THE GREAT CLIMATE SHIFT - Saxo Bank
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THE GREAT CLIMATE SHIFT
Contents:
1 2020
Climate and inflation: two new priorities for markets ............................ page 3
It’s time for a greener portfolio ................................................................. page 5
The US dollar is a tough one to turn ......................................................... page 8
Commodities in the crosshairs of climate and inflation ......................... page 11
Europe is getting ready for green QE ........................................................ page 14
Climate indifference has peaked ............................................................... page 17
Asia is sinking, flooding, burning & freezing – all at the same time ...... page 23
Breaking down evidence of global warming ............................................ page 25
Q32019
Q12020
By
By#SAXOSTRATS
#SAXOSTRATS
Climate and inflation:
two new priorities for markets
By Steen Jakobsen
Climate is an issue that can raise the temperature of conversation nearly anywhere.
Are you a partisan in what is the oddly politically charged climate change debate or are you
simply concerned about the climate based on the consensus of the scientific community?
We don’t really care to join the debate or try to argue the scientific evidence of the extremely
complex climate system. But the long-term reality is that nature is telling us that the cost
of the present ‘model’ of economic growth is turning negative. Not only at the margin,
but probably full blown negative in terms of the costs to society and the environment,
upon which all economic activity, digital or otherwise, is based. We have simply passed
the equilibrium point of economic growth versus its costs: natural resource constraints
and diversity in nature to start with, and for the non-deniers the additional risks from CO2
emissions.
It has become increasingly clear For the first time since WWII we sense a
that our accounting systems and
measures of economic growth do
shift in which climate and the environment
a lousy job of measuring the total – not growth – will become the priority of
costs of our activity when there is no
accounting for longer-term resource
governments and their citizens
depletion and environmental
harm. On top of that we have the extensively from Cape Town in open-ended support to the hard-
damage wrought by the lack of price South Africa to Moscow, then on hit New South Wales region, after
discovery over the last decade, as to Europe through the Middle it was engulfed in flames with dire
central banks have done everything East and out to Asia and Australia. consequences for its flora, fauna
to keep our unsustainable economic Everywhere I touched down, the and human life and limb, not to
activity levels at maximum throttle front page on the local English mention property.
to avoid a reset. This has not only newspaper read “Climate plan
eroded the long-term potential of needed” – accompanied by a picture For the first time since WWII we
our economies, but also led to a of the last local natural disaster. sense a shift in which climate and
terrible lack of productivity as we the environment – not growth – will
chase existing assets with growing The fallout from the climate is now become the priority of governments
mountains of cheap financing rather so costly for governments across and certainly their citizens, as
than investing in new ways of doing the globe that additional spending shortages of food, clean water and
things. 'fiscal spending' is taken out to cover air become existential questions.
cyclones in Japan, drought in South
How do we know the ‘turning Africa and Namibia, flooding in There will be major political fallout
point’ has been reached to Indonesia and a shortage of onions from this. First through the rising
change priorities? in India. Over the last few days, the cost of living as food prices spike,
During Q4 2019 I travelled Australian government has pledged then through a further rise in
3
Q12020
By #SAXOSTRATS
Climate and inflation:
two new priorities for markets
inequality. Make no mistake, more catalyst, but the real culprit was an The huge internet monopolies and
revolutions have been started extremely ‘generous’ Fed. Point? asset markets have been so pumped
over food prices than anything up by mispriced money and central
else: the French and 1905 Russian The consensus economic forecasts bank forcing that we are clearly
Revolutions and the Arab Spring. for 2020 rely on a cocktail of in the frothy phase of the cycle,
The 2020s will bring more. promises: including low inflation with echoes of Gordon Gekko’s
and low rates forever, an “Greed is good!” bouncing around
For investors this comes at a bad abolishment of price discovery, a the market’s echo chamber. Greed
time – exactly when they have both full acceptance of monopolies in might be fun – but it’s not very
central banks and governments technology and non-commitment productive. The lack of focus, lack
‘onside’. 2019 saw all assets rise to reduce inequality. The output of accountability and lack of respect
– yes, all assets – as major central or taste of this increasingly toxic for nature is about to change the
banks went from quantitative cocktail is permanently low growth, dynamics of how politicians get
tightening back to quantitative close to zero productivity and a elected, how economic growth is
easing, and many governments monetary policy with no exit path, measured and, most importantly,
started expanding fiscal deficits, as seen recently as the US Fed how society prioritises its resources
including China, the UK, US and became not only lender of last and activities.
Japan. Early in 2020 you can already resort for the repo market but also
hear the market chanting: “Fiscal tilted toward full monetisation of
expansion, fiscal expansion, MMT, the US federal deficit. The taste of
MMT!” this increasingly
Three ways the status quo
What the market does not see or can change in 2020 toxic cocktail is
want to see is an inflation scare. Political – a change of US President permanently low
Inflation is expected to continue to would create a new impulse both
fall, driven by demographic shifts, politically and economically. growth, close to zero
falling populations and lack of productivity and a
productivity, but this ignores the Credit failures – the blown out
bigger risk of supply disruption. I do value of the market becomes an
monetary policy
realise that most of today’s readers issue, the loss of control over repo with no exit path
and traders would not have been by the Fed generates massive event
born or around in the 1970s, but risk in credit space with the US shale Climate will most likely be the long
back then stagflation killed growth sector being most exposed. play for the 2020s and with this
and the markets. This was driven piece we hope to engage and start a
by two major factors: an over- Inflation/climate – The new branch of Saxo Research, where
easy Federal Reserve and supply combination of climate sending a we apply a climate and environment
constraints. Does this remind you signal of distress – raising the cost filter on all investments and assets
of something? of food, water and clean air – with impacted by this change. This
an enormous underinvestment in Quarterly Outlook has plenty of
Similarly to now, the pundits at the infrastructure means the market discussion topics and investable
time had written off inflation as it becomes so complacent that it’s ideas. As Julius Ceasar said as he
had not materialised through the the perfect storm for a wake-up crossed the Rubicon: Alea iacta est
late 1950s and most of the 1960s, moment that spikes volatility when – “the die is cast” as we have
but the OPEC embargo changed the next disaster strikes. reached the point of no return.
that. The rise in oil became the
Steen Jakobsen, Chief Economist & CIO
Steen Jakobsen first joined Saxo Bank in 2000 and has served as both Chief Economist and Chief
Investment Officer since 2009. He focuses on delivering asset allocation strategies and analysis of
the overall macroeconomic and political landscape as defined by fundamentals, market sentiment
and technical developments in the charts.
