Ethical Investment Jan 23 Global Report

Market Update

While 2022 was dominated by investor concern over accelerating inflation, rising interest rates and supply chain disruptions, 2023 started with signs of disinflation and hopes of an economic soft landing. China's economic reopening and easing global supply chains also added to the positive sentiment, driving most major equity indices higher.

In the US, the S&P 500 Total Return Index returned 6.3% over the month, and in Europe, the Euro STOXX 50, Germany DAX, and FTSE 100 total return indices returned between 4.3% and 9.9% over the month. In Australia, the S&P/ASX 300 Index returned 6.3%. 

Values Based Capitalism

In January, Treasurer Jim Chalmers outlined a path towards pursuing "values-based capitalism" in a 6,000-word essay entitled "Capitalism After the Crises." He proposed more public-private co-investment and collaboration to direct capital towards societal areas in need, such as renewable energy, and overhaul key economic institutions and markets.

Furthermore, he prioritised ensuring an orderly energy and climate transition, building a more resilient and adaptable economy, and achieving growth that prioritises equality and equal opportunity. He argued that the traditional economic model would not be successful in delivering prosperity for Australians, particularly given the sluggish real wage growth and increase in inequality observed since the Global Financial Crisis.

Since the Treasurer's essay implies a larger role for governments and a shift away from the free-market approach to which we have become accustomed, there are concerns among market participants. However, we share many of the Treasurer's concerns. Although new and different frameworks will need to be applied, we think it is important to invest in alignment with our values. Many other "ethical" strategies simply avoid companies that are causing harm. However, like the Treasurer, we believe it is important to direct capital towards companies and industries that positively contribute to the world, achieving social and environmental outcomes beyond financial goals alone.

Portfolio Snapshot

During the month, the Fund returned 5.8% by investing in high-quality Global growth companies that are making a positive impact on the United Nations Sustainable Development Goals. Our portfolio companies, typically have global operations and are making an impact around the world.

Our portfolio companies also have industry leading business practices and are facilitating the transition to a more sustainable future through their investments and internal policies. They have taken initiatives to address important issues such as inequality and climate change within their respective organisations.

Portfolio News

Tesla

Tesla reported a robust finish to the year, with revenues of US$24.3 billion for 4Q22, representing a year-over-year increase of 37%, and a net income of US$3.7 billion, a year-over-year increase of 59%. During the period, the Automotive division of the company increased its revenue by 33%, reaching US$21.3 billion, and delivered 405,278 vehicles, which was a 31% increase.

In addition, the Energy Generation and Storage division of Tesla saw a 90% increase in revenues, amounting to US$1.3 billion, and storage deployed grew by 152%, reaching 2.46 GWh. For reference, an average US household consumes 0.01 GWh per year. Although this division is currently a small part of the overall business, it is expected to become more significant in the years to come and be on par with the Automotive division.

Elon Musk, the CEO of Tesla, mentioned in the conference call in January 2023 that the company is experiencing the strongest orders in its history, following demand concerns towards the end of 2022. The company has set a delivery target of 1.8 million vehicles this year, with the potential to deliver 2 million vehicles if demand remains strong. Furthermore, new products, such as the Cybertruck and mass-market vehicles, are expected to be launched in the coming years.

ResMed

In January, ResMed announced their 2Q22 results, with group revenues growing 16% year over year or 20% in constant currency to US$1,033.7m. Despite increasing average selling prices, the company's gross margin contracted by 30 basis points to 56.1%. This was primarily due to higher sales growth in lower margin devices compared to sales growth in higher margin masks and accessories. Unfavourable currency movements also contributed to declining margins. The company saw strong revenue growth of 26% in the US, Canada, and Latin America, due to increased production from improving chip supplies, and supply challenges faced by its competitor. Revenue in Europe, Asia, and other markets grew by 8% in constant currency and the company’s Software-as-a-Service revenue increased by 18% including the MEDIFOX DAN acquisition.

After Tesla’s severe stock price decline in 2022, we recommenced increasing our position, and is now our largest weight in the portfolio. We remain excited about both Tesla and Resmed over the long term and they are both important positions in the Fund.

This note has been prepared by ELM Responsible Investments (‘ELMRI’) ABN 70 607 177 711 AFSL 520428, for Australian wholesale clients for the purposes of section 761G of the Corporations Act 2001 (Cth).

The information is not intended for general distribution or publication and must be retained in a confidential manner. Information contained herein consists of confidential proprietary information constituting the sole property of ELMRI and its investment activities; its use is restricted accordingly.

This note is for general informational purposes only and does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of preparation and presenting and all forecasts, assumptions, opinions, data and other information are not warranted as to accuracy or completeness and are subject to change without notice. This is not an offer document and does not constitute an offer or invitation of investment recommendation to distribute or purchase securities, shares, units or other interests to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this note. Any potential investor should consider their own circumstances and seek professional advice.

ELMRI funds, its directors, employees, representatives and associates may have an interest in the named securities.

Past performance is for illustrative purposes only and is not indicative of future performance.