September 2021 Investment Report

October 22, 2021
Investment Updates

From the recent high in mid-August the S&P/ASX 300 price index had fallen -3.8% to the end of September. Equity markets are becoming worried that the higher level of commodity prices and China’s property woes will potentially result in slower demand growth and limit the economic recovery that is underway, while at the same time generating enough inflation to give rise to stagflationary concerns. Certainly the deflationary environment that has existed in global trade for most of the last decade appears to have given way to higher producer prices in China in recent times (now up 10% yoy).

All the indications we can observe through our company by company research however point to industrial demand remaining solid and there being a strong cycle ahead, coupled with attractive valuations. We believe this will be favourable for our investment style and current portfolio positioning and that the best investment opportunities will be those companies that can participate in the demand recovery and those that can pass on increased pricing through the supply chain. So despite the market appearing to be at a high level historically, the Australian market is largely made up of sectors that can perform reasonably well under the current circumstances and once the current liquidity dissipates it is our view the market will recover.

The current goods supply shortages and global shipping disruptions that are leading to lower volumes of goods reaching their end markets and increased pricing is very different to falling demand for goods and services that occurred in a period such as 2015, when commodities fell. On all accounts demand has stayed strong and commodity prices for energy and base metals are reflecting the underlying fundamentals. Interest rates have moved up from unsustainably low levels to reflect the current economic recovery and the possibility of less bond purchases by central banks. We continue to position the portfolio towards high quality cyclicals and financials with attractive valuations in this environment.

Corporate activity and the IPO market continue on at very active levels and we expect more listed companies will become targets of M&A given the cheap price of money, the available liquidity and the general stability of markets. See attached for full commentary

ESG AND ENGAGEMENT COMMENTARY (see attached for full commentary)

This month Ethical Partners had the pleasure of speaking at an IGCC & PRI webinar about the Net Zero Asset Manager Initiative which Ethical Partners has recently joined.

We were pleased to be able to talk about how closely the goals of the Net Zero Asset Manager Alliance aligned with our own internal Net Zero goals (for the Ethical Partners Australian Share Fund), including the below requirements of the NZAM alliance that Ethical Partners has already actioned.

This included how Ethical Partners has and is:

- Set 2030 interim targets towards our Net Zero 2050 goals; Developing a climate action plan; Working with our clients regarding decarbonisation; Engaging with portfolio companies on real emissions reductions and meaningful transition pathways; Reporting on our progress to the PRI and through TCFD reporting; Maintaining an active stewardship and voting program; Undertaking active collaboration with other investors; Increasing our capital allocation towards climate solutions where there is a compelling investment case; Considering our own climate footprint (we are now certified Carbon Neutral in our own operations).

The last month has also included the UN Food Summit, the International Day of Awareness of Food loss and waste, and the privilege for Ethical Partners of interviewing Ronni Khan, the inspiring founder of OzHarvest.

The world is not on track to achieve SDG 12.3 –and staggeringly, 14% of food produced is lost between harvest and retail, while an estimated 17% of total global food production is wasted. This food waste equates to $1 trillion per year in economic losses and 25% to 33% of all food related GHG emissions. In Australia alone, we waste 7.3 million tonnes of food per year – and a disturbing 300kg per person. At the same time, 1 in 9 people go to bed hungry each day, a situation that has also been exacerbated by COVID. And with the global population projected to reach over 9 billion by 2050, we will require a 70% increase in food production – whist simultaneously land suitable for farming is shrinking by 5 million hectares every year, soil quality and agricultural yields are decreasing, weather extremes and physical risk impacts on crops are increasing, we need to cease deforestation and land clearance for agriculture, and poverty and inequality is increasing.

It is very clear then, that food waste is one of the first and most crucial steps in addressing both climate change (SDG 13), life on land and biodiversity loss (15), the increasing global hunger challenge (SDG2) and poverty and inequality (SDG’s1 and 10). Ethical Partners believes that are real opportunities for companies in addressing food waste, including increasing profits and helping to create better supply chain management and efficiencies. There are also clear reputational and financial risks to those businesses who are not addressing these issues. This in turn then is obviously an important consideration for investors and therefore we believe there is an important opportunity and responsibility for investors to work with companies to encourage them to better address food waste and create more efficient food systems.

It is for these reasons that Ethical Partners remains committed to addressing the world’s twin crisis of food security and climate changes and the intersection of both these challenges, through our EPORA investment process, our portfolio investment focus on sustainable agriculture and through our engagement and advocacy.

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