Where do we see value in the portfolio today?
We see a lot of value in the portfolio as we look at it today. Over the next 12 months, we are expecting high teen earnings growth for the strategy, and that compares to high single digits for the broader benchmark.
At the same time, returns within the strategy continue to be very high. Return on equity (ROE), for example, is 18% – again, well above the benchmark. The net debt levels for the portfolio are well below the benchmark, and earning stability – a classic quality metric – again is well above the benchmark’s level.
Then if we look at a value metric like cash flow yield, that’s in line with the benchmark and, overall, we’re paying what we think are very reasonable valuations given the growth that we’re getting within the portfolio. So, looking at a price-earnings (P/E) multiple, when adjusted for growth, it is around 15% below the benchmark.
In summary then, we see a lot of growth and a lot of value in durable businesses at very reasonable valuations.
What’s the case for sustainability now?
From our perspective, sustainable investing is as relevant now as ever. Even though we’ve seen some rollback in government incentives and subsidies for sustainability, particularly in certain regions, there are multiple structural sustainability trends that extend beyond government mandates.
These trends provide exciting investment opportunities across multiple industries, and we expect these trends – related to areas like artificial intelligence (AI), electrification and financial inclusion – to persist over time and to also provide both positive financial and sustainability outcomes.
When we approach analysing sustainability, we take a triangulated approach. We assess companies‘ financial sustainability through the products and services that they operate. We look to see whether they are providing solutions. Then, finally, we assess operational sustainability. We feel it’s really important to focus on understanding the relationship across these three areas and how they influence one another.
We believe that investing through this lens, coupled with taking a longer-term, more forward-looking approach, puts us in a superior position to be able to identify high-quality companies that are more efficient in the way that they operate, more resilient financially, and more innovative. These are the companies that are operating at the forefront to providing solutions to complex sustainability challenges. Even if we see dampening sentiment on sustainability, we still expect these companies to do well in the long term.
What are the most compelling long-term structural trends we’re currently positioned for?
We see a number of key structural trends driving growth within the strategy. The first trend I’d highlight are those companies that are helping to drive a more circular economy. This is a crucial theme given the importance of resource scarcity, rising input costs, and supply chain security; and security of supply at a time when we have trade wars is paramount and applies both to corporates, and we saw the fragility of supply change during the Covid-19 pandemic. It also applies at a national level where security of supply remains a key factor.
Another interesting theme is electrification. We’re seeing this across industry, infrastructure, buildings, and most notably in transport. This is a theme that drives widespread policy support given the role it plays in minimising our dependence on fossil fuels, while also driving greater resiliency across industries.
The next trend I would call out is financial inclusion, where globally there are still 1.5 billion people who are unbanked. The theme has been driven by digital technology, helping to reach more customers and doing so more efficiently. We see further growth potential in financial inclusion – both in developed markets but particularly in emerging markets – driving tangible benefits to customers, whether they be individuals, businesses and communities, all stand to gain from broadening financial inclusion.
We continue to see strong growth opportunity in artificial intelligence, and here there are three areas that we are monitoring. The first is investment in AI cloud computing, where we’re continuing to see increasing spend by hyper scalers, the mega-cap companies deploying hundreds of billions of dollars in this space. The second area to watch is in the consumer AI platforms – the chatbots, such as Chat GPT – where we are seeing a really meaningful pickup in use. The third area is in enterprise adoption where, again, we are seeing an uptick as companies look to deploy and use AI within their businesses. The key growth opportunities therefore in the years to come are both with the AI enablers, but also with those companies that are most successfully deploying it to drive productivity improvements within their businesses.
