Momentum for change on climate and social policy
The momentum behind sustainable investing is now the greatest that I have witnessed in 15 years. Government policy is changing fast. The agreement between the US and China on climate change, which followed several meetings on 15 and 16 April between US Special Envoy on Climate Change John Kerry and his Chinese counterpart Xie Zhenhua, is to be welcomed as a key breakthrough. It being signed on Chinese soil, in Shanghai, was significant. China and the US are the world’s two largest emitters of carbon, and for them to reach agreement, despite their other differences, smashes the bottlenecks of old.
US President Joe Biden’s virtual Leaders Summit on Climate on 22-23 April was attended by 40 world leaders, including President Xi of China, Prime Minister Modi of India, President Putin of Russia, and Prime Minister Suga of Japan. The summit was notable for its harmony: the world’s leaders were at one on climate change, a moral imperative cutting across national divisions. Biden announced at the Summit steeper cuts in US carbon emissions, with a new US target to achieve a 50 to 52% reduction from 2005 levels by 2030.
Changes made by policymakers will inevitably have consequences for the profitability of companies. Carbon costs will affect companies’ cash flow statements, income statements, and balance sheets sooner than has been expected. Offering clients access to a decarbonised strategy remains a key focus for me and my team.
Social inequality is fused with climate change, as the most vulnerable bear the worst burdens from environmental degradation. The pace of change in social policy has historically been slower than in climate change, but the pandemic has thrown inequality issues to the fore. On 28 April, the Biden-Harris administration announced a transformational plan of US$1.8 trillion in support for American families and children.
The United States has long lagged other developed nations in parental leave policies which support female participation in the workforce. The Covid-19 pandemic has made this problem worse, causing a US$64 billion loss in women’s wages and economic activity per year. The US, shockingly, is the only major developed market economy where there is neither federal paid parental nor sick leave. There is a lot of catching up to do, and in our view companies already well-positioned on these issues, offering their employees fairer terms, and with more diverse workforces, are leaders in delivering a more sustainable world.
The cycle on fast-forward
My team have felt for some time that reflation was the order of the day, both from an economic and market point of view, and indeed cyclical assets have continued to rally strongly. We see this as a cycle on fast-forward; in many ways the post-2008 period was really an anomalous cycle whereas this time we’re seeing a more traditional ‘recession into recovery’ dynamic play out.
Have we reached peak growth? Our original thinking was that, as base effects start to roll over in the summer, growth could dip also and signal an end to the acceleration phase. We haven’t fully changed our mind on that yet, but we have noticed evidence that this recovery has more strength and persistency than we first gave it credit for. These include inventories at multi-year lows, US housing stock at all-time lows, and an incredibly strong acceleration in the labour market.
The big question remains inflation: is this pick-up in inflation transitory or not? The Fed have been very strong in saying they view it as transitory, but we do some risks bubbling up that inflation may be a bit more persistent. For example, last week’s income data shows that wage inflation is starting to come through. We’re keeping a really close eye on whether wage rises are broadening out, as that would further indicate persistent inflation and raises questions about the policy response.
Notwithstanding those factors, we still favour cyclical and short duration assets, with a relative preference for the UK and Europe, with a more neutral view on the US where we’re focusing on high quality assets.
We pay a lot of attention to investor sentiment, and there are certainly signs of euphoria with record inflows into equity funds. That’s a ‘yellow light’ on our dashboard that stops us from being table-poundingly bullish at the moment, but it doesn’t derail the pro-cyclical bias in our strategy.
Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances.
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