Five insights in five minutes
As with any bottle from Château Cheval Blanc’s 1947 vintage, there is never a bad time to own a multi-asset fund – they are the pinnacle of clever, rounded investing. Portfolio diversification makes even more sense when there is volatility. Something to ponder as you look at the chart beneath. It shows our strategy team’s estimates for expected returns versus risk (volatility) for a range of asset classes. We’ve explained before that the trade-off between the two has flattened in recent years. That means accepting either lower returns for the same risk or more volatility for the same returns. If you prefer the latter, therefore, a multi-asset portfolio that includes smart diversifiers, such as emerging credit, Asian high yield, commodities and private equity, is the way to go. Consider too, that developed market currency volatility has only been this low on four occasions in the past three decades – it’s at roughly half the average level. Hence, regional diversification may be an increasing part of the allure of multi-asset funds in future. Like a good wine cellar in fact.
Themes: multi-asset, global equities, alternatives
China’s maturing bond market
Two Chinese property developers defaulted on their bonds this week, joining a handful of peers in a sector that represents a quarter of onshore and offshore defaults year to date – some $17 billion by outstanding amount. These issuers went into default with weak underlying fundamentals, so investors have little reason to fear a broader contagion. Indeed, the ‘three red lines’ policy was meant to discipline real estate companies indulged in excessive borrowing. Property isn’t the only area where Beijing sees the need of a little tough love. As discussed in our China Insights publication this month, the government’s increasing tolerance toward defaults by state owned enterprises has prompted investors to re-evaluate their long-held assumption of an implicit government guarantee behind these once-thought-to-be indestructible companies. The repricing of SOE credit risks has already resulted in an average 350 bps widening of spreads between the A- and BBB- Fitch-rated bonds in the offshore market just in the past six months (see chart). A healthy development that underlines the need for active management and deep analysis.
Themes: China, bonds
Seismic news at Exxon and Shell on Wednesday. That a mouse-sized US investment firm won at least two seats on the former’s elephantine board is extraordinary. So is the ruling by a Dutch court that Shell must cut its emissions twice as hard as planned. The first and last letters in ESG were important before. These events change the sustainable investing game. But how? Implication one is that if you want to alter corporate behaviour, engagement is the most powerful weapon available. An activist buying just 0.2 per cent of shares in the US oil major has already achieved more than years of exclusions and underweightings. Ownership matters. The second implication is that investors must keep a close eye on courtrooms when mapping the energy transition – there are currently 1,800 climate-related lawsuits being fought around the world right now. Implication three is that neither development is necessarily bad for returns. Indeed, reduced supply, capex discipline and a focus on cashflows tend to have the opposite effect. Both share prices rose on the day.
Themes: ESG, low-carbon, sustainable investing, global equities
Hot European stocks
Bourses from London to Warsaw and Madrid to Oslo are having a great 2021, with double-digit returns outpacing most developed market peers. That is despite last week’s European Commission press conference addressing new ways to solve an old problem – corporate tax. As explored in our recent Europe Insights publication, statutory tax rates vary from 12.5 per cent in Ireland to 24 per cent in Italy, and such divergence supports the low rates paid by large multinationals. And Europe isn’t alone – our macro strategy team recently noted that US corporate tax revenues have been dwindling as a government spending source since the 1950s. Both regions have different ideas for solutions: for the US a proposed minimum global tax rate of 21 per cent on the 100 largest multinationals (though the Treasury would rather 15 per cent), for Europe a common framework and digital levy. Luckily for investors, there is no long-term relationship between tax regimes and equity returns, as taxes are just one of many profit drivers that are constantly traded-off between shareholders, customers, suppliers and employees.
Themes: European equities, multi-asset
While the first and lightest element in the periodic table sometimes evokes images of the Hindenburg disaster, an economy powered by hydrogen is floating your way. Of the 75 countries with net-zero carbon ambitions, representing over half the world’s output, more than 30 have hydrogen-specific strategies. Some $70 billion in public funds have been committed, a quarter of the projected total spending to 2030. This is because hydrogen is an effective energy store to compliment intermittent renewables, and produces only steam as a by-product. Europe leads the push globally, with nearly half of projected investment – H-powered trains have already carried passengers over 100,000 miles on trial runs in the region. At lower estimated costs than existing fuels, per the chart below, hydrogen stands to play a growing role in heavy duty transportation, where lithium batteries are less suitable. When a carbon tax equivalent to Switzerland’s today is considered, hydrogen becomes appealing to more industries. Investors in the energy transition take note.
Themes: climate change, net-zero, energy transition
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