Markets Weekly podcast – 4 December 2023

Julien Lafargue (JL): Welcome to a new edition of Barclays’ Markets Weekly podcast. My name is Julien Lafargue, Chief Market Strategist at Barclays Private Bank, and I will be your host today. 

As usual, we will start by reviewing last week’s events before moving on to our guest segment. And this week, I’m very, very happy to be joined by Damian Payiatakis, our Head of Sustainable and Impact Investing, to discuss a very timely topic, COP28, that is taking place in Dubai. But more on that in a second. 

But, first, let’s look at last week and maybe even last month, the month of November, because that was quite a month. The S&P 500 registered its best month, its best performance on a monthly basis since July 2022, while bonds, as proxied by the US Aggregate Bond index, posted their best monthly return since May 1985, so quite a long time ago. 

What happened? Well, really stocks have been in this ‘having their cake and eating it too’ kind of phase, celebrating the combination of disinflation, a more dovish monetary policy outlook, and the resulting drop in yields.  

But, at the same time, they’ve also kept some confidence in the growth and earnings outlook, meaning that although from a bond perspective, things seem to be slowing down at the macroeconomic level, equities tend to take the benefit of that as well as the benefit of still stronger growth. So, the question is really how long this can last, and we’ll discuss that in a second. 

In terms of data releases from last week, again, it was all about inflation. We got both the eurozone inflation and the PCE in the US. In the eurozone, the headline CPI cooled to 2.4% year over year, that was down from 2.9% in October and below consensus of 2.7%. So, at the headline level at least, we’re getting, hopefully, close to the ECB’s target. 

Now, in the US we got the October PCE, so there’s always this month lag. Here again cooler than expected. The PCE came in at 3%, the consensus was looking for 3.1%. So, all around cooler-than-expected inflationary pressure in both the eurozone and the US, which fuelled the pullback in yields and those expectations that interest rates will have to be cut much faster than initially anticipated. 

If we’re looking at what the market is pricing in today, in the eurozone, rates are expected to go from 4% today to 2.8% by the end of 2024. In the US, we are expected to go from 5.5% to just 4% in 12 months’ time. So, a significant amount of cut is already being priced in. And, look, while this is clearly possible, we find it also quite optimistic, and optimistic in the sense that if we were to see that much cut, it’s probably a reflection of a much, much slower macroeconomic momentum and, therefore, we would question the resilience of equity markets so far. 

To be fair, we’ve had that view for a few months now and it hasn’t worked out as we thought. We didn’t anticipate equity markets to be so strong in November, but the reality, the other part of our message has always been it’s important to be and stay invested. And as long as investors have done that, they should be pleased since both equities and bonds have posted positive returns. 

Now, going forward, we continue to believe that both equities and bonds are, as I said, a bit too optimistic about the soft landing type of scenario and the early interest rate cuts, and we expect the Fed and other central banks to push back against these expectations, which could lead to some volatility going into the end of this year and early 2024. 

Now, that’s it for the markets from last week. Let’s move on to this week’s interview with Damian. COP28, which is the largest annual gathering on climate action, began last week in Dubai. It’s going to run for about two weeks and close to 100,000 individuals have registered to participate with attendees including heads of states, ministries, negotiators alongside, of course, with climate activists, civil society and CEOs. 

In his opening remarks, the President of COP28 Sultan Al Jaber declared and I quote, “We see that the world has reached a crossroads. Since Paris, the world has made some progress, but we also know the road we have been on will not get us to our destination on time. The science has spoken. It has been loud and clear. It has confirmed the moment is now to find a new road.” And to discuss all that, as I said, here with me today is Damian Payiatakis, our Head of Sustainable and Impact Investing. 

Damian, it’s been very hard to miss the news about COP28 since last Thursday. Maybe we can start by taking a bit of a step back and you can remind our listeners about the history of COP, the role it has in the global and world political and climate discussion. 

Damian Payiatakis (DP): Well, thanks, Julien. OK. So, let’s quickly recap the origin story here. At the Earth Summit in 1992 nearly every country signed up to the UN Framework Convention on Climate Change and, since 1995, the countries that have ratified this convention, which there’s now 198 of them, have held their Conference of Parties, or COP.  

The first one was in Berlin, the one last year was in Sharm el-Sheikh. Arguably, the most significant recent COP was in 2015 when the Paris Agreement was signed. This seeks to combat climate change in three ways: mitigation, so reducing the amount of emissions; adaptation, so actually being able to generate more resilience for countries and people; and financing, so actually increasing the amount of financing going to these solutions that are needed. 

Overall, the Paris Agreement’s primary goal is to reduce global greenhouse emissions, to limit global warming to well below 2 degrees, and preferably to 1.5 degrees Celsius. So, while the global focus spotlights the roughly annual conference, there’s considerable debate and negotiations and agreement that happens throughout the year, but COPs really serve to bring the world together to meet, to evaluate progress and negotiate new agreements to reach those goals. 

JL: Right. So, we’re now at the 28th meeting to agree on how to collectively address climate change. Regular podcast listeners will recall that we had you in, I think it was September, to highlight the findings of the Global Stocktake, the first progress report since that famous 2015 COP in Paris. So, overall, how has the world been doing with respect to this 1.5 degree target? 

DP: Well, I think as a report card, the Global Stocktake would read ‘limited progress, much more work needed’, so rather poorly. It did acknowledge that some progress had been made, but the Stocktake conclusions left no doubt that countries are not doing enough to meet the Paris Agreement. 

