Here are the 3 factors that will affect the markets
"The 3" ds "of the future: decarbonization, defense and deglobalization". The analysis by Natasha Ebtehadj, Columbia Threadneedle Investments' global equity manager
Peace is like concrete: its effects are not always visible, but they hold everything together. It is the foundation of geopolitics and markets, which have been deeply shaken by the unexpected events of the last few weeks, the repercussions of which will likely be felt in the years to come.
The economic sanctions recently imposed on Russia have a rather limited direct impact on our portfolios and global equity markets – at the end of 2021, our flagship strategy, Global Select, had no direct exposure to Russia, from which it drew less than 1% of its revenues. Furthermore, Russia represented just 0.4% of our global equity benchmark [1]. However, we see many secondary impacts reflected in global equity portfolios.
There has been a lot of talk about oil, natural gas and wheat, but the world also depends on Russia for other raw materials: palladium and neon, essential in the production of semiconductors and cars, and titanium, used in the aerospace industry. The shortage of semiconductors, which hit the automotive sector hard last year, seemed to finally begin to ease, but this latest supply shock could delay the resumption of chip production again, with ripple effects on the various products that make them. use. Long waiting lists for new cars are starting to become the norm.
Markets are moving to incorporate the earnings impact of rising inflation and commodity costs into prices. In this context, one of the positions in the portfolio, Ecolab (a company of cleaning and hygiene products), decided on a temporary price increase in an attempt to cover the increases in input prices. In our view, it is companies of this type – characterized by robust pricing power and flexible manufacturing capabilities – that are best positioned to address inflationary challenges and it is on these companies that the global equity team will focus to identify potential opportunities. of investment.
As long-term investors, our goal is always to look beyond the “noise” to glimpse the world ahead. Beyond the new wave of inflation coming from production chains and raw materials, there are three themes destined to persist beyond the initial inflationary surge: decarbonisation, defense and deglobalization.
The war in Ukraine could represent for the energy transition what Covid has represented for the cloud. Necessity sharpens the wits and we expect to see a major acceleration in the pace of decarbonisation, especially in Europe where dependence on Russian energy is particularly high. The REPowerEU [2] plan recently presented by the European Commission in response to the energy security problem shows the size of the EU's ambitions, which aims to reduce its dependence on Russian gas by two thirds by the end of the year. Accelerating the development of renewable sources such as wind, solar and green hydrogen will have to play a key role in achieving these goals. Orsted, a leading offshore wind company, is one of the positions in the strategy that gives us exposure to this theme.
Defense spending is another area that we believe will see an increase in the coming years. This will happen both at the government level and within private companies interested in increasing spending on cybersecurity. Cyberwarfare is a relatively recent dimension in a larger physical conflict, but an increase in this type of attacks against private companies involved in the conflict via boycotts against Russia is likely to be expected. Enhancing the protection of businesses' digital assets will likely be another trend that will gain momentum as a result of the war, and cybersecurity service providers will play a crucial role.
The last theme is that of deglobalization, inaugurated by former US President Donald Trump in 2018 with his trade war with China. This confrontation, exacerbated by the pandemic, could be "cemented" by the war in Ukraine. In the short term, continued setbacks along production chains are likely to translate into further diversification of suppliers and production facilities and better alignment between production and demand locations. Over a much longer time horizon, the use of economic sanctions against Russia, and above all the hitherto unprecedented decision to use the dollar as a weapon against a G20 member state, freezing Russia's access to USD 630 billion in reserves currencies, will almost certainly have repercussions on the global economy. It is difficult to imagine that China, with its USD 3.2 trillion of foreign exchange reserves, [3] most of which probably denominated in dollars, [4] would want to maintain this dollar exposure, given its personal geopolitical tensions with the United States. . Added to inflation, this could create a scenario where the nominal cost of capital continues to trend upwards.
When markets try to incorporate change in prices, opportunities always arise. The benefits of active management allow us to move to stocks that we believe have discounted excessive risk and to stay focused on these opportunities, identifying the companies best able to adapt to the new environment.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/mercati-decarbonizzazione-difesa-deglobalizzazione/ on Mon, 18 Apr 2022 06:32:02 +0000.