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Three investment themes at COP28
Market take
Christopher Weber
Opening frame: What’s driving markets? Market take
Camera frame
We’re following three topics and their investment implications at this year’s UN climate conference, COP28, in Dubai.
Title slide: Three investment themes at COP28
1: Progress on climate resilience
We [think] companies that create and adopt products and services that boost climate resilience should be on investor radars and will become a more widely recognized opportunity. Why?
The number of climate events with inflation-adjusted damages above $1 billion has steadily climbed over the past roughly four decades.
As such risks increase, we are seeing early signs of growing demand for products and services that boost climate resilience.
2: Unlocking climate finance for emerging markets
Second, we see emerging markets playing a pivotal role in the transition. We estimate that they will account for over half of energy demand and carbon emissions by 2050. But they’ll likely face lower-than-needed transition-related investments due to factors like a greater perceived investment risk, higher cost of capital and greater exposure to physical climate damage.
3: More details on transition policies
Lastly, we think COP28 will offer further details about policies that are likely to drive how the mix of energy use evolves – and the investment opportunities.
Countries at COP28 looked poised to agree to triple capacity of renewable power by 2030.
Outro: Here’s our Market take
We monitor COP28 for signs of growth in low carbon transition-related investment themes.
We see granular opportunities in public companies that produce climate resilience solutions across sectors like technology and industrials.
And we think public sector reforms could make it easier for private market players to fill the emerging market financing gap.
Closing frame: Read details:
www.blackrock.com/weekly-commentary.
Transition themes
We track the low-carbon transition to identify investment opportunities and risks. We’re eyeing three related themes at the annual UN climate conference.
Market backdrop
US stocks last week hit their highest level of the year, and US 10-year Treasury yields fell lower. We expect near-term volatility and rising yields in the long term.
Week ahead
US payrolls data this week will show if jobs growth is still slowing. We think the US can only sustain a fraction of recent job growth without inflation resurging.
The low-carbon transition is one of five mega forces, or structural shifts, we track for investment risks and opportunities. We’re following three investment themes at the UN climate conference (COP28) in Dubai. First, climate resilience – society’s ability to prepare for and withstand climate risks – is an underappreciated theme, we think. Second, we eye progress on unlocking climate finance in emerging markets. Third, we watch for new policy plans that could shape the transition path.
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Physical damages mount
US events with inflation-adjusted losses over $1 billion, 1985-2023
Source: BlackRock Investment Institute, NOAA National Centers for Environmental Information (NCEI) US Billion-Dollar Weather and Climate Disasters (2023), data as of November 2023. Notes: The yellow bars show the number of climate events with losses greater than US$1 billion. The data include droughts, flooding, severe storms, hurricanes, wildfires, winter storms and freezes. The orange line shows the total cost as a 10-year moving average. The data are adjusted for inflation using 2022 dollars. All currency figures are in USD.
We highlight climate resilience first because it is an emerging theme not yet fully appreciated by investors. We think companies that create and adopt products and services that boost climate resilience will become a more widely recognized opportunity. Why? The number of US climate events with damages above $1 billion has steadily climbed over the past roughly four decades. See the yellow bars in the chart. As such risks increase, we are seeing early signs of growing demand for climate resilience solutions. Case in point: Demand for home air-filtration appliances in the northeastern US spiked during the Canadian wildfires in early 2023. Emerging markets (EMs) are set to bear some of these risks more acutely given greater exposure to physical climate damage. Yet they face difficulties in raising financing needed for the transition. We think this also offers an investment opportunity and is key to tracking the transition’s overall speed and shape.
The IPCC has reported persistent increases in average annual temperatures, precipitation and sea levels. The frequency and intensity of acute weather events, such as extreme heat and widespread floods, has also increased. We see policy and regulation driving the growth of the market for resilience products. Any COP28 agreement on a global plan for climate adaption could spur new policy. Some incentives to invest in resilience are already in place, including $50 billion from the Infrastructure Investment and Jobs Act and over $20 billion from the Inflation Reduction Act. Other support comes from building code updates in the U.S. and Europe explicitly focusing on improving climate resilience. Read more in our new paper.
