Shifting sustainable gears

Amid ongoing inflation concerns and the need to move towards a more sustainable world, what role will investors play in 2022 and beyond?

The turn of the year is always a good time to look forward and consider what the enduring trends are and what tail events might derail our baseline thinking. 2021 serves as an important reminder that sticking with a trend, in this case the activity post the shock of COVID, is a powerful way to compound returns.

Sure, there are always tests along the way, but as time passes so does our sensitivity to them – it is the destination, not the journey that matters!

At some point, the trend is fully discounted, at which point new risks and opportunities become the dominant driver of returns.

Asia was first out of the virus-driven slump, but market performance was derailed by policy changes in the world’s second largest economy. This became the newly dominant factor in the region.

It is a cliché to say that successful investing is all about discounting and not about forecasting, but it is also true. The best performing sector this year has been energy, precisely because capital flows into the industry have been so weak; with supply not able to respond to the rapid spike in demand that came with the economic reopening.

Few industries have generated as poor a return on capital in their history as energy (the returns instead accrued to human prosperity), but when an extended bear market converges with a global mega trend like climate change, it is the perfect recipe for a pronounced volte-face.

When an extended bear market converges with a global mega trend like climate change, it is the perfect recipe for a pronounced volte-face.

As American billionaire investor Charlie Munger observes, investing is akin to a liberal arts education: the learning and insight is drawn from multiple parallel tracks. It is the unpredictability, the range of outcomes, the ever-evolving landscape that makes investing so challenging but also so intoxicating.

Which brings us to this year’s Panorama Investing in 2022: putting our discounting hats on we try to think about 5 potential developments in the year ahead that are not well reflected in current asset prices. Maybe we are being influenced by the fact that a pandemic was, to use the words of Donald Rumsfeld, ‘a known unknown,’ as we include here another extreme event but with seismic consequences for how we all go about our daily lives.

One of the risks, that of structural inflation, is picked up by our Solutions team in their discourse on investment trends for 2022, but for the rest of this edition we stick with the enduring trend of sustainability. Every year that goes by, sustainability has a broader impact on the investing landscape; our contributors examine the topic in the context of investing in China, and also consider how it is manifesting in the real asset sector.

Our O’Connor team discusses how to seek out winners and losers from the shift to the low carbon economy, while our multi-asset team explores the incorporation of ESG and the efficient frontier.

Understanding the problem of using imperfect ESG data in the investing process is covered before our most experienced in-house ESG expert concludes with an examination of the regulatory landscape through a seasoned investor’s eyes.

We trust that you find this edition of Panorama to be a helpful guide on your investment journey. As always, please reach out to your trusted UBS Asset Management partner for any further advice.

We look forward to our continued partnership with clients throughout the next year.

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