MARKET INSIGHTS

Weekly market commentary

11-Mar-2024
  • BlackRock

Low-carbon transition themes in 2024

Market take

Weekly video_20240311

Jessica Thye

Opening frame: What’s driving markets? Market take

Camera frame

The transition to a low-carbon economy is a mega force or structural shift we track that is shaping investment returns.

Title slide: Low-carbon transition themes in 2024

We see potentially market-moving developments in three key areas this year.

1: Battery prices

First, battery prices make up a significant portion of the production cost of some clean technologies and have slid sharply over the past decade. We think falling prices could give a boost to electric and hybrid vehicles, and energy storage for power grids this year.

2: Global elections

Second, global elections, including in the European Union, U.S. and India, come at a time of increasing geopolitical fragmentation. This year’s many elections could have trade and policy implications for the evolution and adoption of clean technology, and the path of the low-carbon transition.

3: Climate resilience

Third, further  extreme weather events could spur interest in a new investment theme: climate resilience, or society’s ability to adapt to climate risks. We believe financial markets may underappreciate the prospects for companies that create and adopt products and services that boost climate resilience.

Outro: Here’s our Market take

As we weigh transition-related investment opportunities and risks, much will depend on the direction of global transition policy following key elections. As physical climate risks mount, we think climate resilience could come to the fore as an investment theme.

Closing frame: Read details: 

www.blackrock.com/weekly-commentary

Three themes

We monitor battery prices, elections and market attention on climate resilience for their impact on transition-related investment opportunities and risks.

Market backdrop

U.S. stocks were mostly flat last week, while 10-year U.S. Treasury yields fell further. Markets still expect the first Federal Reserve rate cut around mid-2024.

Week ahead

We’re watching February U.S. CPI data out this week to see how much further inflation will fall in the near term. We still expect inflation to resurge in 2025. 

The low-carbon transition is a mega force we track that is shaping investment returns now. We see potentially market-moving developments in three key areas this year. First, falling battery prices could boost demand for energy storage systems for power grids, and electric and hybrid vehicles. Second, elections around the globe could affect future energy and industrial policy. And third, rising physical damages could spur interest in a new investment theme: climate resilience.

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Cheaper batteries
Lithium-ion battery costs, past and projected, 2015-2040

The chart shows that battery prices have slid sharply over the past decade. There was an uptick in 2022, but battery costs are projected to fall even further through 2040.

Source: BlackRock Investment Institute, with data from BloombergNEF and INET, March 2024. Notes: The chart shows past and projected costs per kilowatt-hour for the volume-weighted average lithium-ion battery cell. This includes data from passenger cars, buses, commercial vehicles and stationary storage.

Battery prices make up a third or more of the production cost of some clean technologies, such as energy storage systems for power grids, electric and hybrid vehicles (EVs). They have slid sharply over the past decade. See the chart. The 2022 uptick looks to have been a blip, with battery producers signaling potentially sharp price cuts this year – largely due to an 80% price drop in lithium, a key input, after a surge in supply. Intense competition and rapid technological progress are helping reduce prices, too. Some companies are using artificial intelligence – another mega force – to discover new battery materials that could lower future costs. We’re watching whether a further fall in battery prices will feed through to final purchase prices and boost demand for energy storage, EVs and hybrid autos – especially as their running costs are lower than for traditional internal combustion vehicles.

Elections in focus

This year’s many elections, including in the European Union, U.S. and India, come at a time of increasing geopolitical fragmentation and as governments seek to balance decarbonization, energy security and energy affordability objectives – which can be complementary or competing. The election results could have implications for how that balance is struck – and consequently for the evolution and adoption of clean technology, and the path of the low-carbon transition more broadly.

Several governments are subsidizing their energy and clean tech industries, with non-subsidized competitors facing pricing and margin pressure. Countries could levy trade restrictions on imported tech to shield local industries. U.S. and EU investigations into the Chinese EV industry could have this outcome. We could also see changes to transition-related policy after the elections – potentially accelerating the transition in some places and slowing it in others. In India, the election could result in policy continuity, paving the way for quicker decarbonization and bolstering the country’s efforts to become a bigger clean technology production hub. The U.S. election result could have implications for the Inflation Reduction Act – a 2022 law that has spurred major investment in, and demand for, energy infrastructure and technology. Changes could range from repeal or delays to complementary policy that increases its effectiveness, like land permitting reform.

