BlackRock Commentary: Low-carbon transition themes in 2024

Wei Li – Global Chief Investment Strategist together with Chris Weber – Head of Climate Research, Jessica Thye – Sustainable Research and Analytics all forming part of the BlackRock Investment Institute and David Giordano – Global Head of BlackRock Climate Infrastructure, share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.

Key Points

Three themes: We monitor battery prices, elections and market attention on climate resilience for their impact on transition-related investment opportunities and risks.

Market backdrop: U.S. stocks were mostly flat last week, while 10-year U.S. Treasury yields fell further. Markets still expect the first Federal Reserve rate cut around mid-2024.

Week ahead: We’re watching February U.S. CPI data out this week to see how much further inflation will fall in the near term. We still expect inflation to resurge in 2025.

The low-carbon transition is a mega force we track that is shaping investment returns now. We see potentially market-moving developments in three key areas this year. First, falling battery prices could boost demand for energy storage systems for power grids, and electric and hybrid vehicles. Second, elections around the globe could affect future energy and industrial policy. And third, rising physical damages could spur interest in a new investment theme: climate resilience.

Battery prices make up a third or more of the production cost of some clean technologies, such as energy storage systems for power grids, electric and hybrid vehicles (EVs). They have slid sharply over the past decade. See the chart. The 2022 uptick looks to have been a blip, with battery producers signaling potentially sharp price cuts this year – largely due to an 80% price drop in lithium, a key input, after a surge in supply. Intense competition and rapid technological progress are helping reduce prices, too. Some companies are using artificial intelligence – another mega force – to discover new battery materials that could lower future costs. We’re watching whether a further fall in battery prices will feed through to final purchase prices and boost demand for energy storage, EVs and hybrid autos – especially as their running costs are lower than for traditional internal combustion vehicles.

Elections in focus

This year’s many elections, including in the European Union, U.S. and India, come at a time of increasing geopolitical fragmentation and as governments seek to balance decarbonization, energy security and energy affordability objectives – which can be complementary or competing. The election results could have implications for how that balance is struck – and consequently for the evolution and adoption of clean technology, and the path of the low-carbon transition more broadly.

Several governments are subsidizing their energy and clean tech industries, with non-subsidized competitors facing pricing and margin pressure. Countries could levy trade restrictions on imported tech to shield local industries. U.S. and EU investigations into the Chinese EV industry could have this outcome. We could also see changes to transition-related policy after the elections – potentially accelerating the transition in some places and slowing it in others. In India, the election could result in policy continuity, paving the way for quicker decarbonization and bolstering the country’s efforts to become a bigger clean technology production hub. The U.S. election result could have implications for the Inflation Reduction Act – a 2022 law that has spurred major investment in, and demand for, energy infrastructure and technology. Changes could range from repeal or delays to complementary policy that increases its effectiveness, like land permitting reform.

An emergent investment theme

A third focus: whether 2023’s title as the hottest year on record – as recorded by the World Meteorological Organization – and further extreme weather events this year will spark greater investor interest in climate resilience, or society’s ability to prepare for and withstand climate risks. Think early monitoring systems for floods, air conditioning to cope with heatwaves or retrofitting buildings to better withstand extreme weather. We think markets may underappreciate the prospects for firms creating and adopting resilience-boosting products and services – and see this becoming a more recognized opportunity.

Our bottom line

We think falling battery prices could boost the EV and energy storage industries this year. Much depends on the direction of global transition policy after key elections as we weigh transition-related investment opportunities and risks. As physical climate risks mount, we believe climate resilience could come to the fore as an investment theme.

Market backdrop

The S&P 500 was mostly flat on the week after pushing to new highs. U.S. 10-year Treasury yields edged lower and were about 20 basis points off their 2024 high after remarks by Fed Chair Jerome Powell did little to change expectations for a first rate cut around midyear. U.S. jobs data showed a strong if moderating labor market. Wage growth also moderated but remains at levels not consistent with inflation staying at the Fed’s 2% target. We still see inflation on a rollercoaster.

We’re watching the release of the U.S. CPI data for February this week to gauge how much further inflation will fall in the near term after January showed stubborn inflation. Rapidly falling goods prices look set to drive inflation down near the Fed’s 2% policy target this year. Yet once goods prices stabilize, we see inflation on a rollercoaster ride back up in 2025 as wage growth remains elevated and keeps services inflation higher than before the pandemic.

Week Ahead

March 12: U.S. CPI; UK jobs data

March 13: UK GDP

March 15: University of Michigan consumer sentiment survey

March 11-18: China total social financing

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