The big themes driving global equity returns

Louise Watson: Hello and welcome to Navigating the Noise, a podcast by Natixis Investment Managers Australia, where we bring you insights from our global collective of experts to help you make better investment decisions.

I'm Louise Watson, Head of Country for Natixis Investment Managers in Australia and New Zealand. And today, I'm joined by Jens Peers, who is a Portfolio Manager for Mirova as well as the Chief Investment Officer for Mirova in the U.S.

Now, I've known Jens a long time. He visits Australia where he has investments as well as multiple wholesale and institutional clients including Telstra, Super and HESTA. He's a thematic investment expert, particularly in areas like sustainability, technology and demographics and he also appears regularly at conferences and in the media in Australia and around the world.

Now, when I first met Jens, I spent a lot of time trying to pick his accent, so I'll save you the trouble. Jens was born in Belgium, his mum is still there. His daughters study in the Netherlands. And he did a long stint working in Ireland. And now lives in Boston. So the accent is still thick from a number of those places, see if you can pick it. Another thing I love about Jens is that he hates coffee but loves tiramisu. And he also loves watching football. I think it's Man United, right, Jens?

Jens Peers: Yeah, Louise, it is, unfortunately. I'm also a big fan of the Belgium national team so that's not much better for the time being. But yeah, I do love watching those.

Louise Watson: We can save the football chat for another podcast, maybe, in another world. I've always found Jens to be one of the most interesting and thoughtful commentators on global equities and responsible investing in the global economy so it's an absolute pleasure to have you on the podcast today, Jens. Let's kick straight into it. You invest with a multi-thematic strategy. You're investing long-term in structural drivers of change in our world. And we're talking here about things like demographics, the environment, technology, governance. Which of these themes really excite you the most at the moment? Overnight, at the time of this recording, we've seen some big gyration in markets, the VIX index at 65. How's that impacting your short and medium-term outlook and the opportunities that you're looking for in markets now?

Jens Peers: Sure. Good question. And indeed, there's a lot happening at the moment. But we're long-term investors, right? So, any volatility in the market, specifically on the downside when things fundamentally don't really change. For us, as well, it’s an opportunity to strengthen some really high-conviction positions. Or for people that are not already invested in some really great names and long-term visibility, it's a great time to actually do it right now. Just like going and buying something in a store, everybody likes a discount. And in the market it should be the same really. And we see a lot of that happening today.

You rightly point out those longer-term trends. We want to invest in companies that make the world change over time, that make our economy, that will help construct our society over the next decade. We're thinking about solutions for the battle against climate change, for instance. We know that we need to do that. If you warm up the world by three degrees it's going to be unbearable. We're going to have more immigration as well and more economic problems. A lot of issues to solve, et cetera. So fighting it is very important. But, unfortunately, in some regions adapting to it as well. And it doesn't matter what economic cycle you're in, that will need to happen.

The same thing with an aging population, for instance, we need solutions for older people. More specifically, as of today, there's a few really nice themes out there right now. And the volatility in the market helps maybe to some extent for people that are not already in. AI is a very important topic already, I'm sure we're going to talk about that later. Renewable energy, for instance, also benefits from that move to AI, and data centres are being built. A lot of the data centres have committed to a net zero economy as well, so they ask for more renewable energy as well. And to see great valuation opportunities there. You have the battle against obesity that continues. We see more evolutions in cancer research happening as well. And we see great valuation opportunities there, for instance, as well.

An interesting one for us under a theme that we call governance. It's more like around the culture of our economic system, so to speak, and how we organise our economy but is rethinking global supply chains as well. After Covid and because of the geopolitical issues in the world, many industries, many companies as well are rethinking their supply chains as well. Are thinking about on-shoring again and, what we call, near-shoring and friend-shoring so outsourcing to countries that are nearer to you or that are more friendly…to your own political views as well. And there's great opportunities in that too in terms of the companies that help build those factories, companies active in transportation, et cetera. Many exciting themes as of today. The volatility that we're seeing in the market today really helps buying companies at a cheaper price that are well positions to benefit from that long term.