EM financing gap
We are closely watching policy developments that could unlock investment opportunities in EMs. They play a pivotal role in the global reduction in carbon emissions, in our view. Why? We estimate EM will account for over half of energy demand and carbon emissions by 2050. Yet transition-related investment in EMs will likely be lower than in DMs due to a higher cost of capital from greater perceived investment risk, and greater exposure to physical climate damage. We think closing the financing gap would require significant public sector reforms and private sector innovation, resulting in greater "blending" of public and private capital. We think successful reforms could see low-carbon investment in EMs rise on average by a further $200 billion a year – or $4 trillion overall – above our base view of a major increase in investment between 2030-2050.
Evolving energy use
We think COP28 will also provide further details about policies that are likely to influence how the mix of energy use evolves – and the investment opportunities. We see policy, technology and consumer preferences driving an accelerating shift to renewable energy in DMs. 2023 has seen record growth of about 50-70% for renewable energy, according to the International Energy Agency. Countries at COP28 look poised to agree to a goal to triple capacity by 2030. We think further policy support may make the goal achievable – and yet the S&P global clean energy index is down about 28% year to date, LSEG data show. Even with this growth in renewables, meeting global energy demand will rely on traditional energy for some time – and we think it can outperform at times, especially when there are supply-demand mismatches.
Our bottom line
We monitor COP28 for signs of growth in transition-related investment themes. We see granular opportunities in public companies that produce climate resilience solutions across sectors. Solutions like early monitoring systems to predict floods or retrofitting buildings to better withstand extreme weather make the technology and industrial sectors stand out to us. And we think reforms could make it easier for private market players to fill the EM financing gap.
Market backdrop
Last week, the S&P 500 closed at its highest level this year after rising roughly 9% in November – the largest monthly gain in 16 months. The U.S. 10-year Treasury yield slid lower to near 4.30%, with its November drop of more than 50 basis points marking the largest monthly fall in 12 years. We expect further volatility for bonds in the near term as policy rates peak. We think long-term yields will rise again as investors demand more compensation for the risk of holding long-term bonds.
The U.S. payrolls report for November is in focus this week. We are looking for signs that job growth is slowing further as the post-pandemic normalization runs its course. Structural labor shortages as the U.S. population ages means the economy will only be able to sustain a fraction of recent job growth without stoking inflation again, in our view.
Week ahead
Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from LSEG Datastream as of Nov. 30, 2023. Notes: The two ends of the bars show the lowest and highest returns at any point in the last 12-months, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in US dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE US Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (US, Germany and Italy), Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index and MSCI USA Index.
Dec. 5
Japan CPI; China PMI
Dec. 7
China trade data
Dec. 8
US payrolls; University of Michigan consumer sentiment survey
Dec. 9
China CPI and PPI
Read our past weekly commentaries here.
Investment themes
01
Holding tight
Markets have come around to the view that central banks will not quickly ease policy in a world shaped by supply constraints. We see them keeping policy tight to lean against inflationary pressures.
02
Pivoting to new opportunities
Higher macro and market volatility has brought more divergent security performance relative to the broader market. Benefiting from this requires granularity and nimbleness.
03
Harnessing mega forces
The new regime is shaped by five structural forces we think are poised to create big shifts in profitability across economies and sectors. The key is identifying catalysts that can supercharge them and whether the shifts are priced by markets today.
Directional views
Strategic (long-term) and tactical (6-12 month) views on broad asset classes, December 2023.
| Asset | Strategic view | Tactical view | Commentary | |
|---|---|---|---|---|
| Equities | Developed market |  |
 |
We are neutral equities in our strategic views as high-for-longer interest rates lead us to re-evaluate our estimate for stock valuations from here. Tactically, we stay underweight DM stocks but upgrade Japan. We are underweight the US and Europe. Corporate earnings expectations don’t fully reflect the economic stagnation we see. We see other opportunities in equities. |
| Emerging market | |
|
Strategically, we are neutral as we don’t see significant earnings growth or higher compensation for risk. We go neutral tactically given a weaker growth trajectory. We prefer EM debt over equity. | |
| Developed market government bonds | Nominal | |
|
Higher-for-longer policy rates have bolstered the case for short-dated government debt in portfolios on both tactical and strategic horizons. Strategically, we carve out an overweight for short- and medium-term bonds as yields have surged. We stay underweight US and euro area long-dated bonds as we expect investors to demand more compensation for the risk of holding them. We are strategically neutral on government bonds overall. Tactically, we’re neutral long-term Treasuries as the yield surge driven by expected policy rates approaches a peak. We’re overweight euro area and UK bonds as we see more rate cuts than the market does. |
| Inflation-linked |  |
|
We are strategically overweight DM inflation-linked bonds where we see higher inflation persisting. But we have trimmed our tactical view to neutral on current market pricing in the euro area. | |
| Public credit and emerging market debt | Investment grade | |
 |
Strategically, we’re underweight due to limited compensation above short-dated government bonds. We’re underweight tactically to fund risk-taking elsewhere as spreads remain tight. |
| High yield | |
|
Strategically, we are neutral high yield as we see the asset class as more vulnerable to recession risks. We’re tactically underweight. Spreads don’t fully compensate for slower growth and tighter credit conditions we expect. | |
| EM debt | |
 |
Strategically, we're neutral and see more attractive income opportunities elsewhere. Tactically, we’re overweight hard currency EM debt due to higher yields. It is also cushioned from weakening local currencies as EM central banks cut policy rates. | |
| Private markets | Income | |
- | We are strategically overweight private markets income. For investors with a long-term view, we see opportunities in private credit as private lenders help fill a void left by a bank pullback. |
| Growth | |
- | Even in our underweight to growth private markets, we see areas like infrastructure equity as a relative bright spot. |
Note: Views are from a US dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.
