Outlook 2024: the rise of a new multi-year bond cycle and the impact of COP28 for the rebound of energy transition investments
Key words for investment managers in 2024 will no more be only “inflation”, “FED pivot” and “economic growth/recession”, but also “bond investments”. The end of the sharpest interest rate hike cycle in the last decades led an increasingly attractive yield perspective, and next year could be a turning point for investors, with significant inflows in the bond market thanks to an interesting risk/return profile, especially compared to some expensive equity areas/styles, while COP28 pointed out the needs and positive perspective for environmental oriented investments.
Mildly positive outlook 2024
Inflation, interest rate hikes, recession. Tightening monetary policies of the major central banks to face inflation led to significant market movements both among equity - with small & mid cap stocks leading the worst performers, as both hit by interest rate hikes and economic growth concerns - and bond markets, with 10Y govies back to interesting positive yields after a prolonged period of low to negative yields and monetary stimulus which had been sustaining the economy for more than 10 years.
There is an increasing consensus among analysts and strategists of a favorable perspective for a rebound in 2024 of fixed income markets, while within equity asset class, Europe could be more negatively impacted by the economic recession and by a market rotation towards bond investments, which could provide a more favorable risk/return profile for fixed income investors and the come-back of the 60/40 portfolios.
In this still uncertain market framework, last macroeconomic data releases seems providing encouraging signals that central banks are succeeding in slowly easing inflationary pressure, despite economic recession seems unavoidable, at least in Europe, also led by the Chinese slowdown. In this context, US economy seems better positioned and more resilient, and worth to highlight that next year will be the Election Year. This could lead to some extent to market volatility spikes (also close to Taiwan elections), but also support the US economy in the light of potential fiscal supports which could be evoked by the two parties.
COP28 and the impact on fund industry
The COP28, the United Nations Conference on Climate Change in 2023, has recently come to an end. This year's event took place at Expo City in Dubai, under the Presidency of the United Arab Emirates, led by Sultan Al Jaber, an Emirati politician, CEO of the Abu Dhabi National Oil Company (ADNOC), and founder of a state-owned company involved in the renewable energy industry. His leadership has sparked considerable debate, mainly related to the possibility of conflicts of interest, in light of his role in the fossil fuel business. Some discussions on the topic of energy transition have generated strong reactions, as exemplified by the statement made by the president of COP28: "there is no science behind demands for the phase-out of fossil fuels." This is another testimony to how geopolitical dynamics significantly influence the equilibrium of not only the argument of sustainability, but also, and this is a natural implication, the equilibrium of the financial market.
Two other major conferences took place in conjunction with COP28, the 18th Conference of the Parties to the Kyoto Protocol (CMP18) and the 5th Conference of the Parties to the Paris Agreement (CMA5). Various key themes were discussed, including the acceleration of the transition from fossil fuel to renewable energy sources, given that GHG emission reductions have not yet reached levels sufficient to meet the targets outlined in the 2015 Paris Agreements. It was also emphasized that there is a delay in achieving the majority of Sustainable Development Goals (UN SDGs) by 2030.
Several agreements were reached during the conference, with a focus on biodiversity and sustainable agriculture. One notable agreement is the "Declaration on Sustainable Agriculture, Resilient Food Systems, and Climate Action," signed by 134 jurisdictions to enhance their respective food systems. It underscores that over a third of global greenhouse gas emissions stem from this sector. Additionally, there were agreements addressing the energy transition, such as the "Declaration to Triple Nuclear Energy." This declaration recognizes the crucial role of nuclear energy in achieving zero greenhouse gas emissions and containing the temperature increase below two degrees by 2050.
Interesting valuations and perspective for environmental solutions
Also in the lights of COP28 results, it is worth to highlight the positive perspective for energy transition investments for asset managers. Sustainability metrics transparency and data availability have been constantly increasing among UCITS funds and liquid investments, and ESG KPI assessment, GHG emission and PAI analysis have become a pretty common base within the fund industry. Carbon solution strategies will further increase in terms of relevance and new launches, mostly through ETFs and passive strategies which are anchored to a Paris Aligned Benchmark (“PAB”).
2024 could be the year of the definitive rise of strategies with a specific focus on a single/few SDGs, not only among equity asset class (which are experiencing interesting valuations and good rebound perspective after two years of corrections), but also among fixed income investments, and in particular on investment solutions linked not merely to SDGs on environmental aspects, such as SDG 7 and 13 (respectively “Affordable and Clean Energy” and “Climate Action”), but also to specific social thematics and to biodiversity.
Head of Portfolio Management
FARAD Investment Management
Junior Portfolio Manager & ESG Analyst
ARAD Investment Management