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Five insights in five minutes

Five in Five: oil, real assets, Asia airlines, govies, climate finance
04 March 2022

    Oil prices

    Like a well blowout, oil prices gushed heavenwards this week, with Brent approaching USD120 for the first time in more than a decade. The inflation-adjusted number isn’t quite so scary, as can be seen in the chart below, however our strategy team makes clear in its latest Insights publication that a USD10 rise in nominal oil prices still raises inflation by about half a per cent across the world’s major economies and reduces global growth by 0.1-0.2 per cent. Doesn’t sound like much, but given Brent was at USD20 less than two years ago, it adds up. Opec, which met on Wednesday, used to act like the pressure release systems that were introduced on oil rigs in the 1920s. It ratified an increase of 400,000 barrels a day. Trouble is, that is only a 1.4 per cent rise in output and Opec’s market share has fallen a tenth over the past decade to a third of total crude and condensate-supply. America’s shale producers took most of that and are nearing a 40 per cent share now. Futures contracts suggest this latest spike in oil prices is temporary. That said, any meaningful supply-side response has to be global.

    Conversation starter for… equity and fixed income strategies, real assets, multi-asset

    Oil prices   For illustrative purpose only. 

    Portfolio allocations

    Meanwhile our strategists are busy reminding clients that even against a backdrop of geopolitical uncertainty, higher inflation means that cash doesn’t make sense and that defensive positioning should emphasise relative value and diversification instead. Real assets are a sensible place to start. Commodities, for example, are up more than 20 per cent so far this year, trouncing the nearly ten per cent decline in global stocks. Per the chart below, the return of a traditional balanced portfolio of 60 per cent equities and 40 per cent bonds is flat over the past 12 months. If ten percentage points from each allocation had been put into commodities and property, performance would have improved six per cent – and for roughly the same level of volatility no less. That’s a 20 times better risk-adjusted return! This is a simplified case of course. However, it illustrates how clever portfolio adjustments can help make (or preserve) wealth.

    Conversation starter for… active multi-asset funds, alternatives

    Portfolio allocations   For illustrative purpose only. 

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    Asian airlines

    It’s not the airspace everyone is talking about at the moment. But those in Asia should go outside and look up now. Is it a bird? Is it a plane? Wow…that really might be a plane. While Superman has more or less had the sky to himself since the pandemic, regional revenue passenger kilometres is now five times higher than in April 2020. And investors are expecting more flying to come. Asian airline stocks have maintained their altitude year to date, outperforming the general market by seven per cent. Not bad given the Omicron wave, rising oil prices, and a major military conflict in Europe – all of which would normally send share prices spiralling. It is true that sector earnings, like most planes, remain grounded. But given that air traffic is less than a tenth of pre-covid levels, you don’t need x-ray vision to see the potential upside when travel restrictions are lifted. What is more, compared with global peers, airlines in Asia had stronger growth prior to the pandemic, averaging eight per cent annually over four years, as can be seen in the chart. Who’s got nerves of steel out there?

    Conversation starter for… Asian stocks, Asian bonds

    Asian airlines   For illustrative purpose only. 

    US govies

    Only two weeks ago, the market was pricing seven rate hikes in the US before the end of the year. And treasury yields were on a relentlessly upward path, with ten-year notes reaching the two per cent mark. How geopolitical events have completely changed the story. Given the perceived supply and demand-side implications for the global economy, investors are now betting on ‘just’ six hikes from the Federal Reserve this year, as can be seen in the chart below from our strategists. Yields are now at 1.85 per cent again, roughly where they were a month ago, having almost reached 1.7 per cent before Chair Powell’s congressional testimony reversed the slide on Thursday. That’s quite some volatility, although for comparison, German bund yields have fallen by even more since mid-February. Our strategy and fixed income teams still believe the Fed wishes to return to a more neutral stance post the covid-era stimulus. But the profile of hikes will be even more cautious and data-dependent. Like you needed another reason to watch the jobs report on Friday.

    Conversation starter for… fixed income, credit strategies, multi-asset

    US govies   For illustrative purpose only. 

    Climate finance

    A shiny, new report released on Monday by the Intergovernmental Panel on Climate Change gives an update on the state of climate finance, which continues to show an upward trend. The bad news, however, is that funds still lag the investment required, and there is a major lack of money for adaptation (fighting the impact of climate change, rather than its cause). Indeed, data from the Climate Policy Initiative show that adaptation accounted for just eight per cent of total climate finance in 2020. Most adaptation funding provided around the world is via public sources (including the EUR725 billion EU Resilience and Recovery Facility, detailed in our latest Europe Insights). As shown in the chart below, private sources only accounted for four per cent of the total adaptation financing in 2020. Why should private sources focus on adaptation? One answer is the high rate of return on investments in adaptation. According to a report from the Global Commission on Adaptation, every USD1 invested in adaptation could result in USD2-USD10 in net economic benefits.

    Conversation starter for… ESG strategies, climate change, net zero

    Climate finance   For illustrative purpose only. 


     


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