An emergent investment theme

A third focus: whether 2023’s title as the hottest year on record – as recorded by the World Meteorological Organization – and further extreme weather events this year will spark greater investor interest in climate resilience, or society’s ability to prepare for and withstand climate risks. Think early monitoring systems for floods, air conditioning to cope with heatwaves or retrofitting buildings to better withstand extreme weather. We think markets may underappreciate the prospects for firms creating and adopting resilience-boosting products and services – and see this becoming a more recognized opportunity.

Our bottom line

We think falling battery prices could boost the EV and energy storage industries this year. Much depends on the direction of global transition policy after key elections as we weigh transition-related investment opportunities and risks. As physical climate risks mount, we believe climate resilience could come to the fore as an investment theme.

Market backdrop

The S&P 500 was mostly flat on the week after pushing to new highs. U.S. 10-year Treasury yields edged lower and were about 20 basis points off their 2024 high after remarks by Fed Chair Jerome Powell did little to change expectations for a first rate cut around midyear. U.S. jobs data showed a strong if moderating labor market. Wage growth also moderated but remains at levels not consistent with inflation staying at the Fed’s 2% target. We still see inflation on a rollercoaster.

We’re watching the release of the U.S. CPI data for February this week to gauge how much further inflation will fall in the near term after January showed stubborn inflation. Rapidly falling goods prices look set to drive inflation down near the Fed’s 2% policy target this year. Yet once goods prices stabilize, we see inflation on a rollercoaster ride back up in 2025 as wage growth remains elevated and keeps services inflation higher than before the pandemic.

Week ahead

The chart shows that U.S. equities are the best performing asset year-to-date among a selected group of assets, while the German 10-year Bund is the worst.

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 March 7, 2024. Notes: The two ends of the bars show the lowest and highest returns at any point year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE U.S. Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (U.S., 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.

March 12

U.S. CPI; UK jobs data

March 13

UK GDP

March 15

University of Michigan consumer sentiment survey

March 11-18

China total social financing

Big calls

Our highest conviction views on tactical (6-12 month) and strategic (long-term) horizons, March 2024

  Reasons
Tactical  
U.S. equities Our macro view has us neutral at the benchmark level. But the AI theme and its potential to generate alpha – or above-benchmark returns – push us to be overweight overall.
Income in fixed income The income cushion bonds provide has increased across the board in a higher rate environment. We like short-term bonds and are now neutral long-term U.S. Treasuries as we see two-way risks ahead.
Geographic granularity We favor getting granular by geography and like Japan equities in DM. Within EM, we like India and Mexico as beneficiaries of mega forces even as relative valuations appear rich.
Strategic  
Private credit We think private credit is going to earn lending share as banks retreat – and at attractive returns relative to credit risk.
Inflation-linked bonds We see inflation staying closer to 3% in the new regime on a strategic horizon.
Short- and medium-term bonds We overall prefer short-term bonds over long term. That’s due to more uncertain and volatile inflation, heightened bond market volatility and weaker investor demand.

Note: Views are from a U.S. dollar perspective, March 2024. 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.

Tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, March 2024

Legend Granular

Our approach is to first determine asset allocations based on our macro outlook – and what’s in the price. The table below reflects this. It leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns. The new regime is not conducive to static exposures to broad asset classes, in our view, but it is creating more space for alpha. For example, the alpha opportunity in highly efficient DM equities markets historically has been low. That’s no longer the case, we think, thanks to greater volatility, macro uncertainty and dispersion of returns. The new regime puts a premium on insights and skill, in our view.

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 U.S. 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.

Meet the Authors
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Chris Weber
Head of Climate Research – BlackRock Investment Institute
David Giordano
Global Head — BlackRock Climate Infrastructure
Jessica Thye
Sustainable Research and Analytics — BlackRock Investment Institute