@Steen_jakobsen
4
Q12020
By #SAXOSTRATS
It’s time for a
greener portfolio
By Peter Garnry
The fire engulfing Australia has alarm bells ringing in every capital in the world. With
millennials demanding action on climate change, we are sensing the beginning of a new
period that creates great opportunities in equities. We have no strong view on climate
change, but recognise that political capital is being mobilised to improve the environment.
If we have learned anything since the financial crisis it is to not fight governments.
We believe that carbon-intensive future, the most The positive catalysts for these
obvious of which are solar, wind, green industries are clear. High
these green stocks fuel cells, electric vehicles, hydro, growth, massive government
could, over time, nuclear, bioplastic, recycling, water, support, changing consumer
building materials and food. Some choices, millennials demanding
become some of of these industries are mature and change and technological
the world’s most experiencing a renaissance while advancement lowering costs
others are emerging technologies of green technologies. Plus,
valuable companies that come with high risk. We have likely more climate change
— even eclipsing the identified 49 stocks that give turbocharging these overall
investors exposure to these green drivers. But what about the risks?
current technology industries. These stocks should
monopolies be seen as inspiration and not
investment recommendations.
Governments will increase
investments and subsidies
for “green” industries, starting a "Green" stocks basket vs global equities Saxo's 'green' stocks basket (49 stocks equal weight)
total return in % (USD) MSCI ACWI Index
new mega trend in equity markets. 180
We believe that these green 160
stocks could, over time, become
140
some of the world’s most valuable
companies — even eclipsing the
120
current technology monopolies as 100
regulation accelerates during the 80
coming decade. Investors should 60
consider tilting their portfolios 40
towards green stocks so they don’t
20
miss this long-term opportunity.
0
The industries and stocks -20
2015 2016 2017 2018 2019
to green your portfolio SOURCE: BLOOMBERG AND SAXO GROUP
Several industries will drive a less
SOURCE: BLOOMBERG AND SAXO BANK
5
Q12020
By #SAXOSTRATS
It’s time for a greener portfolio
Key risks in green Overweight European
industries and valuation and EM equities
The risk factors impacting the different industries are Central banks and governments have decided to throw
both systemic and idiosyncratic. From a risk perspective, out the old playbook of not adding stimulus in the
relative to the general equity market the hydro, nuclear, late stage of an expansion in which the labour market
recycling and water industries are less risky as their is tight. Both monetary and fiscal policy is readily
demand profiles are more stable than the overall being deployed in 2020 across all the world’s largest
business cycle. Solar, wind, electric vehicles and building economies. This is not the time to be underweight
materials are more cyclical than the general market and equities. With the OECD’s leading indicators moving from
would be impacted more negatively during a recession. contraction to recovery back in October, the historical
backdrop tells us that the best period for equities against
The fuel cell, bioplastic and food (in this case plant- bonds is ahead of us.
based) industries have far more idiosyncratic risks as
they are more nascent than the other industries. The OECD leading indicators Global China US
fuel cell industry is heavily dependent on government
106
subsidies as the industry rolls down the technology 104
curve in terms of cost of production. Thus, the industry 102
is very high risk. The bioplastic industry is a small and 100
fragmented, and publicly listed bioplastic companies 98
could easily lose out to larger names in the traditional
chemical industry.
96
94
Except for nuclear and wind turbines, all of the 92
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industries trade at a valuation premium to the global 2019 SOURCE: BLOOMBERG AND SAXO BANK
SOURCE: BLOOMBERG AND SAXO BANK
equity market. This premium obviously reflects investors’
optimism about future cash flows in those industries, During the recovery phase emerging market equities
though with high expectations comes higher risk if these tend to outperform developed market equities by a
expectations are not met. wide margin. European equities typically outperform the
market during the late expansion and early slowdown,
Another important point about these companies is but this time we go against history and recommend
that they are operating in the physical world. Unlike, investors to also overweight European equities. We
say, the software industry, where return on capital is already provided this view back in our Q4 Outlook when
insanely high and easily scales. These greener industries we looked at the USD and how it impacts equity returns.
all require vast amounts of capital to operate — and A weaker USD, which the world needs, has historically
as such, the low interest rate environment has helped led US equities to underperform against European and
fund growth. If interest rates rise again, this should emerging-market equities. Our tactical asset allocation
have a negative effect on their operating conditions and strategy Stronghold, which clients can invest into
especially on equity valuations. through SaxoSelect, also increased its allocation to
emerging market equities in January.
6
Q12020
By #SAXOSTRATS
It’s time for a greener portfolio
With the Fed’s aggressive balance Global recession probability and equity returns. The conclusions
sheet expansion and the growing US peaked back in September, and are that equities tend to respond
fiscal deficit the USD should weaken. with stimulus flowing through the positively to short-term inflation
Indeed, it has weakened 1.3% since economic pipes the recession has shocks but negatively to sustained
September measured by the Fed’s most likely been averted this time. inflation rate above 3%. Higher
US trade-weighted real broad dollar This brings us to the other risk inflation rates and inflation shocks
index. Another recent factor that that could derail equities in 2020: have historically led to more equity
could add to USD weakness is rising inflation, which seems to be picking volatility. So in 2020, we will be
prices across many commodities. up again. In May 2019 we wrote a watching inflation closely.
big read on 105 years of US inflation
US Trade Weighted Real Broad Dollar
115
110
105
100
95
90
85
80
75
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
SOURCE: BLOOMBERG AND SAXO BANK
Global recession probability peaked back in September,
and with stimulus flowing through the economic pipes the
recession has most likely been averted this time
Peter Garnry, Head of Equity Strategy
Peter Garnry joined Saxo Bank in 2010 and is the Head of Equity Strategy. In 2016 he became
responsible for the Quantitative Strategies team, which focuses on how to apply computer
models to financial markets. He produces trading strategies and analyses of the equity markets
as well as individual company stocks, applying advanced statistics and models to beat the market.
