Global markets to 12 November 2021
- A world ablaze
- Significant progress but a long way to go
- The financial industry has a role to play
- Just how short-lived is “transitory”?
- What are consumers going to do with their money?
A world ablaze
So far this month, three burning issues have been dominating the news headlines: central bank policy, inflation and climate change.
The COP26 climate change conference has seen prominent dignitaries, heads of state and numerous climate activists gathering in Glasgow to share their bleak predictions regarding the future of our planet with the world media.
Fossil fuel emissions generated by burning the coal, oil and gas that we have been using for millennia are warming the planet up at an alarming rate. There is no longer any doubt about the consequences of this, and in the years ahead we are certain to see more forest fires and increasing numbers of extreme weather events, such as heatwaves and floods.
The last decade has been the warmest on record and most of the world’s leading experts now agree that if nothing is done, the situation will only worsen. Indeed, governments now generally recognise that a global action plan is needed and the last couple of weeks in Glasgow have been about getting 200 or more countries to bolster their plans to cut their emissions levels by 2030.
Significant progress but a long way to go
The long-term temperature goal of the Paris Agreement was to keep the rise in mean global temperature to well below 2°C, preferably limiting it to 1.5°C. More than 40 countries have now agreed to phase out their dependency on coal – the biggest contributor to climate change. But there are still a number of coal-dependent countries such as Australia, India, China and the US which have yet to sign up to the pledge.
Although a final overarching pledge has yet to be signed, a number of “side deals” have been agreed on at the summit.
Methane, for example, is not talked about as often as carbon dioxide is, but it is actually 25 times as potent as a greenhouse gas. Reducing the quantities of it in our atmosphere is therefore one of the best ways to quickly reduce global warming. The Global Methane Pledge that the US and the EU announced at COP26 will cut emissions of it by 30% by 2030.
Another constructive pledge to emerge from the climate summit was a promise to end and reverse deforestation by 2030, signed by more than a 100 countries.
The financial industry has a role to play
As far as the financial industry is concerned, banks, insurers and global investors with an estimated US$130 trillion at their disposal are playing their part in tackling climate change by placing it at the forefront of their investment propositions.
Investment Quorum, for example, launched its own sustainable investment strategy in January of this year, together with an integrated sustainable screening process that we now apply to all of our investment strategies.
While many outstanding issues still need to be addressed at COP26, a “cover decision” has been published that will hopefully form the basis of an agreement that will be reached by the end of the conference and then signed by all those in attendance.
Just how short-lived is “transitory”?
The debate over whether inflation is just a transitory phenomenon or if it is more embedded into the global economy continues. This week, it was revealed that the US consumer price index had surged to 6.2% in October – the biggest inflation surge in more than 30 years.
Any pay rises that workers might have received for the month have been more than wiped out by increases in rent, as well as increases in fuel, food and used-car prices. If you strip out food and energy price increases, the increase in core inflation drops to 4.6%. But that is still the fastest rise since August 1991.
In Europe, members of the European Central Bank revised their growth and inflation forecasts for December upwards, indicating that the European inflation rate could now be approaching its target rate of 2%.
The continuing rise of inflation, at a time when GDP growth is slowing, is cause for concern: central bankers remain dovish, recently sidestepping the opportunity to raise interest rates and confirming their view that inflation is transitory rather than embedded into the economy.
What are consumers going to do with their money?
In the short term, this could have a bearing on how consumers dispose of their income. Higher living costs (food and energy in particular) and potential higher taxes could scupper any hopes of the consumer spending boom that many leading economic experts had predicted. Throughout the pandemic and the lockdowns it has brought with it, household savings ratios have risen remarkably.
With Christmas just around the corner, it will be interesting to see how consumers react and what happens to their spending habits.
Since the start of the pandemic nearly two years ago, the global economy has been on a rollercoaster ride: it collapsed in the early part of 2020, then we saw the fastest growth rate since 1984 and the best start to a bull market in financial history.
There are bound to be some bumps in the road after such an event: higher inflation, pent-up demand and supply chain bottlenecks are all inevitable phenomena. Inflation is the most universal of all taxes, and the way to counteract it is with pricing power. That’s why we recommend owning businesses that can react favourably to inflationary pressures.
Meanwhile, innovation and technological disruption continue to reshape the services we enjoy, creating highly appealing investment opportunities. As the year draws to a close and we look set to enter a period of higher inflation and interest rates, it will be essential to own quality companies with pricing power that are innovators or disruptors – not the businesses that will be disrupted or which will perish under the stresses and strains of the changing world we live in.
Peter Lowman is IQ’s Chief Investment Officer. He brings to IQ over 40 years of experience in getting client portfolios to perform outstandingly. Peter is relentlessly focused on building and honing IQ’s bespoke investment portfolios, and as a long-standing member of the Chartered Institute for Securities & Investment, his expertise is regularly sought by the investment press.
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