In the short term: unstable and volatile markets
After inflation rose, as a result of the pandemic and the war in Ukraine, central banks had to raise interest rates. In accordance with their mandate, they seek to slow the economic cycle in order to bring inflation back to its target level. If the context is familiar to investors, the peculiarity of the current cycle lies in the fact that it is achieved after a long period of very low rates, followed by a short period of rapid rise in prices.
This rapid rise reveals a whole series of latent vulnerabilities that have now come to light. The recent collapse of some banking institutions in the US or Europe reminds us of the fragility of some sectors. The ongoing bank credit crunch will affect economies And the possibility of a recession could materialize in the coming months.
Added to this weak fiscal context is also an uncertain geopolitical situation. Everything indicates that the markets will remain relatively volatile and uncertain in the coming months.
Environmental transformation, investment conviction
While market news naturally prompts us to err on the side of caution, climate change certainly represents one of the most important opportunities long-term investors can seize.
Today, powerful forces are at work to encourage and facilitate the climate transformation that has become necessary: pressure from consumers, action by regulators, manufacturers’ transition to business models and fair allocation of capital by investors. Government actions also contributethrough public investment programs or tax credits.
Climate transformation will be built on four main axes:
electrification. Electricity has become the dominant energy carrier. From about 20% of global energy demand in 2020, it will rise to more than 70% in 2050. To produce electricity, we will have to switch from fossil to renewable energy (water, wind, sun and certainly nuclear).
Agriculture and nature conservation. By 2050, we will want to feed an additional 2 billion people, with significant arable land being restored for reforestation and biodiversity projects. We will have to rethink the methods of production and consumption.
Materials. It will be a matter of separating the path of economic growth, which we wish to keep strong, from the path of raw material extraction. The “take, make, and waste” paradigm should be replaced by the “reduce, reuse, and recycle” paradigm. building materials need to be redesigned; cars will be shared; Its components will be recycled.
carbon. The market economy model must be extended to all of its externalities. Carbon emissions must be more costly, creating necessary incentive mechanisms for industrial actors to adopt genuine transition strategies. At the same time, proven carbon sequestration will open the door to unexpected cash transfers until recently.
Like the industrial revolution in 19H century, or the information technology revolution of the past 50 years, these transformations will have a significant impact on all of our economic systems. Leading companies will emerge stronger, others will disappear.
The solutions are there
Most of the technologies needed for these transformations already exist. They are evolving towards collective solutions. We are on the cusp of an exponential acceleration of these industrial solutions which should open up unprecedented growth opportunities.
Several factors are responsible for this acceleration. First of all, lower production costs: in the field of renewable energies, costs have fallen by 60 to 90% over the past ten years. Next, continuous performance improvement: the electric vehicle achieves an energy efficiency of around 80% compared to 20% for a conventional vehicle. Finally, massive support from public authorities, amounting to several hundred billion francs for the three major blocs Europe, the United States and China, is helping to accelerate investment and implementation of large-scale industrial solutions – in the areas of heat. Pumps, electric vehicles and building materials eg.
The war in Ukraine is an additional accelerating factor: we will note here Europe’s renewed conviction of the importance of true energy independence.
Align portfolios with the ongoing transition process
To take advantage of climate change-related investment opportunities, it is essential to understand its nature and pathways. This requires real basic research work. It is necessary to analyze the level of maturity, performance and growth potential of different technologies and be able to model their development. The challenge is to be able to anticipate the nature of the upcoming major changes, which are sure to shake up many economic sectors and lead to the emergence of new business models.
It is useful to keep track of the investments made by companies: they often point to sources of future profitability. The energy transition alone should account for approximately CHF 3,800 billion in investments annually worldwide, over the next ten years. This amount is comparable to the capital expenditure of the IT sector, which today accounts for nearly 20% of total global corporate revenue, compared to only 5% in the 1990s. Event in this area, let’s prepare for the emergence of new GAFAs tomorrow.
Climate change is no longer a matter of concept. This is no longer a far-fetched project. It is our deep conviction that this transformation has begun today. She is on the move. It’s accelerating in many ways. For the investor, the question to ask is: do we want to ignore them, or, on the contrary, should they not be systematically integrated into our investment portfolios?
Tribune by Frédéric Rochat, Managing Partner, Banque Lombard-Odier
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