Equity markets around the globe were on edge as February came to a close. The technology-laden NASDAQ fell nearly 7% from an all-time high on February 12th. The weakness in equity prices came despite very accommodative comments from US Federal Reserve Chairman Jerome Powell during his scheduled two-day Congressional testimony last week. Equity markets became unnerved as government bond yields began to rise at an accelerated pace in the US, Eurozone and particularly the UK. Benchmark interest rates have been rising since the beginning of this year and US interest rates have been climbing since last Summer signaling expectations of improving economic conditions in the months ahead. As long as the rate environment increases gradually, gains can continue in equity markets. But, as we witnessed over the past few weeks, a steep ascent in market interest rates will have an expected adverse impact on risk assets. [chart courtesy Bloomberg LP (c) 2021]
What does a pledge from China of carbon neutrality by the year 2060 actually mean, and how do we measure progress? There are various global targets for climate change mitigation that attempt to quantify what needs to be done so that the global system does not exceed the point of no return, generally seen as a rise of 1.5 – 2.0 degrees Celsius. Under the Paris climate accord, a number of nations committed to carbon neutrality in the next 30 years. China said 40, but as the largest economy on Earth how do we measure their progress? This week’s chart from the US Energy Information Administration country analysis of China (Sept. 2020) is just one hint at the structural challenges China faces in achieving the target. On a per-capita basis China’s carbon footprint is still smaller than the developed West, but their total footprint is more than a quarter of the world’s total output, and their energy mix is just 15% non-carbon and more than half coal. After the pandemic interruption that marked the period around the Lunar New Year, China’s carbon output returned to or even exceeded pre-pandemic levels. We are looking for the steps China will take now to level out carbon growth so that it can begin reversing the trend after 2030, and wonder, even worry whether another 10 years of increasing output takes us past the global point of no return.
What happens when one ESG priority comes into conflict with another? This week we examine a chart from the World Resources Institute (www.wri.org) of data from the Servicio de Información Agroalimentaria y Pesquera chronicling a decade of growth in avocado production in Mexico. Avocados play on ESG themes of healthy eating, job creation and economic opportunity. Unfortunately, the explosion of consumption, primarily in the US as a result of NAFTA, of Mexican avocados has fueled deforestation, draining of aquifers, soil degradation, increased CO2 emissions, threatens indigenous species and even triggers small earthquakes. According to various studies assembled by the World Economic Forum, avocado groves consume multiples of the water of indigenous forest, and the fruit has an end-point carbon emissions footprint many times that of bananas. As with other monocultures like palm in Indonesia, avocado has brought economic opportunity to areas that badly need it like Michoacán province, but at a profound and unsustainable cost. Conscientious consumption and deploying capital to find more sustainable methods of cultivation without depriving Michoacán of needed money and opportunity are examples of where ESG is headed to address whole-systems challenges rather than focusing narrowly on single issues or ideas.
As the sun sets on 2020, we want to extend our gratitude and appreciation for our amazing clients, partners, vendors, friends and colleagues. It was quite a ride, and we are thankful to have taken it with you. We will take a break from the weekly charts to leave room for both celebration and contemplation about the challenges and opportunities in front of all of us in the new year. Wishing everyone a terrific holiday season, and a happy, HEALTHY, and prosperous new year. The COTW will return in January!
European equities have been rallying yet continue to lag the US and the rest of the world. Since global equities found their pandemic-induced bottom on March 23rd, both the S&P 500 and the MSCI World Indices have rallied over 65% as of last week’s closing levels (12/18/2020) while European shares have climbed just over 60% measured in US dollar terms. While a 60% recovery in approximately three quarters is impressive, it is masked due to currency movement over the period. The Eurostoxx 600 itself has climbed 44% in local currency terms from March 23rd through Friday’s close, and the Euro has rallied over 17% since March 23rd. The disparity in performance suggests a few things to us. First, European investors may have less confidence in their stock markets due to a lack of forceful coordinated continental response to the pandemic. Second, the currency tailwinds for European shares reflect more of a “retreat” from the pandemic flight-to-safe-haven currencies like the Dollar than true economic resiliency. Finally, we are particularly mindful that other stock markets beyond Europe may offer superior growth prospects, which would be especially attractive in a low-growth developed West.