HAMISH MCRAE: Investors will make as much from companies aiming to be carbon-neutral as from those that can’t or won’t
The Dow took its time to get to 36,000, but last week it got there at last. And there is a message there for anyone wondering how the current concerns about the environment might change investment over the coming decades.
Step back a moment. Dow 36,000: The New Strategy For Profiting From The Coming Rise In The Stock Market, was the title of a best-selling 1999 book by James K. Glassman and Kevin Hassett.
They predicted the Dow Jones Industrial Average index of large US companies would reach that level in the next three to five years.
When they wrote that year, the Dow was pushing towards 19,000, having more than doubled in the previous five years, so the idea that it might double again did not seem too outrageous. But it was completely wrong, and the authors have had to live with their bosh prediction ever since.
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That is not to jeer. Anyone who writes about financial markets is going to get things wrong. I will own up to some pretty bad calls myself.
Rather it is to point out that the Dow is not really a true reflection of the direction of the American economy, just as the FTSE100 index is not one of the UK.
The Footsie, by the way, has had a very poor couple of decades, for it ended 1999 at 6,930, where it was in September before the recent uplift.
The Dow represents solid America, with just 30 giant companies. Those members change as enterprises rise and fall. But while it does have both Apple and Microsoft in there, it does not have Amazon, Facebook or Google – and it certainly does not have upstarts like Elon Musk’s Tesla.
Instead there are Boeing, Johnson & Johnson, JPMorgan Chase, Merck, McDonald’s, Walmart and so on. It is the American business aristocracy, not the noisy disrupters. Go back 20 years and most of those disrupters either did not exist or were in their infancy.
Amazon was founded in 1995, Google 1998, Tesla 2003, and Facebook 2004. Investors were mesmerised by the dotcom boom, for it was that which was driving share prices to their peak at the end of 1999 and early 2000.
We all knew that communications technology was changing the world economy. But it was almost impossible to see quite who would benefit and who not.
Now look at how environmental concerns might change things. Mark Carney, former Governor of the Bank of England and co-chair with Michael Bloomberg of the Glasgow Financial Alliance for Net Zero, has assembled a package of measures with the headline total of $130trillion.
That is a mind-bogglingly huge number, roughly the same size as the value of global equities – all the companies quoted on stock exchanges around the world – and much bigger than annual global GDP of some $95trillion. When you try to work out what is actually new funding, where the money is supposed to come from, and when, it all becomes rather cloudy.
So I think it is more helpful to focus on Mark Carney’s message. In an interview on Bloomberg TV, he said that there’s no reason to expect that investors who follow low-carbon strategies should have to make do with lower returns than they would if they invested in regular industries.
You see what he is saying? It is that you will make as much money by putting your cash into companies and industries that aim to be carbon-neutral, as you will in those that either can’t or don’t try to reach that goal of net zero.
None of us can know whether that will be proved right or wrong, any more than anyone could say in 1999 how the prediction about the Dow would look in ten or 20 years’ time. But I think the lessons from that Dow 36,000 book are very relevant now. Here are three.
One is that the companies that prosper will be those that adapt to social and economic change.
For example, retailers that realised they needed online strategies could mount a better defence against Amazon than those that didn’t.
A second is that solid, successful enterprises, such as Apple and Microsoft, can still be leaders in 20 years’ time.
Third, it simply is not possible to envisage where the opportunities from the shift to net zero will arise.
Many of the Facebooks and Teslas of tomorrow that will drive that movement do not now exist. The task is to spot them and back them when they are still in their infancy. That is easier said than done – but at least it is clear where the challenge lies.