Our granular views indicate how we think individual assets will perform against broad asset classes. We indicate different levels of conviction.
Tactical granular views
Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, December 2023.
| Asset | Tactical view | Commentary | ||
|---|---|---|---|---|
| Equities | ||||
| United States | |
We are underweight the broad market – still our largest portfolio allocation. We don’t think earnings expectations reflect the macro damage we expect. We recognize momentum is strong near-term. | ||
| Europe | |
We are underweight. We see the European Central Bank holding policy tight in a slowdown and the support to growth from lower energy prices is fading. | ||
| UK |  |
We are neutral. We find that attractive valuations better reflect the weak growth outlook and the Bank of England’s sharp rate hikes to deal with sticky inflation. | ||
| Japan | |
We are overweight. We think stronger growth can help earnings top expectations. Stock buybacks and other shareholder-friendly actions may keep attracting foreign investors. | ||
| Pacific ex-Japan | |
We are neutral. China’s restart is losing steam and we don’t see valuations compelling enough to turn overweight. | ||
| DM AI mega force | |
We are overweight. We see a multi-country and multi-sector AI-centered investment cycle unfolding set to support revenues and margins. | ||
| Emerging markets | |
We are neutral. We see growth on a weaker trajectory and see only limited policy stimulus from China. We prefer EM debt over equity. | ||
| China | |
We are neutral. Growth has slowed. Policy stimulus is not as large as in the past. Yet it should stabilise activity, and valuations have come down. Structural challenges imply deteriorating long-term growth. Geopolitical risks persist. | ||
| Fixed income | ||||
| Short US Treasuries | |
We are overweight. We prefer short-term government bonds for income as interest rates stay higher for longer. | ||
| Long US Treasuries | |
We are neutral. The yield surge driven by expected policy rates is approaching a peak. We now see about equal odds that long-term yields swing in either direction. | ||
| US inflation-linked bonds | |
We are overweight and prefer the US over the euro area. We see market pricing underestimating sticky inflation. | ||
| Euro area inflation-linked bonds | |
We prefer the US over the euro area. We see markets overestimating how persistent inflation in the euro area will be relative to the US | ||
| Euro area government bonds | |
We are overweight. Market pricing reflects policy rates staying higher for longer even as growth deteriorates. Widening peripheral bond spreads remain a risk. | ||
| UK Gilts | |
We are overweight. Gilt yields are holding near their highest in 15 years. Markets are pricing in restrictive Bank of England policy rates for longer than we expect. | ||
| Japan government bonds | |
We are underweight. We see upside risks to yields from the Bank of Japan winding down its ultra-loose policy. | ||
| China government bonds | |
We are neutral. Bonds are supported by looser policy. Yet we find yields more attractive in short-term DM paper. | ||
| Global investment grade credit | |
We are underweight. We take advantage of tight credit spreads to fund increased risk-taking elsewhere in the portfolio. We look to up the allocation if growth deteriorates. | ||
| US agency MBS | |
We’re overweight. We see agency MBS as a high-quality exposure within diversified bond allocations. | ||
| Global high yield | |
We are underweight. Spreads do not fully compensate for slower growth and tighter credit conditions we anticipate. | ||
| Asia credit | |
We are neutral. We don’t find valuations compelling enough to turn more positive. | ||
| Emerging market - hard currency | |
We prefer emerging hard currency on due to higher yields. It is also cushioned from weakening local currencies as EM central banks start to cut policy rates. | ||
| Emerging market - local currency | |
We are neutral. Yields have fallen closer to US Treasury yields. Plus, central bank rate cuts could put downward pressure on EM currencies, dragging on potential returns. | ||
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a US dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.