Louise: Yeah, that's right. Let's dig a little deeper on that AI theme that you touched on earlier. It's such a hot investment theme. It's one that you're exposed to, as you mentioned. Nvidia is a stock that's resonated really strongly with investors, not just in our market but around the world. And it's had a huge run over the last year. It's come down from some recent highs in June and July. What are your expectations for growth for this stock and the universe more broadly?

Jens: AI is a ... obviously, is a theme that will change a lot in the way we do our business, in the way that technology is organised. But we're at the very early days. We've been investing in Nvidia for over two years, two and a half years now so we've had some ups and downs with that stock. Obviously, the last few quarters have been only up with very, very high and then very strong returns. And on the one hand, we think this is only the beginning. We are seeing a structural shift in the way we organise our economy. If you compare it to other metals in the past or maybe even oil-like demand for semiconductors, basically, and GPUs that can digest an awful lot of data…it'll be the core of our infrastructure that we're building out for our economy going forward.

Everything will be connected as well. It's not just AI, but everything we use will be connected with each other. We may have self-driving cars, everything will be data-driven, et cetera. The companies that help build that infrastructure, active in the semi-space. And, obviously, the GPUs that Nvidia produces are the strongest in the markets, and certainly also for the price you have to pay for that one. Still the best there as well. They're in extreme demand.

And the last couple of quarters have been very beneficial for the whole sector. But when you're thinking about the whole sector, really thinking about semiconductors as well, the data centres, but also energy companies, cooling, AC, water supply, for instance, for those data centers as well. There's a whole range of sectors that will benefit from that. Even consultants in the IT space. Big companies in the IT space themselves or big banks, et cetera, will have their AI specialists but others won't and you still have to adapt. There's going to be a lot of need for consultants in this space as well. So, we have exposure in our strategy along that supply chain.

We're seeing right now when you're looking at more recent results of the likes of Meta, Alphabet, et cetera that they're all talking about the risk of under-investing in AI or in GPUs, basically, is higher than the risk of over-investing so they're really short-term. They continue to buy a lot of these and to order a lot of these GPUs. I think short-term for Nvidia that's very, very good news. But as they are very likely over-demanding or over-ordering today, no doubt there's going to be some pause in that growth. Maybe not in the next quarter but in one of the next few quarters. So, we're a lot more cautious on the shorter-term outlook, but long-term, specifically strong players in that system like a TSMC, an ASML, for instance. Obviously, Nvidia as well, Microsoft. These continue to be very well-placed because they receive the orders.

But for some others, again, like the likes of Meta and Alphabet, the higher risk there would be that it's similar to 3G, 4G, 5G for the telecom industry where they have no choice, they have to invest in these technologies and spend a lot of money just to keep their current market positioning because if they don't others will. But it may not be able, for some of the players, to really monetise that investment. AI as a trend I think is certainly here to stay. But it's also one that you need to be very careful in terms of how you position yourself.

Louise: And managing that short-term noise around quarterly results can be really challenging. And like any strategy, not all strategies outperform all the time. And there's been a bit of a perception that sustainable funds have underperformed in recent times. How do you feel about this? Do you think it's true? How do you expect your approach to perform in the next coming quarters and certainly the medium and long-term?

Jens: Yeah, and that's a really good question. And I think it's important to understand that our starting point in our process is just that thematic view. It's not necessarily sustainability per se but a thematic view. The fact that the world will change in terms of demographics, technology, environment, and culture, and governance, and all that. That we want to identify companies that are offering solutions for those changes and, therefore, are well-positioned. But it's equally important to integrate sustainability. We don't see sustainability just as a choice, that's important as well. We want to create a better world. But also necessity, because companies that take irresponsible risks, specifically if ... like us, you're a long-term holder. If you keep stocks in the portfolio for eight years or longer, the likelihood that poor sustainability practices will lead to an accident or a fraud or something like that and, therefore, to underperformance is always a lot higher as well. So, from that point of view, I think sustainability as an approach will always be important, and will also help to limit downside risk when things are a bit tougher.

