News

Please see below ‘Markets in a Minute’ article received from Brewin Dolphin yesterday evening, which provides market analysis on a global scale. The commentary discusses rising inflation in the UK and US as well as Asia’s considerable economic recovery. 

Most major stock markets fell last week amid a higher-than-expected surge in inflation and increasing cases of Covid-19.

In the US, the S&P 500 and the Nasdaq slipped 1.0% and 1.9%, respectively, after data showed inflation jumped by 0.9% in June – almost double the figure forecast by economists. Federal Reserve chairman Jerome Powell reiterated his view that inflation pressures are temporary, which helped to moderate losses.

The pan-European STOXX 600 fell 0.6% after figures showed new Covid-19 cases in the EU and EEA had surged by 64.3% from the previous week, raising concerns about the continent’s economic recovery. The European Centre for Disease Prevention and Control said 20 countries had seen an increase in new cases, although hospitalisations remain stable.

The UK’s FTSE 100 also slid 1.6% as inflation fears resurfaced and rising infections outweighed optimism about ‘freedom day’.

Over in Asia, China’s Shanghai Composite ended the week up 0.4% after figures showed gross domestic product (GDP) rose by 7.9% in the second quarter from a year ago, while retail sales and industrial production in June surged by 12.1% and 8.3%, respectively, from a year ago.

Stocks slump as Delta variant spreads Equities slumped on Monday (19 July) as the spread of the Delta variant of Covid-19 weighed on investor sentiment. The Dow recorded its worst day in three months, sliding 2.1%, while the S&P 500 and the Nasdaq lost 1.6% and 1.1%, respectively.

The FTSE 100 posted its biggest one-day fall since May and finished below the 7,000 mark. Travel and leisure stocks suffered on news that fully vaccinated arrivals from France will still need to quarantine. British Airways owner IAG slumped 5.2% and easyJet declined 6.7%. Energy stocks also struggled after OPEC+ agreed to increase supply from August, leading to a decline in crude oil prices.

UK and European stocks rebounded at the market open on Tuesday, with the FTSE 100 and the STOXX 600 both adding 1.1%. Japan’s Nikkei 225 tumbled to a six-month low following Monday’s selloff.

US and UK inflation soars

Figures released last week showed inflation in the US and the UK accelerated in June, leading to renewed speculation that central banks could start to rein in their support for the economy.

In the US, headline consumer prices rose by 0.9% from the previous month and by 5.4% from a year earlier, marking the fastest pace of annual growth since 2008. Core inflation (excluding food and energy) rose by 4.5% from a year ago, the highest since 1991.

The surge was largely driven by the biggest monthly bounce in used vehicle prices for more than 60 years. Prices rose by 10.5% between May and June, meaning second-hand cars were being bought for around 45% more than a year earlier. Prices of new cars also rose by 2% month-on-month – the biggest increase since 1981.

Meanwhile, UK data showed the headline consumer prices index rose to 2.5% in the 12 months to June, the fastest pace for nearly three years, as prices continued to recover from their early pandemic lows. Higher food and fuel prices drove the increase, as did rises in the cost of eating and drinking out, clothing and footwear, and second-hand cars.

US retail sales beat expectations

Last week also brought the latest data on US retail sales, which unexpectedly rose in June by 0.6% from the previous month, according to the US Census Bureau. Economists polled by Reuters had forecast a drop in sales of 0.4%. On an annual basis, sales surged by 18.0% and are now above their pre-pandemic level.

The rebound came despite purchases of motor vehicles declining for the second month in a row amid a lack of supply caused by the global semiconductor shortage. US retail sales are measured by receipts not volume, which meant higher prices from supply constraints flattered the figures.

Although consumers seem to be spending more, separate data released last week suggested they are also growing more cautious. The University of Michigan’s preliminary gauge of consumer sentiment fell to its lowest level since February, largely because of worries about inflation.

“Consumers’ complaints about rising prices on homes, vehicles, and household durables have reached an all-time record,” said Richard Curtin, the survey’s director.

Japan manufacturing index soars

Over in Japan, confidence among Japanese manufacturers rose in July to its highest level for twoand-a-half years, as global demand helped the country’s export-driven economic recovery. According to the Reuters Tankan poll, sentiment was boosted by strong confidence at car, chemical and metal products manufacturers, which offset poor conditions among textiles and paper.

However, the survey also showed service sector sentiment turned pessimistic in July, falling to -3 from a flat reading in June, as Covid-19 mitigation measures continued to curb spending. Tokyo is currently under its fourth coronavirus state of emergency, which is due to last until 22 August. On Wednesday (14 July), the capital recorded its highest number of new infections in almost six months.

We will continue to publish relevant articles and news, so please check in again with us soon.

Stay safe.

Chloe

21/07/2021

Please see below article received from Invesco yesterday afternoon, which explains how investment managers are adopting an ‘ESG approach’ in order to achieve net zero targets.

As we approach the United Nations (UN) Climate Change Conference of the Parties (COP26) in November, we expect increased scrutiny of how investment portfolios are aligning to meet the climate goals of the Paris Agreement and how exposed portfolios are to risks under different climate scenarios. These are topics of growing importance to investors. At Invesco Fixed Income (IFI), we have been examining the practical implications of applying net zero methodologies to global investment grade credit portfolios to ensure that we can support our clients who are looking to align their investing approaches to their own net zero commitments.

