M&G Investments 2021 outlook: Sustainability to take centre stage

Ecological building with the wall full of plants

Sustainability to take centre stage

Randeep Somel, manager of the M&G Climate Solutions Fund

This piece was written at the start of January, before the conclusion of the Georgia State runoff Senate Elections. 

This year we experienced a major global pandemic which caused economic disruption and resulted in significant government and central bank action. The reason the markets have been relatively sanguine is the speed at which the response came forward, which has been nothing short of phenomenal. One of the biggest questions when it comes to the outlook for equities from here is whether US equities will stay strong throughout 2021, as they have for the last decade. Technology stocks have been very importance in the outperformance of the US market. Tech has not suffered from pandemic-induced lockdowns in the way that other sectors have – in fact it is coming out of this crisis stronger. For a large proportion of this year, many of us have had to adapt our living and working patterns with the aid of technology and we are unlikely to ever go right back to where we were before. The main winners are technology companies. The US innovation culture is ideal for tech, and despite the US presidential change, the American economy is likely to remain strong and dynamic. As we gage the markets today, with interest rates close to zero, with high bond values and low yields, the market is now seeking growth and it is those equities that have the assurance of growth and returns that will continue to do well.

Sustainability is another important topic to keep an eye on in 2021. Consumers, industry and governments have become increasingly concerned about climate change. Big developments across major carbon emitting countries this year include president-elect Joe Biden’s intention to re-join the landmark Paris agreement, and Chinese president Xi Jinping’s surprise and welcome commitment to target a peak in emissions by 2030 in China’s national plan, with an aim for net neutrality by 2060. European companies have a strong culture in sustainability and as we begin to see the world’s two largest economies move in this direction, it should provide a strong growth tailwind for those companies that are well placed.

Many countries have struggled, but China got through COVID-19 quite quickly following an immediate shutdown after the Chinese New Year. The country has managed to reopen again relatively quickly and has used a fraction of the stimulus that it required back in 2008 post the financial crises. China’s economy is structurally sound and I think they will use this opportunity to continue to grow. It is likely that the US-China trade frictions and the focus on domestic trade and jobs will continue to be a big issue, though it is likely to be less confrontational than it has been under Donald Trump’s presidency. The Democrats in the US have realised that a significant reason they lost the election in 2016 was because Americans are unhappy with the terms of trade that are taken on a global basis, especially with China.

A key date in 2021 will be January 5th – when two Senate runoff elections will be held in the US state of Georgia. The Republicans currently have 52 senators. If they lose these two seats the Democrats will take control of the senate and with it all three chambers of the US government. I suspect that the Senate will remain Republican controlled. However, if it does go the other way, climate policy could become even more prominent in terms of US policy. That said, there is still plenty the Democrats can do without winning those two seats. There are 57 policies that the incoming administration have outlined that they can take without having to go through the US Congress, and I have no doubt that most of those areas will be enacted. Importantly, regardless of what the US government does, industries and consumers are moving towards clean energy and a green economy. If the Democrats do win these two seats, I think we will see the growth or adoption rate increase even quicker.

Ultimately, while technology companies will remain important, climate is the one area outside tech that will continue to grow. Unlike technology, where the companies are mostly concentrated in the US, sustainability touches companies across the globe.  European companies in particular have a strong pedigree and history in sustainability and – if anything –  if Europe is going to do well it will be through those types of sustainable companies, and this will be buoyed by the EU Green Deal and similar policies worldwide.

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