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Weekly market commentary

Three investment themes at COP28

­Market take

Weekly video_20231204

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

U.S. stocks last week hit their highest level of the year, and U.S. 10-year Treasury yields fell lower. We expect near-term volatility and rising yields in the long term.

Week ahead

U.S. payrolls data this week will show if jobs growth is still slowing. We think the U.S. 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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Investment themes

01

Managing macro risk

What matters in the new regime: structurally higher interest rates and tougher financial conditions. Markets are still adjusting to this environment – and that’s why context is key in managing macro risk.

02

Steering portfolio outcomes

We think investors need to grab the investment wheel and take a more dynamic approach to their portfolios while staying selective with allocations.

03

Harnessing mega forces

Mega forces are another way to steer portfolios – and think about portfolio building blocks that transcend traditional asset classes, in our view.

Physical damages mount
U.S. events with inflation-adjusted losses over $1 billion, 1985-2023

The yellow bars in the chart show that the number of climate events with damages above $1 billion has steadily climbed over the past roughly four decades.

Source: BlackRock Investment Institute, NOAA National Centers for Environmental Information (NCEI) U.S. 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 U.S. 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 U.S. 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

The chart shows that U.S. equities are the best performing asset year-to-date among a selected group of assets, while Brent crude 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 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 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.

Dec. 5

Japan CPI; China PMI

Dec. 7

China trade data

Dec. 8

U.S. payrolls; University of Michigan consumer sentiment survey

Dec. 9

China CPI and PPI

Read our past weekly market commentaries here.

 

Big calls

Our highest conviction views on tactical (6-12 month) and strategic (long-term) horizons, December 2023

  Reasons
Tactical  
DM equities Our macro view keeps us underweight, but we see the AI theme and alpha potential has taken us closer to a neutral view.
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 than policy targets, making this one of our strongest views on a strategic horizon.
Short- and medium-term bonds We overall prefer short-term bonds over the 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, December 2023. 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, December 2023

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.

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

Legend Granular

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, December 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.

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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