Euro-denominated tactical granular views
Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, December 2023.
| Asset | Tactical view | Commentary | ||
|---|---|---|---|---|
| Equities | ||||
| Europe ex UK | |
We are underweight. We see the European Central Bank holding policy tight in a slowdown and the support to growth from lower energy prices is fading. | ||
| Germany | |
We are underweight. Valuations are moderately supportive relative to peers, but we see earnings under pressure from higher interest rates, slower global growth and medium-term uncertainty on energy supply. Longer term, we think the low-carbon transition may bring opportunities. | ||
| France | |
We are underweight. Relatively richer valuations and a potential drag to earnings from weaker consumption amid higher interest rates offset the positive impact from past productivity enhancing reforms and favorable energy mix. | ||
| Italy | |
We are underweight. The economy’s relatively weak credit fundamentals amid global tightening financial conditions keep us cautious even though valuations and earnings revision trends look attractive versus peers. | ||
| Spain | |
We are underweight. Valuations and earnings momentum are supportive relative to peers, but the uncertain outcome of Spanish elections is a temporary headwind. | ||
| Netherlands | |
We are underweight. The Dutch stock markets' tilt to technology and semiconductors, a key beneficiary of higher demand for AI, is offset by relatively less favorable valuations and earnings momentum than European peers. | ||
| Switzerland | |
We are overweight. We hold a relative preference. The index’s high weights to defensive sectors like health care and non-discretionary consumer goods provide a cushion amid heightened global macro uncertainty. Valuations remain high versus peers and a strong currency is a drag on export competitiveness. | ||
| UK | |
We are neutral. We find that attractive valuations better reflect the weak growth outlook and the Bank of England’s sharp rate hikes to deal with sticky inflation. | ||
| Fixed income | ||||
| Euro area government bonds | |
We are overweight. Market pricing reflects policy rates staying higher for longer even as growth deteriorates. Widening peripheral bond spreads remain a risk. | ||
| German bunds | |
We are overweight. Market pricing reflects policy rates staying high for longer even as growth deteriorates. We hold a preference over Italian BTPs. | ||
| French OATs | |
We are overweight. Valuations look moderately compelling compared to peripheral bonds, with French spreads to German bonds hovering above historical averages. Elevated French public debt and a slower pace of structural reforms remain headwinds. | ||
| Italian BTPs | |
We are neutral. The spread over German Bunds looks tight amid deteriorating macro and restrictive ECB policy. Yet domestic factors remain supportive, namely a more balanced current account and prudent fiscal stance. We see income helping to compensate for the slightly wider spreads we expect. | ||
| UK gilts | |
We are overweight. Gilt yields are holding near their highest in 15 years. Markets are pricing in restrictive Bank of England policy rates for longer than we expect. | ||
| Swiss government bonds | |
We are neutral. We don’t see the SNB hiking rates as much as the ECB given relatively subdued inflation and a strong currency. Further upward pressure on yields appears limited given global macro uncertainty. | ||
| European inflation-linked bonds | |
We prefer the US over the euro area. We see markets overestimating how persistent inflation in the euro area will be relative to the US | ||
| European investment grade credit | |
We are neutral European investment-grade credit. Spreads have tightened vs. government bonds, and we now see less room for outperformance given weaker growth prospects amid restrictive monetary policy. We continue to prefer European investment grade over the US given more attractive valuations amid decent income. | ||
| European high yield | |
We are neutral. We find the income potential attractive yet prefer up-in-quality credit exposures amid a worsening macro backdrop. | ||
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a euro perspective, June 2023. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.
Meet the authors
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Christopher Kaminker
Head of Sustainable Research and Analytics – BlackRock Investment Institute
Chris Weber
Head of Climate Research – BlackRock Investment Institute
Jessica Thye
Sustainable Research and Analytics – BlackRock Investment Institute
This material is for distribution to Professional Clients (as defined by the FCA Rules) and should not be relied upon by any other persons.
Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: 020 7743 3000. Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited.
Sources: Bloomberg unless otherwise specified.
Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.
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