@PeterGarnry
7
Q12020
By #SAXOSTRATS
The US dollar
is a tough one to turn
By John J. Hardy
Given the Powell Fed’s enormous turnaround in 2019 — in which it cut rates three times
and launched a large-scale balance sheet growth to the tune of nearly $400 billion in Q4 —
the US dollar is starting off 2020 in rather resilient shape. Many would have believed that the
Fed’s turnaround over the course of 2019 and acceleration into year-end would have resulted
in a far weaker US dollar. Especially considering that it has outpaced the easing from central
banks elsewhere.
Why the US dollar has not weakened steady drip feed of dollars since chopping of US interest rates,
perhaps speaks to the residual it is the global reserve and trade ongoing Fed monetisation of US
strength in the US economy currency. And finally, the market’s budget deficits and, not least, the
relative to global peers. While its vigorous celebration of the Fed’s US presidential election to weigh on
manufacturing sector has suffered easier stance fed further enthusiasm the US dollar’s prospects. Especially
under the weight of Trump’s tariffs for America’s world-dominating tech if it appears a progressive Democrat
and a slowdown in US shale oil and giants. like Bernie Sanders has any chance
gas development, the dominant of becoming the nominee.
services sector remained resilient Many of the USD-positive drivers
and overall GDP growth averaged noted above look well entrenched The Fed’s actions to shore up
2.4% for the first three quarters as 2020 gets under way, but we liquidity in late 2019 are a result
of 2019. Plus, Trump’s aggressive still look for a low ceiling to what of the inability of the US financial
trade stance saw US trade deficits has effectively been a flat US dollar system to absorb both the Fed’s
narrowing sharply in the second over the last 18 months. As the quantitative tightening since 2018
half of 2019, a difficult process to year wears on, we would look for in addition to the blitz of Treasury
manage in a world that needs a a slowing US economy, a related issuance required to finance
the ballooning budget deficits
in the wake of Trump’s tax cuts
and spending increases. In a US
Many of the USD-positive drivers noted recession scenario, these factors
above look well entrenched as 2020 gets will accelerate further. Even without
one, the provision of Fed liquidity
under way, but we still look for a low ceiling and the risk that this eventually
to what has effectively been a flat US dollar results in inflation and more highly
negative US real rates look enough
over the last 18 months to finally turn the USD lower.
8
Q12020
By #SAXOSTRATS
The US dollar
is a tough one to turn
The US dollar in recent years Fed Broad Trade weighted USD
Virtually flat for the last 18 months Bloomberg Dollar Index
120
1250 115.9496
115
1194.40
110
1150
105
1100
100
1050
95
1000
90
950
900 85
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
SOURCE: BLOOMBERG
The above chart shows the US dollar game on FX policy until it knows growth outlook. We can all easily
through the end of 2019 according to who its negotiating partner will be label it as crazy and unsustainable
both the Fed’s broad, trade-weighted on trade on the other side of the US – but we’re not entirely sure what
measure and the Bloomberg dollar presidential election and we would provides the pivot for this market
index. Both show that the US dollar suggest that the “phase one” trade and brings a return of reality. Will
has done little over the last eighteen deal is likely a phase one détente it be the Fed refusing to play ball
months, a timeframe that has included before hostilities resume down the with the moral hazard of monetising
a final run-up and then crash in US road and the two largest economies Trump deficits and underwriting
treasury yields and a mirror-image continue to disengage. the speculative frenzy, a new trade
dramatic semi-crash and then epic war, a Bernie Sanders presidency
bull sprint in US equity markets. The broader situation across or markets simply collapsing under
Outcomes are all about weighted currencies is challenging as we start their own weight after a further
probabilities, but we suspect 2020 the year at near record complacency parabolic run-up? We dare not say,
either could see more of the same levels. Investors are celebrating the but have a hard time believing the
back and forth for the US dollar policy punchbowl and reaching for go-go environment as 2020 gets
or, more likely, an eventual large yield and the riskiest currencies and underway extends much past the
inflection point lower for the global equities, rather than looking around end of Q1.
nominal measure of GDP as the Fed – at what is still a fairly sluggish
and maybe even the US Treasury – is
set to flood the world with US dollars.
The provision of Fed liquidity and the
Elsewhere, we see the strong CNY at risk that this eventually results in inflation
the beginning of the year as window
dressing ahead of the US-China and more highly negative US real rates look
trade deal signed in mid-January. enough to finally turn the USD lower
China may be playing a holding
9
Q12020
By #SAXOSTRATS
The US dollar
is a tough one to turn
The changing climate for Trump administration. the most advanced developed
currencies from here While the EU economy might economies, but with low energy-
It is difficult to overlay individual reap few rewards in the short intensive GDP. The irony for both
currencies with climate change term from stagflationary and of those blocs, however, is that
policy and environmental factors possibly protectionist climate they are highly export dependent
in an outlook, with one important policy, the longer-term rewards and big energy importers. The US
exception this time around: the will supposedly be reaped in is a food exporter and the shale
EU and the euro. EU policymakers increasing immunity to external revolution means it is almost
have been the most aggressive in fossil fuel reliance. It’s a risky self-reliant in energy – arguably a
declaring a war on climate change gambit for the new EU leadership fortress economy safe from the
and the intent to link pan-EU as we wait and watch whether risk of rising energy prices. Worst
stimulus to the climate change Italy and CEE countries will play positioned of major economies
agenda. ball with these priorities. in theory is China, which is less
food- and energy-resource
This is the easiest political route How climate change and the secure and is also rather export
to stimulus that is financed by all policy environment affect intensive, though much of its
member states. The ECB, under currencies in coming years will external investment in recent
its new, more politically charged depend on factors such as food years has been aimed at reducing
leadership (President Christine security and the energy-intensity vulnerabilities.
