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August 2021 Mid Monthly Update

Summary

The publication of the UN’s Sixth Assessment Report on Climate Change was unequivocal – human action causes climate change and it contained stark warnings for the future. Long term it will have large major effects on the investment industry.

Whether Report 

Possibly the key event in the first half of August as far as financial markets were concerned was the publication of the Sixth Assessment Report(AR6) of the United Nations (UN) Intergovernmental Panel on Climate Change (IPCC).  

The report was unequivocal in its blame on humans for what we are currently witnessing in Northern California and Greece in terms of wildfires and for the recent flooding in Europe.  So, there is no longer a debate on whether humans are to blame for rising CO2 emissions and subsequent climate change. Nor is there any debate on the  need to  achieve Net Zero  by 2050 to address this crisis.  While the report wasn’t a market mover in the short term, it undoubtedly represents a major opportunity for the investment industry.   

Of course, like any opportunity, there is scope for misuse and the industry regulator, the FCA, has been clear in its focus on ensuring that investors in anything with an Environmental, Social and Governance (ESG – I wrote them out in full as a reminder of what that badge stands for) label, measures up to what investors expect.  ‘Greenwashing’ has become prevalent in the industry whereby sticking a ‘sustainable’ word into the title of a fund entices investors into something it might not be.  Fund houses under the spotlight are usually asset gatherers often trying to find the best oil company to meet metrics set by ratings agencies relative to an index. 

At TBAM, we only invest with likeminded investors seeking to achieve an objective not relative to an index and who are not influenced by index sectors we have no interest in – oil and tobacco would be two notable examples. 

Shorter Term 

Markets have continued to fret over whether inflation is transitory or not.  Some recent data from the US would indicate that it might be more likely than last month, but while labour markets might appear to be tight amid skills shortages,as we have said before, it is too early to make the sort of black and white comment desired by journalists. 

Government bonds in developed markets would have you believe inflation is not a threat given their low and below inflation yields for most of the yield curve.  They remain heavily influenced by Central Banks even as they start to buy less of their own government’s debt as economies recover.  As we have noted before, bonds generally lack appeal as an investment choice. 

Delta Blues 

Enjoying more freedoms in the UK, you might be forgiven for thinking the worst is past for coronavirus everywhere in the world.  The successful vaccination programme here has enabled restrictions to be lifted and while infection rates are no longer falling in the UK, hospitalisations are relatively small and not currently a threat to the NHS.  Those that have been admitted are primarily those who have not been vaccinated. 

Elsewhere in the world, those countries that initially closed their borders in order to control the virus but were slow to roll out a vaccination programme are now feeling the effects of the Delta variant’s transmission.  This is particularly evident in Asia where China and Singapore would appear to be the exceptions in the chart below.

This has had an impact on the region’s equity markets which have been laggards in recent weeks.  China’s regulatory crackdown being the cause of its equity market’s malaise.  However, China also shut down a terminal at the world’s third largest container port after a single reported case of the Delta variant.  Trade and economic growth will be impacted especially if more closures ensue.  You might want to think about your Christmas presents a little earlier than you thought.

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