That said, when people think about sustainability they typically think about having a positive impact as well. And sustainability themes like renewable energy, and maybe healthcare, education, et cetera, maybe a little bit more of a link or a bias towards technologies as a result as well. A lot of these themes have had a few very, very good years pre-Covid, specifically between 2017 and the end of 2020. That was a time when many people started to look at investing in specifically-focused sustainability strategies, as well, because of a combination of factors like rising interest rates which had an impact on the valuation of companies with very long-term visibility and a lot of these companies have that visibility as well. It was quite negative and some hurdles and some bottlenecks in the renewable energy sector as well. A lot of strategies, indeed, with a sustainability focus, specifically from a thematic point of view, have had two, two-and-a-half years of relatively poor performance. Not all of them, but many of them have. And that has created a bit of this buzz. Combine that with political backlash as well, specifically in the US, and that has created this image.

But as you said, not all strategies, not all approaches can, or actually no approach, when you stick to that approach, can always outperform and it's the same with sustainability a well. So if you want to continue to outperform as well you always have to focus on having a very strong and solid investment process. That's what we're doing as well. We keep on focusing on finding solutions for those long-term trends, so we're less economically sensitive. We are exposed to that growth even if growth may not be naturally available in the markets. But it's very important to keep evaluation discipline as well. Sticking to the process is really key to continuing outperformance, if you’re a sustainable strategy, or more of a mainstream strategy, I think that's all the same.

Louise: And let's pick up on that sustainability point because that's been a really big topic here in Australia for our investors, sustainability, ESG. And particularly holding companies to account, company managements. It's still a huge focus for Australian investors, particularly super funds and also fund managers in Australia. How difficult is it to navigate ESG regulation in the areas that you invest in?

Jens: Sure. Well, we have clients or investors all over the world so they're all exposed to regulation. And I think the first thing that is important is general regulation, is that for pension funds specifically, is you have a fiduciary duty to outperform. And as I said earlier on, I think that's one of the main reasons why you have to look at sustainability. While many people think that sustainability is just a choice, there is a financial materiality with many of those factors as well. And I think that the risk side is better known if you take an environmental risk and it doesn't really play out. And you have an oil spill or what have you then you have related costs and these companies underperform. But you also see more and more links between, say, other factors and positive performance. Take diversity companies that have more diverse management teams tend to outperform, for instance, as well. First and foremost, from that point of view, for fiduciary duty reasons, I think it's important to really integrate sustainability. Secondly, there's more regulation around sustainability. And it's different all over the world.

Louise: Are there any countries doing it better?

Jens: Good question. I'm not going to make a judgment on that because it's early stage, they're all learning from each other. Europe really wanted to be the first and the strictest and they came out with the SFDR regulation. While it created more clarity, it certainly has not led to better definitions, for instance. The approaches are not necessarily still very clear. And there's regulation for investors, there's regulation for the companies themselves, and there's regulation for the actual asset managers. The UK is making an adjusted version of that right now. It's going to be quite strict as well. But in any case, it has led to a lot more reporting. For the end investors you have more data around it. That's already a good start. But at the end of the day, we're also here to interpret sustainability information and get a good return. And that's where some level of freedom always needs to be allowed as well to some extent, some interpretation.

So there's a lot of debate right now around companies that already do it well and offer solutions for sustainability problems. But also transition companies, companies that ... let's say in the mining sector, and that's actually a very important sector for Australia, for instance as well, they're typically excluded in sustainability regulation because of the negative both health and safety, and environmental impacts that most mining companies have. But at the same time, we will need a lot of these metals as well for the energy transition as well. So, there's a lot of debate around regulation for those right now as well. Anybody doing it better, we'll see it's early stage. The regulation will evolve, we'll keep a keen eye on it, and we are an active participant in those discussions. But it certainly will evolve in the next couple of years.

