2021 INVESTMENT THEMES HALF-YEAR UPDATE

The post-reflation outlook

Reopening in progress despite global infection wave: thanks to an impressive acceleration in COVID-19 vaccination programmes, US and European economies are joining China in exiting lockdowns and progressively reopening their domestic economies, ushering in a recovery in the services sector. Unsurprisingly, corporate earnings are also rallying ahead of consensus analyst expectations, driving optimism in equities.  .

A vigorous debate over the long-term inflation path: while it is clear that US inflation will increase quickly in the next few months, led by food and energy prices along with housing costs, the long-term inflation path is still hotly debated. On the one hand, buoyant commodity prices and strong end-demand point to higher general prices ahead, while on the other, the deflationary forces from high unemployment, better post-COVID productivity and accelerating technological advances may ultimately prevent inflation from rising too far, too fast.

Attractive summer defensive alternatives to 100% equity risk: with equities potentially entering the seasonally more challenging summer period after an impressive 27% gain in global equities since the beginning of last November, investors may wish to consider more defensive strategies. The obvious lower-risk choices of sovereign bonds or Investment Grade credit still offer negative after-inflation yields, but there are still solutions offering potential positive real returns at a reduced level of investment risk. These can be found both using some form of lower-risk equity-based exposure, using hybrid (part equity, part fixed-income) assets or via specific strategies embedded in structured products and alternative UCITS funds.

The rush to target a net zero-carbon economy: with the European Union countries, the US Biden administration and the Chinese Communist Party all prioritising a cut in carbon emissions and pollution via low or zero-carbon energy sources, we see stricter environmental regulations boosting carbon credit pricing. Since last November, European Union carbon credits have more than doubled in price to nearly EUR50/metric tonne. But rather than just targeting solar panels, wind power and hydrogen fuel cell technology, we look to energy conservation, large-scale industrial battery storage, biomass harvesting/refining and carbon

capture for “clean” gas provision as more attractive investment subthemes within climate change. Nuclear power is also potentially a consideration as an official low-carbon energy source as well, with the Joint Research Council of the European Union arguing that nuclear energy deserves a “green” label.

The future of food in a sustainable world: food is essential to life, forming an important part of our cultural identity, and playing a chief role in the economy. Many people want their food to form part of a healthy lifestyle, but we should also consider the impact that producing and consuming food has on the world’s resources. Food production is responsible for 26% of global carbon emissions, and thus must be an essential part of a global net zero-carbon strategy.

A sustainable food system is a type of food system that provides healthy food to people while ensuring sustainable impacts on environmental, economic and social systems linked to food. Indeed sustainable food systems start with the development of sustainable agricultural practices (e.g. more efficient use of water in agriculture), more sustainable food distribution systems (using recycled/recyclable packaging), creation of sustainable diets and reduction of food waste throughout the system in line with the United Nation’s 17 Sustainable Development Goals.

Consumers ready with bulging wallets: households around the world have accumulated at least USD5.4 trillion in excess savings since the start of the Coronavirus pandemic, of which USD2+ trillion is expected to be spent as countries’ economies reopen upon approaching herd immunity. Evidence from Israel, the US and the UK suggests that COVID-19 infections and hospitalisation rates collapse once vaccination rates reach 40-60% of total populations. Continental Europe should achieve this vaccination rate by end-June at the current daily rate of vaccination. This suggests accelerating consumer spending over H2 2021. In the near term, domestic travel, home entertainment (gaming and streaming services), pet care, Do-It-Yourself (home and garden) and clothes retailing should all benefit from this consumer boom. 

Edmund Shing,  Global Chief Investment Officer (PhD)