Risk-taking around the 3Gs: Geopolitics, Growth, Green
Green investing and climate change are increasingly themes to watch in 2020. Whether it was the recently released 2020 World Economic Forum report or the latest Davos WEF, climate change and environmental risks are dominating discussions. Europe and China are working together to reduce emissions by launching the Emission Trading System (ETS) which will be the largest carbon market worldwide. Climate change could also be a strong theme in the US electoral debate as global disasters, such as the Australian bushfires, put pressure on politicians to act. Overall, green objectives could be the catalyst for fiscal push, but they could also become the new frontier for trade wars as the European Green Deal considers the possibility of an EU carbon border tax.
From a top down perspective, the interplay between geopolitics, growth and green issues will likely be the main theme driving the risk-on/risk-off mood. From a bottom-up standpoint, credit market dynamics should be the key driver of the financial cycle. The narrative of low rates continues to play in favour of the asset class, despite rich, though not extreme, valuations. Thus, we believe investors should be overweight credit. However, some idiosyncratic stories could still pop up, especially if renewed concerns about a slowdown play out. We believe flexibility and selectivity in managing this asset will be key in generating returns this year.This backdrop translates into some key investment convictions:
- It is not a time to be too defensive. Some short-term issues related to the coronavirus in China or Europe-US trade negotiations may open buying opportunities to add to risk assets. If the situation in China stabilises, growth momentum may improve in a low yield environment. Beyond the short term, when US equities may prove more resilient, Europe is the market in which to play cyclical value themes. We would add exposure to EM equities, with earnings expectations gaining traction, once virus issues fade.
- In bonds, the focus remains less on the duration play and more on credit picking. Europe, EM bonds and US securitised assets are the way to play the continuing risk-on phase.
- Selection in focus. Given tighter spreads, more expensive equity markets globally, and an overall exposure to the “growth factor” across the board, selection is crucial so that investors are not caught in less valuable names that could hurt returns if volatility rises. Selection should rely on fundamentals as well as on ESG, taking into consideration all the risk factors that could affect future business valuations, of which climate change remains the most discussed.
- Finally, ESG will be the area that sees new regulations. This should be the case in the financial sector as well. As shareholders are becoming increasingly demanding on all ESG fronts, we expect to see a rise in the impact of ESG on market performances1.
 See the new Amundi Paper, ESG INVESTING IN RECENT YEARS: NEW INSIGHTS FROM OLD CHALLENGES, December 2019