News

Following on from the M&G article we posted yesterday, please see the below article from M&G:

Alongside their immediate priority to protect health, governments around the world are looking to ensure that the pandemic does not do irreversible damage to the global economy. Huge fiscal stimulus packages, amounting to trillions of US dollars, have been pledged in 2020 to try and prevent a protracted recession.

Infrastructure investment is high on the agenda, not only because it can lay the foundations for long-term economic growth but also because it is essential. Indeed, the need to reverse decades of chronic underinvestment in US infrastructure is one of the few things that presidential candidates Donald Trump and Joe Biden agree on.

As the urgency to move towards a zero-carbon economy has grown, the requirement for new and improved infrastructure has come into focus. I believe that calls for a ‘green’ recovery will only accelerate investment in solutions that support the low carbon transition.

‘Building back better’

In Europe, the issue of sustainability is central to the €750 billion “Next Generation EU” recovery plan, which promotes investments that help cut greenhouse gas emissions and advance renewable energy and energy efficiency.

It is hoped that large-scale public investment, combined with regulatory changes, will galvanise the private sector investment needed for the bloc to reach its goal of being climate neutral by 2050, in line with 2015 Paris Agreement commitments.

The infrastructure built today will determine whether climate targets are met. After all, the OECD estimates that more than 60% of global greenhouse gas emissions are related to physical infrastructure.

A transformation of the systems that form the backbone of modern society is therefore urgently needed. To meet the climate and development objectives articulated in the UN Sustainable Development Goals (SDGs), the OECD has estimated that US$6.9 trillion needs to be invested each year until 2030.

The need for cleaner energy

It is unsurprising that the energy sector is a top priority for decarbonisation, given power generation accounts for around 40% of global CO2 emissions.

Encouragingly, the shift away from burning coal, the most polluting fossil fuel, makes economic sense. The cost of wind and solar electricity generation has tumbled over the past decade, relying ever less on subsidies to be competitive. According to the International Renewable Energy Agency, replacing much existing coal-fired capacity with new solar farms would very quickly pay for itself .

Yet the scale of the challenge is enormous, especially as global demand for electricity is set to keep rising. The International Energy Agency estimates that around US$1.3 trillion a year needs to be invested if SDG 7 – affordable and clean energy for all – is to be achieved by 2030.

The call for better connectivity

Low-carbon electricity is a cornerstone too for more sustainable transport, which accounts for around one-quarter of global CO2 emissions. Beyond electric cars, the long-term trend towards growing urban populations creates a need – and an opportunity – for efficient mass transit systems.

The experience of the pandemic has also revealed the critical importance of the infrastructure that connects us digitally. Without the network of data centres, masts and cables, the ‘work from home’ economy would not have been possible.

Digital infrastructure can also be a ‘green enabler’, in the sense that better digital connections can reduce the need for travel and improve access to opportunities. Further investment is needed to enhance digital connectivity, which is a key ingredient to meeting SDG 9 – building resilient infrastructure, and promoting inclusive and sustainable industrialisation.

Opportunities in the ‘green’ recovery

Commitments to invest in a ‘green’ recovery should prove to be a powerful tailwind for companies that own and develop physical infrastructure assets, like wind farms, solar parks and electricity grids, all of which are necessary to transition to a lower carbon future. Likewise, businesses that own the digital infrastructure on which modern economies depend.

I believe infrastructure companies exposed to the structural shift towards a more sustainable economy are potentially well placed to prosper for decades to come.

The value and income from a fund’s assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.

The Covid-19 Pandemic has shifted the focus even more so onto a ‘greener’ world, investments included. We knew this focus was coming but it has been kicked up a gear now.

Again, I’ll take this opportunity for another shameless plug of our blog series from the summer in which we provided an introduction to ‘ESG’. This will provide an explanation and more context regarding these investment themes.

What is ESG? – An Introduction – Blog Series – Part 1, Part 2 and Part 3.