Lagarde) has also explicitly and energy-mix of GDP. This is
stated it is looking for ways to particularly true of vulnerable Forewarned is forearmed: climate
support the climate agenda. In emerging market economies, change and climate change
the short term, this may boost EU where rapidly rising food and/ policy will be felt the most in
growth through new investment, or energy import costs can more commodities, which have mostly
but may also raise inflation. quickly impact growth. India been bumping along at multi-year
Interestingly, the possibility of is a case in point in terms of lows in recent years. How and
a “carbon border tax” has been vulnerability to rising food prices where commodity costs rise will
raised as part of the EU green and as an importer of the vast become a major factor in currency
deal, in which imports might be majority of its energy needs. movements from here.
taxed on the carbon consumed
in the production of a good. Economies like the EU and Japan
This is a whole new approach are quite well positioned on
to protectionism relative to the the surface, as they are among
John Hardy, Head of FX Strategy
John Hardy joined Saxo Bank in 2002 and has been Head of FX Strategy since October 2007. He
focuses on delivering strategies and analyses in the currency market as defined by fundamentals,
changes in macroeconomic themes and technical developments.
@Johnjhardy
10
Q12020
By #SAXOSTRATSCommodities in the
crosshairs of climate
and inflation
By Ole Hansen
Global commodities face a potentially volatile 2020, given the combination of growth
concerns, geopolitical tensions, climate change and inflationary pressures. While global
growth — and with that demand for key cyclical commodities — remains weak, we see
the supply side also facing multiple challenges due to social unrest and climate change.
Climate change became top of mind in 2019 and we We have witnessed several years of ample supply with
expect this focus will only continue to strengthen as stable-to-lowering prices. In fact, the last period of
the real impact is felt across the world. Whether these tightness among the key crops was back in early 2010
developments will be viewed as a temporary blip 50 when soaring wheat prices helped trigger the Arab
years from now is irrelevant. The trend towards a Spring. While global demand and supply have both
warming atmosphere is likely to see weather become risen during the past decade, the global supply chain
more volatile and unpredictable, thereby creating a will be left vulnerable to a sudden weather-related drop
challenge to global food supply chains. Already warm in yields.
regions are getting hotter, while wet regions are getting
wetter. 2019 was the year where several weather
events ensured these developments received increased The trend towards a
attention.
warming atmosphere is likely
Increased weather volatility is likely to manifest itself to see weather become more
through intense droughts, floods, heatwaves and
wildfires, leading to an increase in the rate of soil loss
volatile and unpredictable,
and land degradation. At sea the change may also have thereby creating a challenge
a significant impact on fish and shellfish habitats and
could disrupt fragile ecosystems.
to global food supply chains
11
Q12020
By #SAXOSTRATSCommodities in the crosshairs
of climate and inflation
The World Food Price Index, published monthly by the Ample supply and weak price action have resulted in
UN FAO, rose 12.5% year-on-year in December to reach negative returns on most exchange-traded funds with
a five-year high — but still sits significantly below its broad-based exposure to key agricultural commodities.
2011 peak. The index, which tracks a total of 73 food The table below highlights three of the biggest ETFs
commodities across five major commodity groups, saw with a diversified agriculture exposure. The chart on all
prices rise fastest in vegetable oils (+20%) and meat three shows that the decade-long downtrend is now
(+17%). being challenged. Of the major commodities we see
sugar, coffee, cocoa and wheat being some of the most
exposed to global weather scares.
No of Market cap
Name Ticker 1 year Ann. 3 yr Ann. 5 yr
markets (M USD)
Invesco DB Agric DBA:arcx 11 352 -5.8 -6.3 -7.6
WisdomTree Agric (UCITS) AIGA:xlon 9 195 -4.0 -8.9 -8.5
Elements Rogers Agric RJA:arcx 19 110 -3.2 -4.7 -5.5
SOURCE: BLOOMBERG AND SAXO BANK
NOTE: REGIONAL RESTRICTIONS MAY APPLY
12
Q12020
By #SAXOSTRATSCommodities in the crosshairs
of climate and inflation
Following years of rangebound trading, we see gold Brent crude oil is likely to remain stuck in the $60s
further building on last year’s strong 18.5% gain. This through the first half of 2020, before moving higher
as the technical and fundamental outlook continues to in the second. The December 6 OPEC+ decision to
improve. However, after racing higher at the beginning maintain and deepen production cuts through the
of January, we may see the metal spend most of the first first quarter is likely to offset any potential growth
quarter consolidating above $1500/oz before moving concerns or renewed US-China trade worries.
higher to peak at around $1625/oz later in the year. The
short-term consolidation also takes into consideration
the elevated level of hedge fund positions. These have
become quite extended near record levels and, in the The December 6 OPEC+
short term, could act as a drag on price. decision to maintain and
Geopolitical events such as the early-January US-Iran
deepen production cuts through
standoff supported gold but only for relatively short the first quarter is likely to
period of time. In order for the yellow metal to climb
further, one or more of our below expectations need
offset any potential growth
to be met: concerns or renewed US-China
trade worries
• The US Federal Reserve is likely to continue to
cut rates while embarking on another round of
quantitative easing.
The mid-September drone attack on the world’s biggest
• Rising inflation, through higher input cost from processing plant in Saudi Arabia, the conflict in war-torn
food and energy driving real bond yields lower. Libya and the early-January standoff between US and
This reduces the opportunity cost associated with Iran all show just how vulnerable the global supply chain
holding a non-coupon and non-interest paying asset. can be. However, with ample availability of strategic
reserves in the US, China, Saudi Arabia and IEA countries
• Continued buying by central banks looking to diversify the fallout from a disruption should be limited and
and, for some, to reduce the dependency on the dollar relatively short-lived.
(so called de-dollarisation).
