BlackRock Commentary: Don’t ignore climate risks in portfolios

Wei Li, Global Chief Investment Strategist together with Paul Bodnar, Global Head of Sustainable Investing, Chris Weber, Head of Climate and Sustainability Research and Vivek Paul, Senior Portfolio Strategist, all forming part of the BlackRock Investment Institute, share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.

Severe climate events around the world this year have intensified debate around the effects of climate change and the risks they pose to portfolios. Investors should no longer view the transition to a low-carbon economy as a distant event only, in our view, as it is happening here and now. Climate risk is investment risk, and the narrowing window for governments to reach net-zero goals means that investors need to start adapting their portfolios today, in our view.

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For illustrative purposes only. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise – or even estimate – of future performance. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream and Bloomberg, August 2021. Notes: The chart shows the difference in U.S. dollar expected returns over the next five years from August 2021 for four sectors of the MSCI USA Index in our base case of a “green” transition (policies and actions taken to mitigate climate change and damages, and to limit temperature rises to no more than 2 degrees Celsius by 2100) vs. a no-climate-action scenario. The estimated sectoral impact is based on expected differences in economic growth, corporates earnings and asset valuations across the two scenarios. Professional investors can access full details in our Portfolio perspectives  and CMAs website

 

The latest report from the United Nations’ Intergovernmental Panel on Climate Change (IPCC) confirmed the accelerating global warming. It assesses that greenhouse gas emissions from human activities are responsible for about 1.1 degree Celsius (or about 2 degrees Fahrenheit) of warming in average global temperatures since the 19th century, and the warming will continue for decades even if immediate actions are taken to sharply reduce emissions. The IPCC still sees a narrow window for limiting warming to 1.5 degree Celsius if there is a coordinated effort to achieve net-zero emission by 2050. Our climate-aware return assumptions assume a successful transition to a low-carbon economy consistent with Paris agreement goals, and that will deliver an improved outlook for growth and risk assets relative to doing nothing. We see climate-resilient sectors such as technology and healthcare likely benefitting the most from a “green” transition, and carbon-intensive sectors with less transition opportunities such as energy and utilities likely lagging. See the chart for return assumptions in our base case vs. a no-climate-action scenario.

Attention on climate change is running high – as extreme weather events have occurred frequently in recent years. The increasing frequency of these events will continue even if global warming is limited to 1.5 degree Celsius, according to the scientific consensus reflected by the IPCC. Severe heat waves that happened once every 50 years in the pre-industrial world are now happening roughly once a decade, and will likely occur once every six years in a 1.5 degree scenario, according to the report. This IPCC report, focused on the physical science of climate change, is one of the four the UN panel plans to release between now and September 2022. The other three will focus on the impact of climate change on society and on natural systems, as well as on the pathways to achieve net-zero emissions. Global governments are due to meet in late October at a key UN climate conference to discuss how to accelerate efforts to achieve their net-zero goals.

Extreme weather events have helped elevate climate risk to a key concern among investors. Consider the two baskets of climate risks: physical risks (think of hurricanes and wildfires and their potential damages to real assets) and transition risks (financial risks arising from the transition to net-zero, stemming from changes in taxes, regulation, technology and business models). The window for a successful transition to net-zero by 2050 – a goal set by many governments – is shrinking, as pointed out by the IPCC. We could see the window for positioning portfolios shrinking too. Accelerated actions to reach net-zero would drive transition risks to be more rapidly priced in by financial markets. Absent that, we would likely see continually accelerating physical risks as a result. Altogether, the pathway to net-zero remains a highly uncertain one, but regardless of the path taken, we see the implications on portfolios accelerating.

The bottom line: We are still in the early stages of a tectonic shift toward sustainable investing, and the full consequences of this shift are not yet in market prices. We expect “green” assets that are likely to benefit from the transition to a low-carbon economy to outperform during this shift. This is one reason for investors to keep tabs on the progress of climate change and that of climate transition. We see two key aspects in the climate transition: technology and policy. The tech transition has already begun in some key sectors such as utilities and autos, and as the window to achieve net zero by mid-century narrows, we expect policy levers to be pulled harder – and this could result in a steeper transition. We believe doing nothing about climate change in portfolios is no longer an option.

