Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
As energy transition turns ‘disorderly’, reallocate to capture opportunities: Amundi
The world’s pathway to net zero is becoming rockier, and diverging policies make it more likely the transition will be “disorderly”, according to a new report from Amundi warning of higher short-term inflation and a more uncertain future that will necessitate a new approach to portfolios.
While the urgency of transition is more profound than ever, with recent spikes in energy prices and supply constraints prompting a greater focus on securing renewable energy, countervailing trends such as deglobalisation as a consequence of geopolitical conflict will make it more difficult for the world to reach its emissions reduction goals in the time it needs to, the Amundi Institute said in its annual Capital Market Assumptions report.
“Detecting inflation and macrofinancial regimes will be key in the next decade as higher average inflation and lower growth will reduce the overall risk-return potential,” said institute head Monica Defend.
“Governments’ uncoordinated reactions to energy price spikes in the past year showed that a successful and orderly transition to a greener economy is far from guaranteed,” she said. “Limiting the rise in temperatures over the net-zero 2050 horizon is the shared endgame, but disruptive themes will likely profoundly affect the real economy and financial markets.”
For one thing, Amundi expects equity returns to be lower over the next 10 years in connection with the “more urgent but less coordinated transition”, although emerging markets may to offer opportunities. “From a sectoral perspective, we believe the leaders in the green transition will be favoured together with information technology, and the outlook for value investing looks positive,” Defend said.
And bonds are resuming their traditional role as risk diversifiers following a “lost decade”, she said, though volatility may continue to be an issue as uncertainty and a weaker economic outlook prevail. However, higher government bond valuations could benefit investment-grade credit, and emerging-market bonds offer higher-yielding opportunities, with the caveat that they are susceptible to potentially higher default rates.
“Real and alternative assets, as well as commodities, will also be crucial, in our view, for building inflation-resilient portfolios,” Defend said. “Real estate and infrastructure are vulnerable to the impact of climate-related events, but are appealing from a diversification standpoint, which may be key to targeting higher returns in an environment of higher risks.”
The report notes that managing social costs will likely be key in the coming years, suggesting that reallocating national income towards labour via higher wages would help achieve a more just transition.
“A more inclusive growth model could be promoted by rebalancing the national share of income towards labour, without significantly affecting the economy,” Defend said.
“Higher wages will compress corporate profit margins, but higher disposable income will buoy household consumption and should help to support companies’ revenue,” she added, citing estimates that a 7 per cent increase in the labour share of income from higher wages would cost most companies less than a 10 per cent decrease in profits over the next 20 years.
According to the report, new legislation aimed at energy decarbonisation is likely to have the greatest impact on frontier and emerging economies, while more developed countries will diversify the makeup of their exports. It therefore recommended investors take the phasing-out of fossil fuels in countries and sectors where “their legacy is strongest” into account when planning investment strategies.
“In our view, investors should therefore factor in the implications of a shift towards a net-zero world, driven by new policies, technology and changing consumer preferences,” Defend said. “The climate transition presents both risks and opportunities for investors, and energy transition themes will remain in the limelight for the foreseeable future.”