We see Brent crude oil at $75/b by year-end, as inflation
• The dollar is potentially on its final leg of strength picks up and the dollar weakens. Any short-term
before turning lower. weakness, perhaps from speculators exciting speculative
long positions, is likely to be limited. With continued
• Event risks such as renewed US-China trade concerns threats to supply from the Middle East and Libya, the
and the November US elections. market is unlikely to reduce by much.
Ole Hansen, Head of Commodity Strategy
Ole Hansen joined Saxo Bank in 2008 and has been Head of Commodity Strategy since 2010.
He focuses on delivering strategies and analyses of the global commodity markets defined by
fundamentals, market sentiment and technical developments.
@Ole_S_hansen
13
Q12020
By #SAXOSTRATSEurope is getting ready
for green QE
By Christopher Dembik
Are Australia’s fires our global wake-up call? This is a legitimate question considering the
devastating impact of the natural disaster happening in Australia. As we enter a new decade,
there is no debate that there are more and more frequent natural disasters in the world.
Based on statistics released by “Our World in data”, there have been 335 natural disasters per
year over the past 20 years, which is twice as frequent as 1985 to 1995. At the same time, the
economic cost is quickly increasing. It reached $200 billion per year on average over the past
ten years, which is four times more than in the 1980s.
The number of reported disaster events Number of reported disaster events The economic cost is increasing to reach Economic costs of natural disasters
has significantly increased over the past 20 years Number
on average $200bn per year over the past ten years Number, billion
450 400
400 350
350
300
300
250
250
200
200
150
150
100
100
50
50
0 0
1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Source: Macrobond, Saxo Bank Research & Strategy SOURCE: MACROBOND, SAXO BANK RESEARCH & STRATEGY
Change is coming from society uncertain, but it has already
and that is ultimately influencing influenced investors’ behavior.
politicians’ choices. The need for Over the course of the current
climate adaptations is reshaping economic cycle, fossil fuels sectors
the political landscape in Europe. have significantly suffered. Looking
Austria’s new government — a We think at Europe, since 2008, the Europe
Conservative-Green coalition — is that Germany STOXX 600 Oil & Gas index has
the first of many to come, and we dropped 25% versus the 14% rise
would not be surprised if a Green-
turning green seen in the STOXX 600.
CDU/CSU coalition rises to power will be the
in Germany following the 2021 The slump is even bigger in the
election. We think that Germany
main political United States. Over the same
turning green will be the main gamechanger period, the Dow Jones Coal Index
political gamechanger in the in the coming decreased by 95% while the
coming years. benchmark index skyrocketed by
years 120%. Of course, not all of this
Climate consciousness is fueling evolution can be only attributed to
public acceptance for more active the rise of green capitalism — but it
fiscal and monetary policy. The has certainly played a key role.
speed of adjustment remains
14
Q12020
By #SAXOSTRATSEurope is getting ready
for green QE
STOXX 600 Index [rebase 2008=100]
Since 2008, the STOXX 600 Oil & Gas index has STOXX Europe 600 Oil & Gas Index [rebase 2008=100]
dropped 25% vs the 14% rise seen in the STOXX 600 Index
150
140
130
120
110
100
90
80
70
60
50
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
SOURCE: MACROBOND, SAXO BANK RESEARCH & STRATEGY
In the US, the fossil fuels sector has also Dow Jones Coal Index [rebase 2008=100]
S&O500 [rebase 2008=100]
underperformed the benchmark index since 2008 Index
300
250
200
150
100
50
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
SOURCE: MACROBOND, SAXO BANK RESEARCH & STRATEGY
In our view, the next step will be has warned of “a climate Minsky recent letter to the EP, ECB Lagarde
the implementation of a massive moment”. clearly stated her intentions:
monetary and fiscal climate package, “the intended review of the ECB’s
but that is more likely in 2021 than The ECB is also embracing this monetary policy strategy…will
2020. Over the past months, most issue. We believe the review of the constitute an opportunity to reflect
central banks have pointed out framework that is about to start on how to address sustainability
the importance of climate change, will be the best opportunity to considerations within our monetary
such as the Bank of England which include climate change. In her most policy framework”.
15
Q12020
By #SAXOSTRATSEurope is getting ready
for green QE
There is already an emerging debate the Treaty, the ECB can play a role 1. Favouring green bonds as part of
on whether climate change should to protect the environment — for the revived QE programme. But
be part of the ECB’s mandate. If instance by launching a green QE there is just not enough issuance
we rely on the Treaty, the primary — as long as it does not enter into out there yet.
objective is defined as price stability. conflict with the primary objective
However, it also mentions that of price stability. Considering the 2. Applying a punitive “haircut” to
“without prejudice to the objective of level of realised inflation and the bank collateral assorted to high
price stability, the European System level of expected inflation in the carbon intensity activities. But this
of Central Banks shall also support euro area, it is very unlikely that the will further weaken the European
the general economic policies in the risk of potentially conflicting goals banking sector.
Union with a view to contributing to will be raised anytime soon.
the achievements of the objectives 3. Targeting transition bonds for
of the Union”. Among these However, green QE from the ECB dirty companies that try to
objectives, it is specifically stated is not going to save the planet and become greener. But this raises
that Union policy prioritises a high- decarbonise the economy by itself. concerns among climate activists.
quality environment (Article 3 (3) of The ECB has mostly three options
the Treaty on the European Union). to launch green QE: Contrary to what has happened
Based on a strict interpretation of over the past 10 years, central banks
cannot be the only player in town to
fight climate change. Governments
will need to step in —and the
Based on a strict interpretation current evolution of the yield
of the Treaty, the ECB can play a role curve is creating a very attractive
environment for fiscal stimulus
to protect the environment oriented to fund green projects.
Christopher Dembik, Head of Macro Analysis
Christopher Dembik joined Saxo Bank in 2014 and has been the Head of Macro Analysis since 2016.
He focuses on delivering analysis of monetary policies and macroeconomic developments globally
as defined by fundamentals, market sentiment and technical analysis.