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Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream as of August 12, 2021. Notes: The two ends of the bars show the lowest and highest returns at any point this year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are, in descending order: spot Brent crude, MSCI Europe Index, MSCI USA Index, ICE U.S. Dollar Index (DXY), Bank of America Merrill Lynch Global High Yield Index, MSCI Emerging Markets Index, Refinitiv Datastream Italy 10-year benchmark government bond index, Refinitiv Datastream Germany 10-year benchmark government bond index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index, Refinitiv Datastream U.S. 10-year benchmark government bond index and spot gold.

 

Market backdrop

The U.S. Senate approved the $1.2 trillion infrastructure bill that will now await a vote at the House of Representatives. Congress will take up the $3.5 trillion spending package covering healthcare, child and elder care, education, environment and other areas after the August recess. The two bills combined would likely provide a boost to annual growth of between 0.4-1.5 percentage point in 2022 and 2023, and have muted impact on medium-term inflation as higher spending will likely be offset by greater productivity, according to consensus expectations.

Week Ahead

  • August 16 – China retail sales and industrial output

  • August 17 – U.S. retail sales, industrial production

  • August 18 – Federal Open Market Committee (FOMC) July meeting minutes; UK inflation

  • August 19 – U.S. Philly Fed Manufacturing Business Outlook Survey

Investors will watch the minutes of the FOMC’s July meeting for details of any deliberations on asset purchase tapering. The Philly Fed survey and retail sales data in the U.S. will also be in focus to gauge the state of the restart. Retail was a key laggard in the latest U.S. employment report, as brick and mortar retail still felt the pressure by the rise of e commerce amid growing concerns over the delta variant.


BlackRock’s Key risks & Disclaimers:

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of August 16th, 2021 and may change. The information and opinions are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets. 

Issued by BlackRock Investment Management (UK) Limited, authorized and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL.


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Notes from the Trading Desk – Franklin Templeton

Franklin Templeton’s Notes from the Trading Desk offers a weekly overview of what their professional traders and analysts are watching in the markets. The European desk is manned by eight professionals based in Edinburgh, Scotland, with an average of 15 years of experience whose job it is to monitor the markets around the world. Their views are theirs alone and are not intended to be construed as investment advice.

The Digest

Last week saw quiet summer trading volumes for many markets and with corporate earnings season ending, there was less news flow, too. In that context, the path of least resistance appeared to be upwards, with European and US stock market indices grinding up to new all-time highs. On the week, the MSCI World Index traded up 0.9%, the STOXX Europe 600 Index up 1.2%, S&P 500 Index up 0.7%, while the MSCI Asia Pacific Index was unchanged.

European Outlook into Year End

With European markets some 20% higher year-to-date (YTD), thoughts naturally turn to what we can expect into year end, given we have had such a strong start to the year. In addition, after 10 days of gains for the STOXX Europe 600 Index, we are starting to see some overbought conditions on some technical measures; for example, the Eurostoxx 600 Relative Strength Index (RSI) is now at 70.5, with 20% of the index components overbought, the highest level this year.

With that in mind, we have read a number of positive research reports from various market constituents in regards to Europe’s outlook. The big picture generally appears positive, but risks include the Delta variant and supply-side problems.

Despite the strong performance this year from European equities, it seems many investment banks still see further gains for European equities into year end, with a robust economic recovery underpinning strong corporate earnings. Risks do remain, but it seems most are comfortable looking through these. German elections are coming up in September, so there is event risk in coming months to keep in mind.

The Week in Review

Europe

It seems the adage of “never be short a quiet market” held true recently as European equities saw their tenth consecutive all-time high, their longest run of record high sessions since 1990. The STOXX Europe 600 Index ended last week up 1.2%, with Italy’s equity benchmark up 2.5% and Swiss equities up 2.3%, leading the way higher. These indices were helped by outperformance of insurers and banks, thanks to the move in yields. However, with many market participants out on summer holidays, market volumes have been low—often down 25%-30% on recent averages—with last week being one of the quietest weeks of the year in terms of European market trading volumes.