Andrew Lloyd

09/10/2020

Please see the below article from M&G Investments:

Engaging with renewable energy champions on both sides of the Atlantic.

Among the core holdings in the M&G Global Listed Infrastructure Fund are NextEra Energy and Enel, two companies at the vanguard of renewable energy deployments. The critical nature of the underlying assets epitomises the attractions of infrastructure as an asset class, while the structural growth in renewables provides a powerful long-term tailwind for companies addressing climate change.

NextEra Energy is a US utility company which ranks as the world’s largest producer of wind and solar energy. With a broad geographic footprint across the US, NextEra Energy is the nation’s leading provider of clean energy including natural gas, a key transition fuel for the reduction of carbon emissions. It is also a market leader in energy storage, with more capacity than any other company in the US, to improve the efficiency of energy use.

Past performance is not a guide to future performance.

Enel, the Italian utility, shares the same philosophy of sustainable growth. Enel is a domestic champion but also a global company with a significant presence in the long-term growth markets of South America. Enel’s strategy combines significant and growing investment in renewables with an acceleration in decarbonisation by way of phasing out coal. The company is planning to increase renewables capacity by more than 30% over the next three years, with wind, solar and hydroelectric power expected to account for 60% of total capacity by the end of 2022.

Enabling the development of electric mobility is another key initiative, with Enel embarking upon the single largest deployment of charging stations in Europe. The company is proposing to increase the number of charging stations across the group by a multiple of nine over the next three years, from 82,000 last year to 736,000 in 2022.

Enel also has a clear commitment to returning cash to shareholders. The company’s guidance for dividend growth over the next three years is at least 8% per annum.

We invested in Enel in June 2018 when concerns about the political and fiscal situation in Italy led to indiscriminate selling in the Italian stock market, particularly in the more interest-rate sensitive sectors. Enel’s business is not confined to the domestic market and we saw the sentiment-driven weakness as a buying opportunity. The stock was purchased on a historic yield of more than 5% with robust and reliable growth in the dividend stream.

The value and income from the fund’s assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested.

The fund can be exposed to different currencies. Movements in currency exchange rates may adversely affect the value of your investment.

The fund holds a small number of investments, and therefore a fall in the value of a single investment may have a greater impact than if it held a larger number of investments. Investing in emerging markets involves a greater risk of loss due to greater political, tax, economic, foreign exchange, liquidity and regulatory risks, among other factors. There may be difficulties in buying, selling, safekeeping or valuing investments in such countries. Further details of the risks that apply to the fund can be found in the fund’s Key Investor Information Document and Prospectus.

The fund invests mainly in company shares and is therefore likely to experience larger price fluctuations than funds that invest in bonds and/or cash.

This blog supports what we have been talking about lately with ‘green’ or ‘ESG’ investing. More fund managers are moving in this direction.

For more on ESG, please check out our 3 part blog series on ‘What is ESG? – An Introduction’ that we posted earlier this year. These blogs will give you an introduction to what ESG stands for, what it means, and what firms in the industry and we as a firm, are doing about it.

What is ESG? – An Introduction – Blog Series – Part 1, Part 2 and Part 3.

Andrew Lloyd

08/10/2020

Please see article below from Legal & General’s asset allocation team – received 05/10/2020

Our Asset Allocation team’s key beliefs

Prepare, don’t predict

Developments in the US election campaign remain highly unpredictable, so this week we discuss how the team thinks about political risk events and scenario analysis, our latest thoughts on the election itself, and our response in terms of asset allocation.

As with all Key Beliefs emails, this email represents solely the investment views of LGIM’s Asset Allocation team.

What’s the forecast?

We are fans of the Good Judgement Project, so were excited to have a virtual meeting with their ‘Superforecaster’ team this week. The initiative, led by Philip Tetlock and Barbara Mellers at the University of Pennsylvania, has regularly beaten even intelligence analysts with access to classified data when it comes to forecasting geopolitical events.

