Markets Weekly - 13 September 2021

Henk Potts (HP): Hello. It’s Monday, 13th September and welcome to the Barclays Private Bank Markets Weekly podcast, the recording that will guide you through the turmoil of the global economy and financial markets.

My name is Henk Potts, Market Strategist for Barclays Private Bank. Each week I’ll be joined by guests to discuss both risks and opportunities for investors.

Firstly, I’ll analyse the events that moved the markets and grabbed the headlines over the course of the past week. We’ll then preview the COP26 climate conference. And finally, I’ll conclude by previewing the major events and data releases that are likely to shape the week ahead.

Equity markets came under renewed pressure last week, as investors appeared increasingly nervous that rising virus cases would indeed infringe upon the speed and the intensity of the recovery and create further supply side disruption that could exacerbate inflationary pressures, which in turn could force central bankers to withdraw stimulus at a faster rate than they would like.

Rising commodity prices have added to the inflationary fears. Aluminium has hit its highest level since 2008 this morning, trading above the $3,000 a ton mark as markets priced in the potential disruption to the supply of bauxite as a result of the political disorder in Guinea, although commodity market supply sentiment has improved after China announced it would release part of its petroleum reserves to domestic customers in an effort to reduce prices. The decision follows on from similar auctions for zinc, copper and aluminium.

In terms of equity market performance, US equities registered their biggest weekly decline since mid-June. The S&P 500 was down 1.7% last week. European stocks racked up four consecutive days of losses last week and recorded its a second week of decline for the first time since the end of April. The STOXX 600 was down 1.2% last week.

As we emerge from the summer months, we expect volatility to rise as the global economy begins to exit its recovery phase and policymakers consider the path to normalisation. However, risk asset investors should remain reassured by the robust global growth rate, rising corporate profitability forecasts and historically attractive policy levels.

The European Central Bank meeting was the main focus for investors last week. The ECB maintained its tune as that the recovery is gaining momentum but risks continue. They’re still projecting that medium- term inflation levels will be below target and promised that any withdrawal of support will only occur at a very modest pace when the recovery is assured.

In terms of the growth outlook, while positive growth resumed in the second quarter, a more meaningful recovery and in activity seems to have started in June. Falling infections, hospitalisations and ICU occupancy rates have paved the way for a gradual reduction of restrictions leading to a faster pace of consumer consumption than anticipated. Growth has also been supported by fiscal support.

The European Central Bank now expects output to return to pre- pandemic levels by the end of this year. We have raised our growth forecast for the eurozone up to 5.3% for this year.

Turning to inflation, the ECB’s latest forecast projects inflation will be more robust than previously predicted for this year and ease back next year and into 2023. We forecast inflation will peak at 3.5% in the fourth quarter of this year and average 1.9% in 2022 and just 1.6% in 2023.

The Governing Council announced that it will conduct purchases in the final three months of the year at a moderately lower purchase pace than the near €80 billion monthly rate deployed over the course of the past six months. The move is a minor adjustment and is far from the tapering considered by the Fed, and could be reversed if the Delta variant leads to a postponement of the reopening of economies.

The European Central Bank said that a more meaningful discussion around the future of its quantitative easing programmes will come at the December meeting.

In the UK, after a strong bounce back UK retail sales lost momentum in August, as retailers struggled with labour and product shortages, and consumer activity was constrained by higher prices.

July’s inflation print eased back to 2% year on year compared to a 2.5% increase in June, but the Bank of England forecast that inflation will hit 4% by the end of this year.

The data from the British Retail Consortium showed the value of goods sold in shops and online grew by 3%, less than the growth recorded in August 2020, despite rising demand for formalwear as employees return back to the office.

There is evidence, however, that consumers are rotating spending back to services as the economy reopened. Barclaycard data showed spending at bars, pubs and restaurants reached its highest growth rate for over 17 months in August.

Future consumption in the UK will be determined, I think, by the ongoing improvement in the medical outlook, the recovery in the labour market, easing supply chain issues and the taming of inflation.

So that was the global economy and financial markets last week. Let’s move on to consider climate change.

Over the summer, we’ve witnessed increasingly intense and varied weather events. Wildfires in Europe and the United States, hurricanes in the US, heatwaves across Europe. All these arguably demonstrate the physical albeit initial impact of climate breakdown, but is there hope on the horizon? The global climate change summit COP26 will start in seven weeks’ time in Glasgow, with the objective to agree and accelerate action on the Paris Agreement which aims to restrict global warming.

With us today is Damian Payiatakis, our Head of Sustainable and Impact Investment, to discuss what investors should know about the event in terms of their portfolio.

Damian, great to have you with us today. Let’s start with the basics. Can you explain COP26 for us?

Damian Payiatakis (DP): Morning, Henk. Pleasure to be here with you. So COP26 is the 26th time that the 197 countries, or really parties, that signed up to the climate change convention have met, hence the Conference of Parties, or COP.

At COP21 in Paris in 2015, world leaders agreed to limit global warming to 2 degrees Celsius above pre-industrial levels, and preferably to keep that within 1.5 degrees as the real target and that’s generally known as the Paris Agreement. So what we have with COP is something to set an ambition, but also some mechanisms to facilitate that. And foremost are the nationally determined contributions, the NDCs.

Now, NDCs are national plans. They explain climate action including national targets for greenhouse gas emission reductions, along with the policies and the measures that governments plan to implement to address climate change and to contribute to that Paris Agreement.