Louise: And let's just bring that back to Australia, which you mentioned there, and the topic of nuclear. That's a really hot topic here at the moment because our federal opposition government is suggesting it may be a better method for Australia to decarbonise its energy production and produce low-cost consistent power in Australia. Are you invested in nuclear? What place do you think it has in the global supply and energy needs and do you think it's a good option for us in Australia to pursue?

Jens: Now we think that nuclear plays a role in the current and future energy mix. Let's focus on the current one first. Nuclear is an option where it's used right now for baseload energy. If you want to replace that you can't replace it with solar and winds because that's more intermittent. The wind doesn't always blow, and the sun doesn't always shine. So replacing nuclear, if you have nuclear ... let's say France is a country where the energy production is dominated by nuclear as well, you have to replace it with gas or coal, right? That's no real option because you make it worse. So, if you can keep existing nuclear open for longer in a safe way, and you can deal with nuclear waste in an acceptable way as well then we don't see a big issue with nuclear.

New nuclear, that's a different story. Let me start with the financial part of it. I've never known any nuclear projects that was delivered on time and on budget, right? The same with desalination, and I believe Australia has a lot of experience with desalination plants as well. Whether or not they're used that's another discussion there. But you have a few mainly in Sydney and Melbourne, if I'm not mistaken.

Louise: That's true.

Jens: None of these are on time or on budget. And also that timeframe is very long. It takes over 15 years typically between deciding to build a nuclear plant and actually having it operational. In those 15 years, we believe that you're going to see a lot more evolutions in the combination of renewable energy and energy storage. We see a lot more opportunities for hydrogen, first as storage, and then ideally using water to produce hydrogen as well. And then burn that or run that hydrogen through a fuel cell to generate electricity again. In the next 15 years, more likely than not you're going to see a lot more evolutions in that space. Personally, we'd be more of a fan of investing in other technologies than in nuclear, but nuclear can play a role in the current and the future energy mix.

Louise: It's a really interesting perspective for us to keep in our sights here in Australia when we're considering those projects, and the amount of time it takes, and the resources it takes to get them approved and executed. We can't leave this podcast without discussing the US election, Jens. And with some of Donald Trump's comments and published views, it seems that a second Trump presidency would be bad news for sustainable investing. Do you think that's true? How do you think about government and politics when you're investing?

Jens: Well, to answer the question very shortly, I don't think it's true. We build portfolios based on a long-term view on how the world is going to evolve. Now, politics play a role, obviously. But we don't know who's going to be the next president in this country or another country or another country or the one after that or the one after that. The world is going to change no matter what. And many companies have to make very long-term plans on how they invest, on what infrastructure to build, et cetera. And they do that irrespective of who is the President of the United States now, for instance.

Now bringing it back specifically to a potential Donald Trump victory. To some extent, we already know what may happen because we've lived through that already. There's a lot of noise. He tends to stand for a lot of themes where sustainable investors are typically not exposed to. You'll think about the classic energy sector, for instance. Well, he wants to drill more oil. Now during his first presidency, for instance, the traditional energy sector was actually one of the worst, if not the worst, performing sector in the market over that time as well. And the same thing may happen again, obviously, here now if you pump up more oil for the same demand for oil you're going to have a lower oil price. That's typically not good from an investment point of view.

And during his first term as well, we've seen that many themes where sustainable investors are typically exposed to, like renewable energy for instance as well, but also diversity and all that. Those companies with exposure to those themes have done quite well over that time as well. One of the reasons is that, while we may think that, as a country, the US is run by the federal government, a lot of things happen on the state level, and companies react as well with the way they do things and the more one part is going in one direction the more some investors, some companies, and certainly some states are going in the other direction as well, as well. So, we're not too worried about that. I think there's going to be a lot of noise, however, a lot of volatility. It's our job to navigate around that, and keep our heads cool, and keep focusing on the long term.

Louise: Well, thank you Jens for helping us to navigate the noise today. It's been wonderful to have you on the podcast. And I'm sure our listeners got as much out of the chat as I did. And if you enjoyed the episode please click follow on your favorite podcast platform to be notified of future episodes. And tune in again to hear more from our global collective of experts.