In the wake of the COP26 summit last month, Janus Henderson has released its outlook for natural resources in 2022 and beyond.
The firm’s head of global natural resources, Daniel Sullivan, said that the next two years would be critical for ramping up global decarbonisation efforts, with a number of “decarbonisation mega trends” set to drive the resources sector.
“Funding for this enormous transition is being committed at all levels of society, with governments, companies, cities, communities and individuals all playing a significant role,” said Mr Sullivan.
The “very progressive and potentially attractive” investment areas identified by Janus Henderson were related to metals required for electric vehicles, the switch from fossil fuels to renewable energy and innovation in the area of healthy food that better utilises agriculture.
“From an investment perspective, producers of electric metals – i.e., those that are required for the electrification of transport, such as copper, nickel and lithium appear attractive, as do companies that facilitate carbon capture, enable or produce renewable energy and those that finance and create credits for the voluntary carbon market,” said Mr Sullivan.
Large natural assets such as forests also provide a compelling opportunity according to the asset manager, not only for their ability to sequester carbon but also for their use as a renewable resource.
“Timber construction materials can replace those that have a high-carbon content, like concrete or steel, while trees can be used to make bioplastics, or biofuels or wood pellets for making electricity,” said Mr Sullivan.
Janus Henderson said it had a positive view on the miners as free cash flow improves in the current part of the cycle, potentially supporting stronger returns to investors from share buybacks and higher share prices.
Despite some disappointed reactions to COP26, Mr Sullivan highlighted a number of positive outcomes that had resulted from the meeting.
“One hundred twenty-six countries, including the US and China, are on the right path, they are just not travelling quickly enough,” said Mr Sullivan.
“The shift to meeting annually rather than every five years means that there will be constant pressure to increase the speed of travel on those countries that are lagging.”
He said that the framework for emissions trading established as part of the Paris rulebook had set the stage for an international carbon market that will support further investment and development of nature-based projects and emissions reduction projects.
While the final agreement from COP26 was changed to commit to a “phase down” of coal rather than a “phase out”, Mr Sullivan eliminated any uncertainty surrounding coal’s future.
“Make no mistake, coal is definitely on the way out, with many investors avoiding coal producers,” he said.
Janus Henderson remains optimistic about natural resources companies moving forward as the “nexus of sustainable development and decarbonisation” according to Mr Sullivan.
“While 2022 may see a pause after a very strong run, a multi-decade runway lies ahead as the world moves towards net zero,” he said.
“This means that the medium-term outlook for metals, energy, agriculture and certain industrials and their potential to change the world for the better is, in our view, incredibly exciting.”