Looking at macro data last week, the most notable data point was the weaker German ZEW sentiment survey. The August ZEW investor expectations survey came in at 40.4, and the Current Conditions Index at 29.3, both lower than expected, suggesting concerns over the Delta variant weighed on sentiment.

In the United Kingdom, gross domestic product (GDP) for the second quarter (Q2) was in line with expectations, coming in at 4.8% quarter-on-quarter, the third-highest quarterly growth since 1955. It is worth noting expectations for third-quarter (Q3), growth are lower (at 2.4%) as the Delta variant wave in July impacted activity.

Capital markets were extremely quiet last week with so many market participants on holiday. However, it feels like we are in the calm as the eye of the hurricane passes over. The European deal pipeline is going to be extremely busy again come September and we will start hitting the lock-up expiries for the initial public offerings (IPO) from the first half of the year

United States

US equity markets hit new all-time highs last week as stocks pushed on amidst low volumes. The S&P 500 Index closed at 4468, up 0.7% for the week. The Dow Jones Index outperformed, up 0.9%, whilst the Nasdaq was the relative laggard, up 0.2%. Stocks have ground higher during the narrow summer trading, helped by a rapid pace of earnings growth for America’s largest companies. Sector performance was mixed last week, but materials outperformed on the week, helped by progress in the Senate on the infrastructure bill. Consumer staples and financials were also strong. The energy sector was the only sector to finish in the red last week. Meanwhile, technology, consumer discretionary and real estate investment trusts (REIT) all finished near flat.

Nearly all of the S&P 500 companies have released quarterly earnings, and reports show more than 80% have topped projections, and earnings have beaten expectations by about 16%, as of this writing. Overall, second-quarter expectations are for revenues and earnings growth of 25.7% and 86.8%, respectively, as companies have been beating on both revenues and earnings-per-share (EPS).

The US infrastructure bill remains a focus for equity markets, and it edged closer last week. On Tuesday, the Senate passed a bipartisan bill of around US$1 trillion by a vote of 69 to 30, which included US$550 billion of new spending. The bill includes US$110 billion for US roads; US$73 billion on clean energy sources; and US$65 billion on implementing high-speed internet in rural or low-income communities. The deal is not yet finalised and needs to be voted on by the House before it can be signed into law; Speaker Nancy Pelosi had said the House will not take up the matter this month, instead focusing on the US$3.5 trillion budget resolution. However, nine moderate House Democrats have signed a letter to Pelosi threatening to withhold support from a US$3.5 trillion budget blueprint until a bipartisan infrastructure package is signed into law. “It’s time to get shovels in the ground and people to work,” the Democrats wrote in the letter, dated 12 August. The moderates’ stance risks unraveling Pelosi’s plans to bring the budget resolution to a vote in the House the week of 23 August. Pelosi’s slim margin of control means she can only afford to lose three members of her caucus in a vote on the budget.

Rhetoric on tapering by the Federal Reserve (Fed) members continued last week. Atlanta Fed’s Raphael Bostic (voter) said that he is in favour of starting to hike interest rates in 2022, but could back a September taper decision if jobs growth proves to be explosive. Boston Fed’s Eric Rosengren (non-voter) called for tapering by the end of the year as he stated that bond buying is no longer helping to create jobs but is driving up house and car prices. Kansas Fed’s Esther George (non-voter) agreed, as she sees it as a time to “dial back the settings”. Meanwhile, Dallas Fed’s Robert Kaplan (non-voter) called for gradual, balanced tapering starting soon.

In terms of macro data, there was much anticipation about the US Consumer Price Index (CPI) print. However, it was something of a non-event as the data was very much in line with expectations, with the headline reading up 0.5% month-over-month and up 5.4% year-over-year. The University of Michigan Consumer Confidence survey was weaker than expected, at 70.2, suggesting concerns over the Delta variant are weighing on sentiment.

