You are using an outdated browser. Please upgrade your browser to improve your experience.

Our views 20 November 2023

SustainAbility: Will the Santa rally last?

5 min read

One of the stranger aspects of investing is seasonal trends. Looking back over many years, certain months of the year equity markets are typically down, and others up.

For example, September and October are notoriously poor months, as shown again this year. November and December are seasonably favourable however, and upwards moves in these months are often labelled ‘Santa Rallies’. It isn’t clear why seasonal trends exist, and they aren’t perfect predictors, but in the last two weeks it has felt like the Santa rally has arrived bang on time. 

The current rally in equity (and debt) markets took hold when the most recent US inflation data came in better than expected. This was quickly followed by UK data showing the same thing. Despite much scepticism to the contrary, inflation is indeed turning out to be transitory, at least in certain cases.

It helps to separate out inflation between goods and services. Goods inflation is the area which has seen the most progress, with Walmart noting last week that they expect to see deflation in their product categories in the coming months. In hindsight, the pandemic lockdown created huge demand for physical goods as we had nothing else to spend on. This elevated demand created tension and bottlenecks in the global supply chain resulting in inflationary consequences. Expenditure on physical goods has reverted to trend, and even below trend in some cases, at the same time as supply chains added extra capacity. This has resulted in prices stabilising and, in some cases, coming down. Transitory indeed.

Services inflation has proved to be stickier, as anyone who has tried to book a holiday or flights can attest to. This area is still seeing pent-up demand from lockdowns, particularly in parts of the world which have only relatively recently come out of them. Even here though, there are signs of softening demand and lower inflation.

This improvement in the inflation outlook, whether it be temporary or not, has resulted in falling bond yields and more optimism that central banks can bring inflation back to their targets without inducing a recession; the so-called soft landing or ‘goldilocks’ scenario. Were this to occur, which is far from certain, it should be positive for both equity and fixed income investors.

Are we misunderstood?

One of our favourite questions to management teams of companies is what do your investors not understand or appreciate about your company? We ask this to understand if the general perception of a company matches the reality of the people who manage it. It is a question management teams are often keen to answer, and usually gives invaluable information about what they feel is being misunderstood about what they do.

In that spirit, and given we meet many potential investors in our funds to answer their questions about what we do, here are few things we would suggest are underappreciated.

Sustainability isn’t simply about the environment; it is much broader than that. It often comes up in conversation as to how the seemingly decreased commitment of some governments to net zero and improving environmental performance could impact the prospects for sustainable funds. Ideally, strong government support would be welcome, but it isn’t essential as most renewable forms of energy and technology are now as cheap as the alternatives. Even if that were not the case, areas such as healthcare, technology, finance, chemistry, and engineering offer a huge range of investment opportunities for our funds outside of climate and renewable energy related areas.

There is also sometimes a misunderstanding of the performance issues the broader sustainable industry has seen in the last couple of years. There have been some funds in this area which have struggled, particularly after the technology boom of the 2010s ended abruptly in late 2021. But this is more symptomatic of weaker investment practices, whether they be investing in more speculative areas of markets or using overly simplistic thematic frameworks to select stocks. Those sustainable funds which managed to avoid this, ourselves included, have not seen any issues other than those seen by all investors because of higher interest rates.

Finally, there is a view that the commitment to sustainability of companies generally is decreasing. We can call this the Unilever effect. Unilever has seen strong criticism from some of its investors regarding its commitment to purpose and sustainability. To some it has seemed like an affectation, and not something which will improve the company and its prospects. From what we hear, corporates communicate their commitment to sustainability in a practical and useful way, rather than it necessarily being a philosophical or purpose driven choice. Sustainability leads to higher sales, lower costs, and motivated employees – as one CEO said to us. So long as this remains the case, and we think it will, the corporate sector will continue its drive to become more sustainable, which will enhance the prospects of our funds as it does.

A failure of imagination

Some readers may have noticed that I went past my 20-year anniversary of being a sustainable investor earlier in November. We’ve published a separate note summarising some lessons over that time to learn from for the next 20.

Despite much pessimism about the economic and geopolitical outlook today, the quality of companies we can invest in on your behalf has improved significantly over that time. In my view, our portfolios are by far the highest quality they have ever been, measured by future growth prospects, returns on capital and sustainability performance, something which can get lost in the day-to-day of observing markets.

Much of this improvement has come via innovation. If we go 20 years back, the iPhone didn’t exist (it was launched in 2007) and no one would have predicted the profound change it, and other smartphones, would have on society. Who knows what we are failing to predict today?

This itself represents one of the more intriguing problems in investing. No imagination is needed to see the present, and all its problems. Lots of imagination is needed to see the future and all its solutions. What we don’t know about (i.e. the future), is where all the value for investors is created. What we know with certainty (i.e. the past), is less relevant.  

We often find when we have made mistakes, whether by missing opportunities or thinking problems are permanent, it has been due to a failure of imagination. The best investments we’ve made have evolved in ways we could not have foreseen when we made them. Cloud computing and AI barely existed when we first took up a holding in Microsoft, as an example.

It seems likely to us, that 20 years from now, the average company that can be invested in will once again be much higher quality and this will be down to things we cannot foresee today. And just like 20 years ago, I think that sustainable investing is however a great way to be involved in this future, as we progress to a cleaner, healthier, safer, and more inclusive world.


This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.