Five insights in five minutes
Five in Five is back from its summer holiday and pleased to see that markets are more or less flat. Some up a bit, some down – so our clever, globally diversified readers should be roughly where they were three weeks ago. The main event, it seems to us, is that the spread of the delta variant has prompted China to re-impose some lockdown measures, causing downgrades to growth forecasts. Consensus output numbers are now sub-America’s for the next three quarters – at 5.9, 4.7 and 5.7 per cent year on year. Indeed, lower-than-expected July retail sales growth and a consumer price inflation of a meagre one per cent imply temporarily weaker demand. Moreover, China has been curbing credit growth in targeted areas of the economy to prevent excesses, contributing to aggregate financing dropping to one trillion yuan in July, the fifth lowest monthly reading since January 2017. As covered in the August edition of China Insights, one such area is the property sector. Curbing profligacy in the financial system will always result in a transient moderation in growth. Investors can’t have it both ways.
Investment relevance: China assets
Investing in nature
As home to the planet’s only known natural nuclear reactor (yes, you read that correctly), it’s fitting that the African country of Gabon is providing lessons on how to leverage nature at scale to mitigate our energy consumption. Gabon is one of the world’s only net sequesters of carbon, to the tune of over 100 million tonnes annually. In reward, the republic just received its first payment from a USD150 million deal with the UN-backed Central African Forest Initiative to support continued preservation of its forests. Early progress in valuing nature’s carbon absorption abilities is important. With new regulations driving up the price of carbon emissions, as evidenced below by the steep increase for EU carbon allowances, this should translate to enhanced value and revenue streams for natural carbon sinks. For investors, the burgeoning asset class that is natural capital offers the opportunity to invest directly in such assets whose value should rise to match their importance.
Investment relevance: climate change, natural capital, multi-asset
The people of Japan weren’t thrilled to host the Olympics. Perhaps sour moods held back spending. As can be seen below, much of Japan pocketed government support provided during the pandemic. This bodes well for a stronger rebound in consumer spending and corporate profits ahead. The chart also shows that Canadians stashed federal cheques. This pent-up demand contributes to the investment case for both markets, which sport discounts of over 20 per cent to the rest of developed markets based on expected earnings. If it’s emerging markets you’re after, the IMF’s updated economic growth projections suggest opportunities here too. South Asia leads, with the ASEAN countries second only to India’s expected growth rate of nearly nine per cent next year – almost double that of advanced economies. Despite such strong growth prospects, ASEAN stocks trade at a one fifth discount to global equities. Gold is often won thanks to comeback performances.
Investment relevance: developed market equities, emerging market equities, Asian equities
Alts for all
The future of alternatives is delicious, according to the latest reports from data providers and consultants. Preqin’s assets under management forecast model reckons alternatives will reach USD12 trillion by the end of the year and USD17 trillion by 2025. And BCG analysis shows that within Alts, private markets ballooned 12 per cent annually over the past decade. This growth is expected to continue. No surprise, as institutions have no reason to stop hankering for superior returns and diversification. What might be less expected, however, is BCG’s expectation that retail will play a greater role in this evolution. Retail investors currently allocate only one to five per cent of their assets in private markets, whereas institutions have ten to 15 per cent. Alongside the creation of solutions that meet non-institutional needs, therefore, transparency and education will be key. Everyone deserves a slice of the expanding alternatives pie.
Investment relevance: alternatives
From wildfires in France and Greece to devastating floods in Germany and China, last week’s 4,000 page IPCC report further illustrated a clear picture on our current reality of climate change. Not only have the physical costs already started to show, but economic costs too. Since 2000, warming has already cost both America and the EU at least USD4 trillion in lost output, and tropical countries are greater than five per cent poorer than they would have been otherwise, according to a recent Stanford University study. But the IPCC report highlights that it’s not too late to limit human damage. In order to have a two-thirds chance of restricting warming to one and a half degrees, above which tipping points are rife, only 400 more gigatonnes of carbon dioxide can be emitted from 2020 onwards – to put this in context, that’s a mere eight years more of emissions in terms of 2019’s levels. Luckily, climate risk doesn’t necessarily equal investment risk, as all-time highs for many asset classes suggests. Still, the call for finance in carbon mitigation and integrated climate science in investment portfolios couldn’t be louder.
Investment relevance: ESG strategies, global equities
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