@Dembik_Chris
16
Q12020
By #SAXOSTRATSClimate indifference
has peaked
By Eleanor Creagh
In a world mired by enduring challenges there has undoubtedly been significant progress
so far this century. Globalisation, free markets and technological advances have generated
unprecedented wealth and opportunity for some, lifting millions out of extreme poverty and
engendering welfare improvements seen across many important indicators such as child
mortality and access to basic education.
However, public debate is plagued with populist
agendas, crises in economic activities, climate anxiety
and rising inequality, which are supplanting free-
market capitalism and expanding democracy as key
themes. As the third decade of the millennium begins
we are on the cusp of an inflection point where the
economic and environmental losses and social impact
of maintaining the status quo are unsustainable. As
policymakers, prudential supervisors, investors and the
corporate community alike recognise that their future is
inextricably linked to a sustainable economic operating
model, growth at any cost will no longer be viable. This
will shape the future policy agenda and reallocation of
global capital with increasing immediacy. SOURCE: CLIMATE ACTION TRACKER
Rising temperatures have not only melted Arctic ice far
Despite years of debate, quicker than predicted and bleached coral reefs, but
also exacerbated the intensity and frequency of deadly
global greenhouse gas emissions droughts, hurricanes, heat waves, and wildfires.
are reaching record levels and
show no sign of reversing
Honing in on the key focus of this report, the climate,
it is our view that the prior decade, which has been the
hottest in history, marked peak indifference on climate
change. Despite years of debate, global greenhouse gas
emissions are reaching record levels and show no sign
of reversing. SOURCE: NOAA NATIONAL CENTERS FOR ENVIRONMENTAL INFORMATION
17
Q12020
By #SAXOSTRATSClimate indifference
has peaked
The devastating loss of life and nature demonstrates Although there are wide margins of error in forecasting
the significant cost of inaction on climate change. It the potential impact and many uncertainties remain,
provides a stark reminder that we are teetering on the the greatest challenge of the 21st century could well be
edge of a tipping point, where the changes to our planet the decarbonising overhaul of the global economy.
far outpace any nation’s ability to adapt to them.
SOURCE: THE ECONOMIST
18
Q12020
By #SAXOSTRATSClimate indifference
has peaked
SOURCE: IPCC 2018 (INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE)
Where we stand Aside from the devastating loss of biodiversity in the
Global warming has seen average air temperatures natural world, this threatens vital marine and land
rise by more than 1°C since records began in 1850, and ecosystems upon which billions of people rely for food
each of the last four decades has been warmer than the and employment. According to the scientific report
previous one. Sea levels globally have risen 20cm since released by WWF warming of 2°C would be untenable
1880 at a rapidly accelerating rate, increasing the risk for 25% of species in Madagascar, which would cause
of flooding. Weather patterns, meanwhile, have been their extinction by the 2080s.
altered — hindering food security.
Beyond 3°C, scientists estimate the frequency of high
The failure to halt emissions growth over the last temperature events will at least double compared to
10 years could limit the world’s ability to shift to a present day and extreme precipitation will become
pathway consistent with 1.5°C or even 2°C of global not only more intense but also more frequent, making
warming, the upper end of the Paris Agreement’s goal disaster induced displacement a growing risk factor.
(Intergovernmental Panel on Climate Change). According
to Climate Action tracker, as of December 2019 under
current pledges, the world will warm by 2.8°C by the end
of the century — close to twice the limit agreed in Paris.
In terms of real policy action, see temperatures could
rise by 4°C .
Accelerated warming has huge implications for our
planet’s oceans, land and atmosphere. For example,
scientists at Climate Central estimate that 275 million
homes could be submerged at 3°C global warming,
with Asian cities most affected. Many land and seaborne
species would face mass extinctions. SOURCE: NEW YORK TIMES
19
Q12020
By #SAXOSTRATSClimate indifference
has peaked
Those already facing poverty will be Gen-Z investors grows financial performance will no
hardest hit, thus exacerbating inequality longer be the only investment goal, increasing demand
27 of the world’s 28 poorest countries are in sub- for positive impact investments that align with broader
Saharan Africa where a combination of dependence on sustainable objectives.
agriculture, environmental deterioration, and population
growth are deadly. Here, the primary cause of migration Creating a sustainable finance ecosystem requires a
is often climate induced. Weak institutions are unable to huge reallocation of capital. Investors and corporates
adapt to climate changes and when people have nothing who do not gear their portfolios towards more
to eat, they are willing to pick up a gun to survive. sustainable business models risk facing large losses in
the coming decades: regulatory changes could leave
many current operating models unviable. Over a third
of global capital already has some form of ESG mandate,
putting many companies and countries on the wrong
side of that mandate on the backfoot. If companies fail
to adjust, they will cease to exist.
Green themes
CLEAN ENERGY
• Wind
• Solar
• Hydro
• Biofuels
BUILDINGS
SOURCE: BLOOMBERG AND SAXO • Energy efficient/Green buildings
• Solar
• Smart cities
• Flood prevention
The cascading effects resulting from constraints like
food and water security concerns or homes and ELECTRIC VEHICLES
livelihoods lost to natural disasters will result in serious • EV manufacture & Finance
• Energy storage
ramifications that are too great to ignore. The world has
agreed immediate action is necessary, and as the costs
of apathy mount implementation is more crucial than TECHNOLOGY
ever. • Robotics/Biotech
• Carbon capture/measurement
• Extreme weather/Emissions monitoring
Investment: • Smart grid (decarbonize & decentralize)
Peak indifference = action WASTE MANAGEMENT
Climate action could be one of the most transformative • Emissions capture
and disruptive challenges faced by the global economy.
• Recycling
• Sustainable packaging/Plastics
For investors in global capital markets, aside from the • Energy-from-waste (EfW)
obvious negative implications to any industry reliant TRANSPORT
on fossil fuels, the impact will be far reaching affecting • Electric public transport
industries from finance to REITs and transportation. •
•
Mass transit
High speed trains
The green transformation will also drive many positive • Greenways/Pedestrian infrastructure
advances as the need for adaptation spurs the adoption
MITIGATION
of policy solutions aimed at funding clean energy • Reforestation
projects, water security, sustainable infrastructure • Water security/Desalination
• Extreme weather infrastructure
developments and green technological innovations such • Flood/fire insurance
as emissions capture and energy storage breakthroughs.