Asia-Pacific

Asian equities underperformed their peers in the other regions last week, with the MSCI Asia Pacific Index closing down six basis points (bps). Concerns over regulatory curbs in China continue to dominate, with weakness in the technology sector behind the region’s underperformance as the government has signalled more regulation in coming years. The sector led the way lower in Asia. Nonetheless, Chinese equities outperformed in the region, with the Shanghai Composite Index closing the week up 1.7%. Australian equities were up 1.2% despite weaker iron ore prices on the back of disappointing Chinese import data. South Korean equities lagged on the week, down 3%, with confirmed COVID-19 infections hitting a new high there on Tuesday.

COVID-19 trends in Asia continued to worsen last week. Cases in South Korea rose to a record 2,200 last Tuesday and there are concerns that the outbreak there could be exacerbated by the long weekend. The Japanese government is likely to extend the state of emergency this week as daily cases there top 20,000. In Australia, the government has extended the lockdown in Melbourne, alongside Sydney which is in its eighth week of lockdown. The picture appears to be improving in China, where local cases have fallen for four straight days and as regional health authorities aim to end the outbreak by the end of August.

This morning’s Chinese macro data disappointed. Industrial Production (IP) for July was up 6.4% year-on-year, which was lower than anticipated amid continued disruption from recent flooding and Delta variant outbreaks. Retail sales were up 8.5%, but also missing expectations with the outlook challenged given further COVID-19 outbreaks hitting services and travel sectors this month.

The Week Ahead

This week, the focus in Europe from a macroeconomic perspective is the Eurozone Consumer Price Index (CPI) report on Wednesday, with inflation trends and expectations a key market driver in recent months. The Eurozone GDP report on Tuesday will also be in focus. In the United Kingdom, employment figures are due on Tuesday, followed by the CPI report on Wednesday and retail sales on Friday—all of which will be closely watched.

Outside of Europe, US retail sales, industrial production and housing starts are expected to garner attention through the week. The FOMC is also due to release its minutes from July’s meeting on Wednesday, where no changes were made to the policy decision. The minutes are likely to show that the committee are divided on the timing of tapering.

Monday 16 August:

  • UK house prices
  • Japan GDP
  • US empire manufacturing
  • China IP, retail sales

Tuesday 17 August:

  • UK unemployment rate, weekly earnings
  • Eurozone construction output, employment, GDP
  • US retail sales, IP, manufacturing production, capacity utilisation, business inventories

Wednesday 18 August:

  • UK CPI, Retail Price Index (RPI)
  • Eurozone CPI
  • US housing starts
  • Japan trade balance
  • FOMC meeting minutes

Thursday 19 August:

  • Switzerland exports/imports, industrial output
  • Eurozone current account
  • US initial jobless claims, leading index

 Friday 20 August:

  • UK consumer confidence, retail sales

 


Franklin Templeton Key risks & Disclaimers:

What Are the Risks?

All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. Past performance is not an indicator or guarantee of future performance.

This article reflects the analysis and opinions of Franklin Templeton’s European Trading Desk as of 16th August 2021, and may vary from the analysis and opinions of other investment teams, platforms, portfolio managers or strategies at Franklin Templeton. Because market and economic conditions are often subject to rapid change, the analysis and opinions provided may change without notice. An assessment of a particular country, market, region, security, investment or strategy is not intended as an investment recommendation, nor does it constitute investment advice. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy. This article does not provide a complete analysis of every material fact regarding any country, region, market, industry or security. Nothing in this document may be relied upon as investment advice or an investment recommendation. The companies named herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. Data from third-party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered by FT affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction. 

Issued by Franklin Templeton Investment Management Limited (FTIML) Registered office: Cannon Place, 78 Cannon Street, London EC4N 6HL. FTIML is authorised and regulated by the Financial Conduct Authority.


MeDirect Disclaimers:

This information has been accurately reproduced, as received from Franklin Templeton Investment Management Limited (FTIML). No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

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