I fielded a question at an investor meeting this week: “What should you do when your gut feeling says the stock market cannot rise any further but the interest rate on deposits is still zero?” I think there are many of us who can feel these reservations. The big underlying issue is how we feel about the economy. Is this just a pause or are we heading for a fall, and in that case how steep a fall? Economic fluctuations are tricky. They rarely come when you expect them, and they are even more rarely calm and rational since the market constantly overreacts. And both Brexit and a trade war are lurking in the shadows, reinforcing the uncertainty. Nonetheless, the stock market has been exceptionally strong at the start of the year and it is difficult to find good alternatives to shares when interest rates are so low. So, what should we turn to if we have that gut feeling the questioner expressed at the seminar?
If there is a general stock market downturn, most companies will naturally be dragged down. However, we believe that investments in companies that benefit from long-term and sustainable trends that can deliver profitable growth over time can manage better, more less independently of the state of the economy. The global transition to a more sustainable world will generate clear winners (and losers) over time, and it is still possible to identify companies that are underappreciated by the market. There are many examples of sustainable trends, including renewable energy, energy efficiency, sustainable production and secure supply chains. I would like to spend a little time talking about plastics, our changing view of plastics and the opportunities this opens up for companies and investors.
Structural trends like urbanisation, population growth and changes in the way we eat and consume have increased our use of disposable products. The majority of these are made of plastic, including straws, cotton buds, cigarette butts, food packaging and bags. Although these products are only intended to be used once, they are often made from materials that take hundreds of years to break down. And the fact that a large proportion of all disposable products end up in the oceans is devastating for both the environment and the food chain. The doomsday prophets suggest that there will soon be more plastic in the seas than fish, and it has become increasingly apparent that this is unsustainable.
It takes time to change people's attitudes and consumption patterns, especially when it comes to such everyday products, but we now seem to be approaching a tipping point in how we look at plastics. Ordinary people, leading policymakers and the international community are all reacting and acting. We are seeing more and more regulation and initiatives to reduce overall plastic use, in order to collect and recycle a larger proportion of the plastic we produce. Innovative alternatives to plastic products in the form of fibre-based materials could gain ground. There are many examples. India, China, France and the UK all have initiatives in place to phase out single-use plastics in the coming years. Cities such as New York, Hamburg and Seattle have introduced bans, and the EU has presented a legislative proposal on the reuse and recycling of plastics. There is a clear rate of increase in planned new deposit and recycling schemes in the wake of all this. Being on the right side of the trend will be crucial for a wide range of companies and sectors, and could mean great opportunities for companies that already have an alternative, a transition for those that do not, and lost market share for any that fail to adapt their offering.
We believe this trend is also underestimated, partly because the market is never able to fully price in long-term trends, and partly because the regulatory playing field has not yet been fully laid out. But growth is there for companies that can deliver a solution to the problem. So, what companies can we identify that will gain from this? Thematically, of course, deposit company Tomra will benefit, as will packaging companies Billerud and Huhtamäki, which produce substitutes for plastic products, and Valmet, which supplies the machines. Another category of winner is forest products companies like SCA, Holmen and StoraEnso, which own the raw material in the form of forest and which supply pulp and pulpwood.
As an active manager, we try to create value for our unitholders in all market conditions. By adding the puzzle piece of sustainability to our traditional broader analysis we hope to improve the accuracy of our company assessments. This is how sustainability finds a place in Catella's investment process. When stock markets are facing concerns, we place our confidence in investing in profitable companies backed by a structural trend. This gives a better prospect of getting through more volatile periods.