So, even without a three-year research project to collect and analyse the data, as I wrote in the September Market Perspectives, we’re really already seeing and feeling the expected effects of climate change and, what’s more worrying, earlier than scientists had thought they’d occur. I’m sure listeners themselves are seeing and have started to experience them also.  

And also, less than a week ago, scientists declared that 2023 will nearly certainly end as the hottest year on record. But that’s looking back. 

Looking ahead, it’s not great news either. To be on a pathway for that Paris 1.5 degree target, emissions need to be cut by about 42% by 2030¹. The problem is, even if we look generously at the current national pledges and targets, they will only achieve 8% cut in emissions². So, the conclusion that much more is needed now on all fronts is why I think people are around the world looking to COP28. 

JL: I think climate is, of course, a very important issue but the reality is there are so many important issues at this particular point in time, right? If you think about the world, if you think about what’s going on around the world, especially from a geopolitical standpoint, I guess people have, you know, maybe other concerns at this stage. How much really does this conference matter? 

DP: Well, clearly, as you said, both in the intro, I think also as we reviewed in the 2024 Outlook, we’re facing multiple challenges occurring simultaneously. But when I look at it, these are interconnected, these are reinforcing. You’ve got inflation, economic uncertainty, explicit wars, implicit geopolitical tension, energy security, all of them have a relationship with social and environmental issues.  

So, if we pull out one, if we look closely at, we can see energy costs and security, cost of living issues and the transition to a low carbon economy all fit together. And I don’t think we should look at this as an energy transition versus an energy security issue, but really how can moving to a lower carbon economy, increasing renewables, can actually improve energy security, which is obviously the point of COP.  

And, well, COPs don’t always deliver on the grand outcome that many expect or hope them to achieve relative to the attendees in the discussions, but the reality is they are our best bet. 

JL: So, what’s on the agenda? What’s the focus this year? You know, if you’re an investor, what should you be looking for as we get those headlines coming out of COP28. 

DP: Well, in principle, it can be challenging to draw a line from a global, political conference to investment portfolios. But in this case, there’s almost too many lines to draw, too many sectors affected. Remember, the purpose of COP is to assess global progress, to halt and reverse climate change, and to agree the plans for next year.  

So, when we look, the COP28 President Sultan Al Jaber has set out an ambition in four pillars, the four Fs. Fast track the energy transition to get to this lower carbon world. Secondly, fix climate finance really to increase the amount of public and private capital that could flow into the solutions that we’re talking about. Third, focus on adaptation and resilience, so people’s lives, livelihoods, this is where we’re going to have and see climate damage happening. And lastly, full inclusivity so that nobody is left behind. 

But your question, what could this mean for investors? I think about it just as no corner of the globe is going to be immune from the effects of global warming, every industry will be affected. Though, of course, it will be to varying degrees, which is why as investors it should matter to us, and we should be looking at it.  

The countries attending COP have made commitments to get their emissions to net zero. This means they’re working really fundamentally to reorganise and decarbonise our entire economic system. And, yes, that means energy but also transport, buildings, agriculture, land use, packaging, waste, water, chemicals, iron, steel, cement, really almost every sector of the economy is going to be affected by this. 

And we’re already expecting, you know, conclusions or outcomes from COP. It’s been impressive to see things take shape already. So, a commitment to triple renewable energy by 2030 or a fund that was started at COP27 to address loss and damage has been committed to and funding going into it. So, we’re already starting to see things that investors can take hold of and look at. 

JL: Well, I’m sure we’re going to have many more things, so I’m very much looking forward to a recap from you as we go into next year of all the things that were said and announced at this 28th COP. Before we wrap up, any final thoughts? Any indication for listeners as to where they can learn more about COP maybe? 

DP: Well, you know, as we said, decisions at COP have to work their way through national agendas and then into implementation, so it’s not a short process. I think investors should look at them as indicators of direction, you know, magnitudes of change.  

So, you can pick up a signal, you can look to model transition risks. You know, I’d encourage investors to be reviewing current portfolios and looking over the horizon, you know, ask how investments you’re holding are accounting for climate change, either on the physical and/or in terms of transition risk. You know, a central pillar is looking at whether or not your portfolio is climate-ready.  

That being said, protecting your portfolio doesn’t necessarily protect the planet. Fundamentally, the global ambition is to decarbonise our economies and human activity. So, in our 2024 Outlook, I highlighted five key sectors that could represent opportunities for investors to explore.  

But to answer your question slightly differently, I’d pull back a quote that I saw from that COP28 President that the moment is now to find a new road, and I think for investors that is part of the question – looking ahead. 

JL: Excellent. Yeah, clearly a lot to do in this space and I think one that will gather more or renewed, should I say, interest in the coming months. And, again, looking forward to your takeaways from COP28 as we go into 2024. Thank you very much for joining us, Damian. 

Before we conclude, just a quick look at what investors should have on their radar as we go into this new week. Last week was all about inflation. This week is going to be all about the US job market. We’re going to get the US JOLTS report for October that will come on Tuesday. We’re also going to get the US services ISM for November, the same day, Tuesday. And the main catalyst of the week will most likely be the US job report for November which will come out, as usual on Friday.  

So, a lot for us to talk about next week. We will be back, and in the meantime, we wish you all the very best for the trading week ahead.