Now, countries must regularly increase those proposed emissions cuts, so-called ratcheting of the process, and at this year’s COP26 all participating countries are being asked to submit their emissions reduction targets for 2030. This will be the second time they’ve done that, really that sets them on that path to hit generally net zero targets by 2050.

And in addition, there’s a number of other mechanisms that exist. Commitment of wealthier countries to finance $100 billion a year for poorer nations to pay for climate change mitigation and adaptation, or mechanisms that are under discussion but not agreed yet, so the idea of creating a single global price for carbon and the associated markets to trade carbon.

Investors can think of it as a bit like an annual review and a strategy planning session for how we address climate change.

HP: So given the fact that most countries have already committed to a net zero ambition, do we really need yet another conference?

DP: It would be fine if the sum total of the parties’ plans collectively targeted the 1.5 degree increase, and reductions of each country or region were on track to meet their commitments, but neither one of those conditions is being met.

Compared to that 1.5 degree Celsius target, temperatures have already risen by about 1.1 degrees and that’s part of the reason why we’re seeing more of the physical effects of climate breakdown. So we only have 0.4 degrees until we’re over the target, so not a lot.

And when you look at it, climate analysts at Carbon Action Tracker have calculated that the sum total of the policies that are in place today most likely will mean or result in a 2.9 degree increase in average global temperatures, so well above either of those. And even with the current pledges and targets, so what people have said they’re going to do, it’s a 2.4 degree Celsius increase.

And I think what that means is you’re going to see bigger commitments and cuts in emissions that are going to be required to reduce the effects of climate change to meet those commitments that everyone has set out, and this decade is really critical to meeting the targets because COP26 is there to agree how to deliver them.

HP: OK. So who should we be looking at to deliver those bigger ambitions?

DP: Well, clearly it’s a global challenge. It’s the classic problem of the commons but the contributions and the effects are not evenly split.

If we look at the World Resources Institute data, the top five greenhouse gas emitters are China, the US, the EU, India and Russia. All told, together they account for about 59% of the global GHG emissions. And if you add in the next five, Japan, Brazil, Indonesia, Iran and Canada, that’s actually just under 70% of the total greenhouse gas emissions emitted anywayannually.

To put that in relative comparison, if you look at the bottom 100 countries, the bottom half of the countries that have signed up, together they account for less than 5% of the global emissions, so you can see a real disproportionate amount of global emissions relative to the countries involved.

But it’s also important to compare not just absolute emissions, you know, China alone may account for about 26% of the global emissions and about 12,000 megatons of CO2 equivalent a year.

But let’s look at that also on a per capita basis and on a consumption basis. You know, we look at Global Carbon Project estimates, China emits about on average 7 tons of carbon per person while the average person in the US emits over 16 tons. The EU comes in at just about 7 tons and India just about 1.8 tons. So that really sets the scene for the discussions and the dynamics around COP26.

HP: OK. So let’s bring it back a little bit towards investors. What does it mean for them?

DP: So when we think about investors I think there’s really the expectation that, in order to meet the overall Paris Agreement, that more is going to need to be done. Countries are going to have to commit more to, than what they’re doing today and will actually have to do more. You know, what they will end up having to do is also report annually on the progress they’re making and those national determined contributions will be updated every five years as opposed to every 10 years going forward.

And with that in mind, what we talk a lot about are transition risks. So the transition risks in this case are the ones that are coming from those commitments being implemented into legally binding activities and the actions that countries are making in terms of promoting or investing or trying to attract investments around these areas.

So for investors a couple of things. We always talk about risks and opportunities and very clearly both of those are on display here in relation to climate. In terms of the risk category, understanding the carbon footprint of your portfolio, knowing which of the sectors are that are higher emitters, and they don’t always have to be the traditional ones of the fossil fuel industries but actually others that are maybe less visible or less likely or obvious.

Fashion, agriculture – that are very clearly in the next stage of where governments are going to need a target. Or greening buildings, you know, one of the other areas, very clearly boilers, you know, one of the unknown or unseen areas where carbon emissions actually are quite considerable.

So looking at your portfolio and understanding where some of those risks are, whether or not you’re still willing to accept those or try to mitigate those or to try to offset or avoid those in terms of what your portfolio is going to be positioned.

And then the other side are very clear, the opportunities. With all this transition happening and money going into things around circular economy, hydrogen, electric vehicles, very clearly there are going to be winners that are coming out and having massive growth potential around those companies and sectors. And we see that in terms of how we’re thinking about sort of what is of interest in our portfolios and where there are interesting opportunities in the private market space as well.

HP: Well, thank you, Damian. Certainly your work on leading the research on sustainable and impact investments for Barclays has given us a much better understanding of the magnitude of the change required and the opportunities for investors. No doubt we’ll be talking to you again as we head toward that conference start.

The focus this week will be on Chinese data and US inflation. The figures for Chinese retail sales, industrial production and fixed asset investment for August are expected to show continued weakness.

In terms of the outlook for the world’s second largest economy, with the comparative normalising and some clear headwinds developing it’s perhaps no surprise that year on year growth rates appear set to moderate over the course of the next 18 months. We predict that the country will drift back towards a new trend growth rate of 5.5% in 2022.

We are expecting another elevated CPI print from the US on Tuesday. We expect the Consumer Price Index to come in at 5.3% in August, only marginally lower than the 5.4% for June and July. However, from the middle of next year, the US CPI rate should return back towards the 2% mark.

With that I would like to thank you once again for joining us. We will of course be back next week with our latest instalment, but for now may I wish you every success in the trading week ahead.