AGRICULTURE
These new climate industries not only provide jobs and
• Meat alternatives
economic gains but also generate a positive impact by • Lab grown meat/fish
providing cleaner air, preserving delicate ecosystems and
• Climate resilient crops
• Smart farms/Agricultural productivity
improving human health. The climate crisis is defining a
future generation, and as the cohort of millennial and SOURCE: BLOOMBERG AND SAXO
20
Q12020
By #SAXOSTRATSClimate indifference
has peaked
A closer look at Australia: trade, construction activity, agricultural productivity
ground zero for climate change impact and retail, against the backdrop of an already cautious
Australia, the world’s driest inhabited continent and consumer, will not only hit those areas most affected,
home to fragile ecosystems like the Great Barrier Reef, but also major East Coast cities engulfed by thick smoke.
is ground zero for climate change and particularly Tourism is Australia’s 4th largest export and could
vulnerable as our planets temperature rises. Australia’s suffer a lasting blow as devastating images of burning
climate alone has heated by more than 1°C since animals and cities shrouded in smoke, leaving the air
1910. In fact, 2019 was the hottest and driest year on quality worse than Delhi, Mumbai and Beijing, flood
records dating back to 1910, according to the Bureau international newsfeeds.
of Meteorology. From extreme heatwaves to heavy
rain, severe droughts to deadly wildfires, a decade of All this comes at a time when the underlying economy
unprecedented warming has seen the frequency and is already weak. Consumer’s confidence in the economic
cost these extreme weather events increase. outlook, which was already supressed, has been mired
further by the ongoing crisis hitting lows not seen since
1994 on some measures. The outlook for consumption
is not only pressured by poor confidence inhibiting the
consumers propensity to spend, but also by ongoing
concerns surrounding job security, stagnant wage
growth and excessive household debt levels.
Several quarters of below trend economic growth,
along with weak consumer spending , poor business
conditions and a private sector in recession presents
a deteriorating outlook for the labour market and
employment growth. This whilst unemployment remains
well above the RBA’s full employment estimate, inhibiting
wage and inflationary pressures from materialising.
SOURCE: BUREAU OF METEOROLOGY
Giving the rest of a world a glimpse at what the climate
crisis may bring in the coming decade, these record- A sustainable finance
breaking temperatures and dry spells have fuelled an
unprecedented bushfire crisis that has so far laid bare
ecosystem requires a huge
over 10million hectares of land. Destroying homes and reallocation of capital
livelihoods, and wiping out an estimated 1.25 billion
native animals, “hastening extinction” for some species
according to Professor Chris Dickman, University of Before bushfires presented a headwind for confidence
Sydney. A tipping point that incites remedial action to and economic activity, we expected the RBA to cut the
minimise climate related risks, as prevention becomes cash rate again in February and once more later in 2020.
less costly than the cure. Whilst not a direct factor, the present disruption only
reinforces our view and adds to the board’s impetus to
The ongoing bushfire crisis will present a headwind deliver another 25bp cut in February, particularly whilst
for the economy in the near term, which is already the government leave the heavy lifting to the central
experiencing a period of soft economic growth. The full bank. This will see both the AUD and Aussie bond yields
impact is hard to gauge and will be moving target as shackled by the domestic outlook, with reflationary
continued hot dry weather presents the risk of the fires bounces short lived and strength sold into. We believe it
intensifying further, but will no doubt cost the economy is too early to maintain an outright bullish bias on AUD,
billions of dollars, with the bulk of the damage felt in despite an ongoing recovery in risk assets and receding
Q1 2020. The damaging disruption to tourism, regional geopolitical risks.
21
Q12020
By #SAXOSTRATSA UN report finds that to even come close to the goal of In Australia, the current governments denial of the
limiting global warming to 1.5°C over the next decade, world’s leading advice on climate change puts them on
nations must halve emissions by 2030. According a collision course with both society and investors. The
to Climate Action Tracker, after removing highly present crisis is defining a new generation of Australians,
unpredictable LULUCF changes to focus solely on energy research from The Australia Institute has found that
and industry emissions Australia’s Paris target translates 2/3s of Australians believe the country is facing a climate
to a 14-16% decrease from 2005 levels by 2030. But emergency and that the Government should mobilise
under current policies, Australian emissions are headed all of society to tackle the issue, like they did during the
for an increase of 8% above 2005 levels by 2030. World Wars.
Climate policy is actually worsening as coal fired power
generation is greenlighted with little regard for the coal If the 2020s are the decade of cleaner, greener change
phase out obligations of the Paris Agreement in OECD then investors and policymakers must allocate toward
countries by 2030. And that is before accounting for the sustainable business models or face large losses.
fossil fuel intense exports that Australia ships elsewhere. Climate change presents challenges that are complex
and unprecedented, but mitigation efforts will require
But we are fast approaching an inflection point, as systemic changes, providing multiple opportunities for
climate change starts to constrain economic growth investors.
where the cost of inaction outweighs the cost of action.
Eleanor Creagh, Market Strategist
Eleanor Creagh joined Saxo Bank in 2018 and serves as the bank’s Australian Market Strategist,
responsible for creating, implementing and monitoring equity strategies and research for traders
and investors, as well as developing quantitative models and customised mathematical frameworks
for institutional clients. Eleanor holds a double major in Finance and Economics from the University
of Sydney.
@Eleanor_Creagh
22
Q12020
By #SAXOSTRATSAsia is sinking, flooding,
burning & freezing
– all at the same time
By Kay Van-Petersen
It seems like each year volatility in temperatures, seasons and weather — as well as natural
disasters — becomes more extreme.
We have had all-time high
temperatures being recorded Climate disasters tend to act like
in Australia, where fires continue volatility in the markets, whereby volatility
to rage.
begets more volatility. One disaster raises
• Over 25 million acres have burnt the probability and potential magnitude of
(that’s bigger than countries such
as South Korea, Hungary, Austria
another type of disaster
or Norway).
