Mike Fox, Head of Sustainable Investments at Royal London Asset Management, assesses the current market environment for sustainable investing over the short and long-term
The past six months have seen a continued stream of optimism in global markets. Many major economies are rebounding strongly as we progress through 2021. Companies are beating market expectations on profits. And governments and central banks continue to pour in support. It’s no surprise we’re seeing equities near all-time highs, even if the counterpoint with a year ago when we were in the eye of the pandemic is stark.
This is just the latest phase of a bull market that is now 12 years old that started in 2009 – if you assume, as I do, that the sell-off last year was a sharp correction, rather than the end of the previous bull market. Investors may be wondering when we will see a longer, more pronounced sell-off or bear market.
It’s easy to forget now, but after the end of the 1982-1999 bull market, equities went nowhere for around a decade. The financial crisis created the conditions for the current bull market, and it is a truism to say that we are now closer to the end of this bull market than ever. But we don’t see it ending just yet. Bull markets tend to end when euphoria takes over and pushes markets well above any sensible level and whilst there are some signs of exuberance, we don’t believe they are systematic. Will a post-pandemic rush of blood be enough to bring this bull market to its conclusion? Possibly, but it is worth noting that the final days of any bull market tend to see significant gains, making it painful to reduce equity exposure too early. As the saying goes, investing is about time in the market, not timing of the market.
Since news of successful vaccine trials broke, we have seen an about-face from markets. The ‘stay at home’ stocks that did so well in the middle of 2020 fell out of favour, to be outperformed by those more dependent on rising economic growth. In sector terms, oil, mining, leisure and retail have been outperforming healthcare and technology. With an accelerating economy, ‘value’ stocks looked cheap and a rebound was inevitable. But we don’t yet really know how these stronger performing sectors will actually fare when the economy is fully open once more. We know that consumer behaviour will change as a result of Covid, but we don’t yet know exactly how this will manifest itself. It seems likely to us that growth stocks, healthcare and technology in particular, will be worth more because the pandemic has happened. Equally we think may value sectors, especially in the physical world, have been impaired. Although this is counter to market trends, the case for growth investing has arguably strengthened through the pandemic.