While the climate emergency is becoming more pressing by the day, our country is continuing its usual policy of (very) small steps at a slow pace. And while solar power is now the cheapest source of electricity, we continue to rely heavily on fossil fuels.
Infrastructure is in vogue, and for good reasons! Here are 5 of them, ranging from performance to inflation protection to accelerating the energy transition.
Sovereignty and energy independence being intimately linked, the transition towards decarbonized energy will necessarily be accompanied by a redistribution of geopolitical cards.
The outlook for sustainable investment is diverging globally, simultaneously being propelled forward by regulation in Europe and parts of Asia, most notably in China, and being significantly challenged by growing politicisation and controversy in America.
In the last newsletter, we pointed out that „the context at the beginning of the year is favourable for the markets, both equity and bonds, as it incorporates quite a favourable mix: continued disinflation, the prospect of an upcoming pause by the Fed and the expectation of a vigorous recovery in China following the end of the zero Covid strategy. In short, a Goldilocks-like outlook. At the beginning of the year, it is always tempting to extrapolate recent trends. Experience shows, however, that intra-annual developments are rarely linear. It is thus likely that economists will revise their inflation forecasts downwards and that the statistics for the coming months, fuelled by the Chinese recovery, will be more disappointing.”
We continue to be cautious on the rest of the world ex-China this year and highlight our key themes ex-China recovery: we do believe that USD has peaked, and that more geopolitical tension as well as central bank buying will be good for precious metals. We also believe that some commodities, such as copper, are more exposed to a China recovery, and that commodities on the whole have suffered from under-investment in the past decade. For the first half of the year, we park most of our ex-China exposure in metals as we wait for better opportunities in the second half of the year. We have a few idiosyncratic theses scattered around the region, but we err on the side of caution as flows back to China can impact even solid companies elsewhere, particularly the outperformers from last year.
2022 was the worst year since 2008 for the Convertible Bond asset class. None of the pillars of the asset class helped. We experienced a sharp rise in interest rates to fight global inflation which marked the end of a lengthy interest rate bull market. Corporates credit spreads widened significantly, and equity markets all closed with a negative performance for the year. Even equity volatility, despite having changed regime, was not very supportive with most volatility trading between 20 and 30 level with some spike in Europe in March due to the war in Ukraine.
The ongoing conflict in Ukraine and its repercussions remain the primary theme impacting investment decisions in the region. This consists both of the factors impacting global markets, but also, more nuanced regional only influences.
2023 will be a year of unprecedented policy support.
The context at the beginning of the year is favourable for the markets, both equities and bonds, as it incorporates quite a favourable mix: continued disinflation, the prospect of an upcoming pause by the Fed and the expectation of a vigorous recovery in China following the end of the zero Covid strategy.