• An estimated 1 billion animals will likely get worse before they is interlinked. For instance, fires
have been killed (the Koala Bear get better. lead to flooding due to destroyed
is now functionally extinct). vegetation.
In Delhi, India – a city normally
• The damage total is A$100bn (5% associated with its baking heat Meanwhile, the mega-cities of major
of Australia’s A$1.9 trillion GDP). – freezing temperatures were countries are now at risk of sinking
recorded in Dec that were the & flooding.
What is even more appalling – apart coldest in over a century.
from poor government response Climate disasters tend to act like As a case in point, the capital of
& complete disconnection to the volatility in the markets, whereby Indonesia is Jakarta, whose greater
severity of the situation by PM Scott volatility begets more volatility. metropolitan area has a population
Morrison, a known climate change One disaster raises the probability of 30 million. Jakarta is one of
sceptic — is that rains are not and potential magnitude of another the world’s fasting sinking cities,
expected until late Feb, so things type of disaster, because nature dropping over 10cm (4in)
23
Q12020
By #SAXOSTRATSAsia is sinking, flooding, burning &
freezing – all at the same time
a year. That is about the width of estimated cost of $34 billion. powerful investment theme in social
an adult male’s palm. Sometimes it’s better to start afresh impact/lifestyle change that is going
and design a city that is built for the to be Godzilla in size and likely run
The irony that faces the sinking sustainability of the future. for decades.
city, that is regularly hit by tropical
cyclones as well as sea storms, is Getting exposure on the There are going to be at least two
that it has a lack of clean drinking sustainability/impact key structural driving forces.
water. Given its thirteen polluted investing theme
rivers, for decades the city has been The first will be demand driven.
pumping ground water with virtually There are traditional allocations to More and more consumers will
no meaningful replenishment of the renewables sector which you want to use their spending capital
the natural underground basins. can access directly through our to vote for companies that practice
This is all due to a population Saxo Investor. There are also sustainability. For instance, probably
explosion, lack of green space and lifestyle consumer choice themes. about 5% of the US’s 330 million
poor infrastructure. And it is leading Tesla [TSLA], for example, is seen people are currently vegetarians,
to a collapse in the pressure of the by its fans as a disruptor in the but that ratio that is likely to grow.
ground that is holding up the city. renewable and storage energy Companies and entrepreneurs that
space from traditional fossil fuel are proactive in regard to consumer
Some studies suggest that in just engines and CO2 emitters. sustainability lifestyle choices will
ten years, northern Jakarta could thrive and move ahead.
be permanently flooded: including
the airport. An estimated $40 billion More and more The second will be supply driven.
sea wall is being built along Jakarta Governments are coming to fully
bay, with the objective of alleviating
consumers will understand that we are likely past
the flooding pressures and allowing want to use their the tipping point where the cost to
lower water levels so the city’s rivers do nothing in regards to sustainable
can drain more efficiently. When
spending capital to growth is much greater than the
around 40% of the city lies below vote for companies cost of addressing it now. To put
sea levels, this is the equivalent of that practice it another way, governments need
insisting on staying in a burning to tip over from being reactive to
house while occasionally dousing sustainability proactive on the climate crisis.
the flames with a cup of water.
Beyond Meat [BYND] focuses on They need to spur innovation,
On a proactive note, the govern- the plant-based protein theme by R&D as well as investments through
ment announced in April 2019 creating foods that taste just as subsidies, grants & tax breaks.
that a new capital would be built good as traditional animal protein,
elsewhere in Indonesia at an yet sourced from plants. This is a
Kay Van-Petersen, Global Macro Strategist
Kay Van-Petersen joined Saxo Bank in 2014 as a Global Macro Strategist, based in Singapore.
He focuses on delivering strategies and analyses across asset classes based on monetary and
fiscal policies, global geopolitical landscapes as well as other macroeconomic fundamentals.
He also takes into account market sentiment, technical and momentum factors, and corporate
bonds with attractive risk and return.
@KVP_Macro
24
Q12020
By #SAXOSTRATSBreaking down evidence
of global warming
By Anders Nysteen
The United Nation’s body for assessing science related to climate change – the
Intergovernmental Panel on Climate Change (IPCC) – estimated in 2018 that human activities
have caused a global temperature rise of around 1.0°C above pre-industrial levels [IPCC].
Plenty of other research groups are seeking to variety of climate models with associated uncertainties
understand the drivers of global temperature rises are presented every year, all contributing to the broader
by applying various climate models and simulations. climate discussion.
The estimates of anthropogenic climate change rely
on a comparison with an artificially generated model We do not seek to take any stance in the climate debate,
assuming the conditions of the earth without human but an understanding of temperature drivers is a solid
activity. As this parallel scenario will never be realised, basis for having a qualified view. This is also from an
these climate models seek to find the best qualified economic point of view, as climate change can have
guess for the parallel scenario by looking at the major geographical impacts that require a shift in
fundamental drivers of climate change in the past prior agricultural production, demographical reallocations etc.
to human existence. As this is a difficult task, a broad
Figure 1 – Temperature trends for the past 65 million years:
Pal Eocene Oil Mio Pliocene Pleistocene Holocene
15 S. Hemisphere Ice Sheets 15
N. Hemisphere Ice Sheets
10 10
5 5
0 0
-5 -5
EPICA Dome C
Zachos et al. (2008) Lisiecki & Raymo (2004) NGRIP Marcott et al. (2013)
60 40 20 5 3 1 300 100 20 10 1950 2150
Myr Before Present Kyr Before Present Year CE
SOURCE: GLOBAL MEAN ANNUAL TEMPERATURES, CHART FROM BURKE ET AL., HTTPS://WWW.PNAS.ORG/CONTENT/115/52/13288. THE LAST PART OF THE
TIMELINE IS A PREDICTION BY THE SOURCE AUTHORS AND SHOULD BE IGNORED IN THIS CONTEXT.
25
Q12020
By #SAXOSTRATSYou can also read
