take place.
Expanding on the final point, in my view, 2022 will be remembered as the year that as an industry we stopped playing the ESG game and started doing it properly. This means no more shipping out portfolios which purport to be green simply because they happen to have low carbon emissions, or because a third party data provider says they are AAA, but rather, seriously thinking about how to allocate capital to businesses which are going to help lower carbon emissions in highly emitting activities. Why is this doing it properly? Simply put, because this is the only way in which we are going to support humanity’s goal of limiting global warming.
The atmosphere doesn’t care what your ESG rating is. It only cares about how much you can reduce our collective total emissions.
It could be in transport, steel or cement production, or any capital-intensive industry but this is where we, as capital allocators, can make a real and tangible difference. For a contrarian, the opportunity set for stocks which can rerate and accelerate their growth – by making materially positive contributions in this way – is outstanding.”