Please find below our interim Investment Market Update as at 13th August 2021.
Blue Sky Investment Market Update
Red alert on climate change
The headlines have been dramatic, and the reporting has been sensational, but there is no doubting that everyone is aware that there is a need to accelerate our commitment to a low carbon future.
The United Nations report which was published this week found that the global surface temperature was slightly over 1°C higher in the decade between 2011-2020 than between 1850-1900, with the past five years being the hottest on record. The study, by the UN’s Intergovernmental Panel on Climate Change, collated and reviewed information from over 14,000 scientific papers and came to the evaluation that humanity’s role in global warming is both overwhelming and unequivocal.
It commented that current efforts to stem the warming of the planet have so far been unsuccessful. A temperature increase of 1.5°C, initially projected to occur by 2040, is now anticipated to happen by 2030.
This report is a “code red for humanity“, said UN Secretary-General, António Guterres.
So, what is needed?
There is often lots of rhetoric which is not always underpinned by substance, but Boris Johnson said that the report makes for “sobering reading” ahead of November’s COP26 Climate Summit in Glasgow. “We know what must be done to limit global warming – consign coal to history and shift to clean energy sources, protect nature and provide climate finance for countries on the frontline,” he said.
World leaders and activists from all over the world were prompt to react to the alarming report.
Investors primed to act
If anyone was in any doubt whether investment into the sustainability space was a fad, as opposed to a lasting phenomenon, then this report should finally put paid to such thinking.
We’ve been investing in sustainable assets at Blue Sky since late 2018. Not that we didn’t believe in sustainability before, more that we found it difficult to invest with confidence as the data was patchy and we felt that we needed to understand which companies were truly embracing sustainable values.
The market has since opened up and, before long, will become mainstream. In just a few years’ time, it is likely that most funds on offer will be sustainable and there will be no need for this classification.
Under the 2015 Paris Climate Agreement, world leaders committed to try to limit global warming. As reported in Euro news, the United Nations Environment Program Executive Director, Inger Anderson stated:
“the world listened but did not hear. The world listened but it did not act strongly enough.”
According to Investment Week, UK based energy companies have long touted their commitments to a green transition, but debate and speculation are still rife as to whether their transition strategies will be beneficial for both the environment as well as investors.
Yet, as evidenced in the report, the need for change within carbon-intensive industries is paramount. Expect accelerated commitment from governments and industry in the sustainable space. Not only is this desirable for all our lives and the nature around us but from an investment point of view, the 95% of clients who invest in our sustainable portfolios should be very encouraged.
I have just written indirectly about how we need to wean ourselves away from fossil fuels and, according to our investment partners LGIM, we may be about to see a fall in the price of commodities. Nothing to do with the UN announcement, more to do with the spread of the virus in China.
As you know we are not directly invested in China as our investment strategy in this part of the world is more aligned to the Pacific region as a whole. Of course, we can’t ignore the influence China has in this region and the latest guidance from LGIM, has been to let us know they are lightening their bullish stance on risk assets.
They are increasingly concerned about the threat of new variances in China which has a relatively low rate of vaccinations. Delta cases have now been widely reported and over 90% of regions are now warning against unnecessary travel. Airline capacity in China has fallen by 10% last week as virus concerns have spread.
The thinking here is that China could go into lockdown which would slow Chinese economic growth. The effect of a slowdown would no doubt adversely impact the world’s largest commodity consumer and lower prices. This is bad news for companies related to the commodity cycle but actually good news for many western consumers because this would weaken inflationary pressure. Bad news, if you rely on China as part of your supply chain though!
Elsewhere in the markets
It’s important to note that LGIM remain bullish over the medium term and reinforce that they still see the global economy at the mid stage of the economic cycle. They expect global growth to remain well above trend for the next few quarters, despite concerns around the Delta variant.
Corporate profits and cash flow have continued to improve in general, which is encouraging for equity markets.
Have a lovely weekend
Gary and the Investment Team
Please Note: This communication should not be read as giving specific advice regarding your personal circumstances. This would only be given following detailed assessment of your individual needs. The value of investments may fall as well as rise; you may get back less than invested. Past performance is not necessarily a guide to future returns.