The Point

Impact investing: Look around for opportunities in the circular economy

By now most people know they need to understand the impact of the Net Zero movement on their investments.

Countries including Australia are pressuring companies to help reduce emissions to zero by 2050 – in order to limit a global temperature rise to 1.5°C above pre-industrial levels.

Science shows that’s the level needed to avert the worst impacts of climate change.

But “impact investors” believe many of the activities needed to achieve net zero are also an investing opportunity.

Regnan fund manager Mohsin Ahmad points to companies taking part in the so-called “circular economy”, which aims to transition away from the linear “take, make and dispose” model.

“In terms of getting to Net Zero, energy efficiency and switching to renewables is only going to solve half the problem,” says Mohsin.

“To get the rest of the way, we need to look closely at how we make and use products, and that’s where the circular economy comes in.”

Regnan: Investors are still not getting the ESG disclosures they need

It’s been five years since the UN’s Task Force on Climate-related Financial Disclosures began trialling voluntary, consistent climate-related risk disclosures for companies.

Some 80 per cent of global companies are disclosing in line with at least one of the 11 recommended disclosures.

But investors still need to see improvement in ESG-related disclosures, says Alison Ewings, who engages with ASX companies for sustainable leader Regnan.

Regnan research shows disclosures are often narrow in scope and largely ignore system-wide interdependencies and different economic scenarios.

“Companies do a good job of analysing the impacts of climate change on physical locations,” says Alison.

“But it is very rare, for example, to see consideration of the infrastructure on which they also rely on like the transport networks that move things to and from those sites.”

Emerging markets: take care when choosing Asian tech stocks right now

July was a strong month for emerging market equities, with the MSCI EM index returning 6.2%.

Not surprisingly, the strongest gains were in the tech sector — especially stocks with exposure to electric vehicles or artificial intelligence.

While these upward moves could continue, Pendal’s EM team sees “multiple signs that there may be excessive optimism in some of these stocks”.

For example, in Korea, EV and battery stocks represented nearly half of stock market turnover on some days in July, driven by retail investor leverage rising to a record 10 trillion South Korean won.

Chinese EV maker XPeng rose 74% in July, despite expectations it will lose $1.2 billion on $4.5 billion in sales. Meanwhile, some high-quality, large-caps with proven track records and technologies were laggards.

“Some parts of the EM equity space look particularly inefficient right now,” says the team.

Emerging markets: Stimulus unlikely but China opportunities remain

China is struggling with a slowing economy – leaving markets searching for signs of stimulus from Beijing.

Despite some recent market excitement, a quick stimulus package is unlikely, says Paul Wimborne, co-manager of Pendal Global Emerging Markets Opportunities fund.

“We think the key priority for the Chinese government remains building long-term economic and financial system resilience and growth hasn’t yet fallen to the levels that would lead them to aggressively stimulate.

“We think they will continue to push through mini stimulus measures in certain areas where they would like to encourage growth — but we don’t think they’re at a point where we’ll get a big stimulus plan.”

Still, there are opportunities to be found for investors.

“There are parts of the economy we are happy to get exposure to — and parts that we would like to avoid,” says Paul.

Emerging Markets: What’s driving Indonesia’s resurgence

Indonesia’s economic outlook has been attracting the attention of investors recently.

Why so?

Pendal’s Paul Wimborne says an improved trade balance on strong exports of commodities like palm oil, coal and nickel is paving the way for a resurgence in domestic demand.

“Indonesia is at that sweet spot in the cycle where the export side of its economy is doing well, the currency has the potential to go stronger, and domestic demand – which has been subdued for 10 years – looks like it could pick up.”

South-east Asia’s biggest economy is also benefiting from a government push to encourage more manufacturing and reform labour markets, says Paul, who co-manages Pendal Global Emerging Markets Opportunities fund.

Paul’s preferred exposure to Indonesia is via companies that benefit from rising domestic demand, such as banks, retailers and auto dealers.