Their methods teach us how to become better forecasters ourselves, and this year they have released some time-series predictions from their network of Superforecasters on a number of COVID-19 related economic topics. These have helped us navigate the shifting timeline probabilities for vaccines and the likelihoods of fiscal stimulus in the US.

As a team, we have always been very interested in this topic: forecasting is our bread and butter, but we recognise it is not an easy task. We spend considerable time running scenarios for political risk events, macro outcomes and tail risks, as good forecasters are obliged to consider different scenarios. Our team motto is ‘prepare, don’t predict’. We have learnt to quantify our forecast likelihoods, and to update those likelihoods frequently and incrementally, with new information or simply as time passes.

The US election obviously poses our next challenge. It’s interesting to note the gap between the Superforecaster probabilities of a Democrat win, at 80% at the end of last week, and the betting odds suggesting a closer race.

Fireworks on the fourth or fifth of November?

Despite the wide gap in polls and a high apparent likelihood of a Democrat victory, we believe this race will feel tight until the night of the election. Due to an increase in postal voting and tensions between the parties, we see a high probability that no party will concede the election until sometime after the vote on 3 November. We believe the chances of a result by 4 November are below 50%.

The markets are also showing an elevated risk of a contested election, with expected volatility for November unusually elevated, even for an election year. But overall, we believe markets will price a likely winner well before either candidate concedes the election.

What can we say about the state of play for the big day? Well, there are not many undecided voters left in the US as views among voters have become more polarised, meaning voting switches are less likely. This is in contrast with 2016: the ‘decided’ share of the electorate in the US is currently 94%, which is roughly normal by historical standards, but in 2016 that number was 83% at the same point before the election.

There are many reasons to believe Joe Biden has an advantage: incumbents haven’t historically won after recessions, with rising unemployment, and with approval ratings below 48%. Democrats are also more unified than in 2016. Biden is polling well in battleground states, with Florida and Pennsylvania drawing our attention in particular.

Many states don’t start counting postal votes until election day, but Florida starts counting three weeks before then, so we may quickly be able to get a picture of how postal votes stack up to physical votes there. And in Pennsylvania we received interesting anecdotal information from our US-based colleagues about greater numbers of Trump placards and billboards in recent weeks, which may show that the president’s ground operation is paying off compared with Biden’s virtual-focused strategy. Indeed, that is reflected in new voter registration in Pennsylvania. Republicans added a net 135,619 voters from June to end September, while Democrats added 57,985. Back in 2016, Trump won the state by a margin of just 44,292 votes, so these numbers matter.

Fatter tails

After the news of Trump’s positive COVID-19 test, we moved our short-term US Treasury and overall duration outlook to become more negative. We had been looking for an opportunity to reduce duration risk ahead of the election, so the market’s knee-jerk reaction to the news – with perceived safe havens jumping higher – presented us with an attractive opportunity to make our move.

Market pricing in the past week has confirmed the sensitivity of the US Treasury markets to potential stimulus. In our opinion, more fiscal stimulus drives up yields through two channels: more issuance for the market to digest, and firmer near-term growth prospects.

We still don’t know exactly how Trump’s health will impact the election, but it introduces even more volatility into the race. If we think the distribution of potential outcomes is now fatter, then it increases the chance of a Democrat clean sweep of the White House and Congress. That is, in our view, the most negative scenario for US Treasuries.

The main risk to this is the prospect of stalling economic growth in the fourth quarter if fiscal stimulus fails to flow to a material degree. However, we struggle to believe that that will be as important as news on potential vaccines and the election.

A good input from Legal & General giving a view on political risk events and their latest thoughts on the US election.

Please continue to check back for our latest updates and blog posts.

Charlotte Ennis

06/10/2020

Please see below an article published earlier today from Blackfinch Investments, which outlines their latest views on markets across the world:

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Please keep safe and healthy.

Carl Mitchell – Dip PFS

IFA and Paraplanner

05/10/2020