Building net zero-oriented investment strategies

The Net Zero Investment Framework (NZIF) created by the Paris Aligned Investment Initiative (PAII) provides a methodology for building investment strategies that are consistent with the goal of achieving global net zero greenhouse gas emissions by 2050. The NZIF also aims to increase investment in the range of “climate solutions” to facilitate achieving net zero. The NZIF recognizes that achieving net zero involves a multi-year transitional effort across the global economy and its approach combines portfolio construction, engagement, and policy advocacy. The framework is more holistic than simple carbon emissions optimizations and looks at where companies sit along a net zero alignment spectrum with a particular emphasis on the material emitting sectors of the economy where transition is vital^.1

Assessing portfolio alignment to net zero 

For fixed income portfolios to become aligned with net zero pathways, we need issuers (from both material and low emitting sectors) to align themselves with the objective of achieving net zero emissions. We see a growing number of global investment grade issuers publicly commit to net zero, and the NZIF sets out specific alignment criteria that issuers must meet to be judged as achieving net zero or making progress towards it. Assessing the actual progress that companies are making against their commitments is critical to this effort.

Data availability, particularly timely emissions information, is an issue that currently hinders the full assessment of transition progress industry-wide, though we do expect improvements in this area as the focus on net zero continues to ramp up among issuers, asset owners, and asset managers. Beyond emissions, data availability is not yet universal across the six core NZIF alignment criteria, which complicates assessing portfolios fully today. The NZIF references three global initiatives – Climate Action 100+ Net Zero Benchmark, the Transition Pathway Initiative, and the Science Based Targets initiative – whose methodologies provide a baseline for evaluating the key global emitters and also can inform the development of in-house, asset manager net zero processes to increase the proportion of portfolios that can be assessed.

It is important to emphasize that issuers with high emissions intensity may still be held in net zero-focused portfolios. However, these material emitting issuers will likely be the focus of close engagement to encourage them to set out and execute on a clear strategy to low carbon, with divestment a final option when progress is not being made against alignment goals. 

Being able to clearly categorize portfolios in the context of the NZIF is key. From this baseline, targets can be set, and decisions are taken accordingly. IFI is starting to map portfolios and benchmarks along the net zero alignment spectrum (see Figure 1) with the intention of then deciding what an appropriate evolution should look like over time.

Figure 1. Mapping to the net zero alignment criteria enables an evaluation of portfolio positioning and areas to focus on

Source: Invesco, June 3, 2021. For illustrative purposes only.

Investment in climate solutions 

While the NZIF encourages increased investment in “climate solutions” (e.g., emerging technologies that are helping the achievement of net zero goals), investment grade portfolios generally have relatively modest exposure currently. This is not surprising, in our view, given the public fixed income market’s inherent bias toward more established issuers (“old economy”) versus cutting-edge green startups (“new economy”), due in no small part to the minimum business size needed to support publicly traded debt. However, we are optimistic that this area can grow significantly, given the rapid uptake of electric vehicles, energy efficiency solutions, and renewable energy, where investment grade issuers have meaningful exposure. We also see some logic to incorporating green bonds into the “climate solutions” segment, especially bonds strongly aligned with UN Sustainable Development Goals. The EU taxonomy should also help to create much needed standardized reporting.

Analyzing the impact of climate change on portfolios

Climate scenario analysis is complementary to the NZIF and allows investors to see how their portfolios would perform in different climate outcomes, including net zero, by 2050, but also in adverse scenarios to demonstrate the risks of inaction. Our analysis incorporates the use of Planetrics climate risk modeling, which estimates a value impairment at the portfolio level of a relatively modest -1%, even in adverse scenarios (a hot-house world or delayed transition)^.2 There are several reasons for this, but the significant equity cushion, favorable geographical exposures (developing markets more exposed to physical climate risk than developed) and relatively low duration of the asset class are all important factors. This conclusion should not detract from the valuable insights and mitigation that can be achieved from closer analysis of issuer, sectoral, or geographical exposures, but we think it helps put the risk in this relatively nascent area into perspective.

Growing investor focus on net zero

With COP26 approaching, we are expecting investor interest in net zero alignment to increase significantly in response to its goal of mobilizing finance to secure global net zero by mid-century. The effort to meet net zero will likely require financing alignment to occur across the whole asset class spectrum, which is why the net zero investment framework also covers equities, sovereign debt, and real estate in addition to corporate bonds. Corporate bond portfolios will have an important role to play in this transition. Even though the impacts on bond values from different climate scenarios may be less marked than on other asset classes such as equities, we still expect investors to be increasingly keen to understand how their portfolios align with the pathway to net zero as well as how they fare in different climate scenarios.

Given the numerous factors incorporated into a decision to invest in a fixed income portfolio (fundamental credit quality, environmental, social, and governance (ESG) credentials, net zero alignment, climate change exposure), we believe investors cannot adopt a “one size fits all approach.” IFI is closely monitoring ESG risks across its portfolios and especially in the rapidly evolving net zero alignment space. We believe having a wellresourced and experienced credit team is important for assessing the issues raised here and to inform our investment decisions. IFI seeks to ensure that credit spreads adequately reflect downside risks, including ESG factors, or, where this is not the case, that “at-risk” names are avoided. 

We will continue to publish further market insight and news as the UK approaches ‘freedom day’ on the 19^th of July. Please check in again with us soon.

Stay safe.

Chloe

15/07/2021