The fund sharply underperformed the benchmark MSCI World Index this month. It was a quiet month for company news, and without earnings announcements. Despite this, economic sentiments are causing significant rotations between sectors, regions and styles.
These sentiments include fears over the impact of worsening trade relations. You may recall that we wrote about this in our June letter. At the time, we said that there would be ‘lots more twists and turns’. Well, they’ve arrived. And it remains unclear how long they will last for.
But this isn’t the only crosswind at the moment. The trade situation has combined with rising commodity prices to fan fears of inflation. This is feeding into speculation of rising interest rates, particularly in the USA. Those rate rises should in turn dampen growth. Even if they don’t, the consensus now is that American economic growth can only slow from here.
None of these changes favour our stocks. Of them all, the one that is most reliably difficult for our strategy is the emergence of the first signs of slowing growth. A lot of impactful companies are cyclical and sensitive to economic growth. Underperformance in September came from weak performances in the Resource Efficiency, Sustainable Transport and Environmental Services themes. These all share cyclical features.
Over time, it is our experience that the secular sustainability trends that underpin our stocks reassert themselves. But in the early stages of recessionary periods, as the saying goes, the baby often gets thrown out with the bathwater.
The best example of this in September might be our Sustainable Transport theme. Four of our stocks in that theme are exposed to improving vehicle efficiency. Three of them, Aptiv, Hella and TE Connectivity, are leaders in the electrification of cars. The fourth, Norma, will benefit from that trend but also has a big role to play in more efficient internal combustion engines.
In September, the subsector benchmark for these stocks underperformed the broader market. The stocks themselves all underperformed the subsector. They had been comfortably ahead over the previous three years.
And yet meaningful adoption of electric vehicles (EVs) will occur in the next five years. The number of EV models available will jump from 155 at the start of this year to 289 by 2022. The global stock of electric cars has grown by over 50% in each of the last three years. The International Energy Agency can envisage electric vehicle penetration reaching 30% by 2030.
More importantly, the messages from the companies themselves have been consistent. Even as demand for cars softens, the manufacturers are not pulling back from their electric and low-emissions development plans. The commercial imperatives are just too strong.
In the longer term, those imperatives are only strengthened by more expensive fossil fuels. Ironic then that also this month, the Brent crude oil price rose from $77.53 to $82.72 per barrel. This move was driven by geopolitical tensions including with Iran, Russia and the Organisation of Petroleum Exporting Countries (OPEC). Some forecasts have it now rising over $100 for the first time since 2014.
The fossil fuel industry is enjoying this short-term revival. The Energy sector was the strongest performing segment of the broader market in September. That’s investment flowing into a sector which is undermining itself with higher prices.
For those playing a longer game, the real opportunities are elsewhere. Market dislocations like this often make them more apparent. And they offer the opportunity to add to the long-term winners at more attractive prices.
 MSCI World Auto Components Index (Bloomberg ticker MXWO0AP)
 Bloomberg New Energy Finance Electric Vehicle Outlook 2018
 IEA Global EV Outlook 2018
 IEA Global EV Outlook 2018