Weekly Bulletin: Climate Change is Investment Risk

Philipp Hildebrand, BlackRock Vice Chairman, speaking at Davos on climate change

“Clients have been telling us for a while that this is an important issue. They’ve recognised that climate risk is investment risk. Sustainability risks are, ultimately, investment risks, whether that is due to physical events such as flooding or regulatory developments. Clients have understood this and they’ve been calling on us to help them get ahead of these trends…We’re at the very beginning of a significant shift in finance and we hope, as a large firm, that we can make a difference, that we can be an accelerator, an amplifier.”

“For company CEOs, this is an opportunity and a risk, like all big changes. With few exceptions, it’s very clear that almost all CEOs recognise that this is a reality and are asking how they adapt their business model to the changes. In some cases, it can be a great opportunity, in others it will be a challenge. There are very few people who feel they can simply ignore this.”

“We want to be much more transparent in how we engage with the companies and in how we vote. Also, we’ve made it clear we expect companies to live up to disclosure responsibilities, making sure that the market has the information it needs to judge where companies are with regard to climate risk.”

“In the very long-term there may be a watering-down of the return potential you have in sustainability, but this is a major shift that’s just about to happen. This is no different to the shifts we’ve seen related to the baby boom, for example. This is a fundamental reshaping of finance that will entail significant reallocation of capital and relative price changes.”

Week Past

UK inflation (December) – UK inflation fell to its lowest level in more than three years in December. Consumer prices were 1.3% higher than a year ago. Expectations had been for a rise of 1.5%, in line with the previous two months. [1]

UK retail sales (December) – Shoppers stayed cautious over the Christmas period, with retail sales volumes falling by 0.6% from November. This was the fifth month in a row without growth, with food stores hit hard. [2]

UK wages and employment – The UK labour market continued to show strength in the three months to November, adding 208,000 jobs compared to the previous three months. Average weekly earnings, including bonuses, rose 3.2% year on year, unchanged from the previous three months. [3]

US-China trade deal – The US and China signed their much-awaited ‘phase one’ trade deal. Critics said the deal lacked substance, but the deal offers a way for both sides to claim victory and has proved supportive for markets. [4]

China Gross Domestic Product (GDP) – China’s economy grew 6.1% in 2019 as the trade war with the US and domestic pressures took toll. This was the lowest economic reading since 1990, as weaker consumer spending, rising unemployment and problems in the financial system weighed on growth. [5]

US manufacturing production (December) – December manufacturing data confirmed that the sector was in a mild recession for all of 2019, shrinking 1.3%. It was the worst year for manufacturing since 2015. [6]

Week Ahead

Interest rate decisions – rate decisions are expected from the European Central Bank and Bank of Japan. In both cases, interest rates are expected to remain on hold, but markets will be looking out for any change in tone from the central banks. [7]

German flash manufacturing and services Purchasing Managers Indices (PMI) (January) – manufacturing data is expected to show some recovery from a dismal 2019 in German manufacturing, rising from 43.7 to 44.0. However, services are predicted to fall from 52.9 to 52.5. [7]

UK flash manufacturing and services PMI (January) – UK manufacturing is expected to rise from 47.5 to 48.4, as the US/China trade deal eases pressure on global trade. Services are expected to fall from 50 to 49.5.

US flash manufacturing and services PMI (January) – In the US, manufacturing is expected to fall from 52.4 to 52, with services predicted to fall from 52.8 to 51.7.

References

  1. UK inflation slips to three-year low, FT, January 2020
  2. Retail sales fall sharply in December, BBC, January 2020
  3. UK jobs market strengthens ahead of Bank of England rate decision, FT, January 2020
  4. US-China trade deal: Winners and losers, BBC, January 2020
  5. China’s GDP grows at slowest pace in 29 years, FT, January 2020
  6. US manufacturing was in a mild recession during 2019, a sore spot for the economy, Washington Post, January 2020
  7. IG Index, week ahead, January 2020

The opinions expressed are as of January 2020 and are subject to change at any time due to changes in market or economic conditions. The above descriptions are meant to be illustrative only.

Weekly Bulletin: A Fundamental Reshaping of Finance

Larry Fink, CEO, BlackRock

“I believe we are on the edge of a fundamental reshaping of finance.”

“The evidence on climate risk is compelling investors to reassess core assumptions about modern finance. Research from a wide range of organisations – including the United Nation’s Intergovernmental Panel on Climate Change, the BlackRock Investment Institute, and many others, including new studies from McKinsey on the socioeconomic implications of physical climate risk – is deepening our understanding of how climate risk will impact both our physical world and the global system that finances economic growth.” 

“Will cities, for example, be able to afford their infrastructure needs as climate risk reshapes the market for municipal bonds? What will happen to the 30-year mortgage – a key building block of finance – if lenders can’t estimate the impact of climate risk over such a long timeline, and if there is no viable market for flood or fire insurance in impacted areas? What happens to inflation, and in turn interest rates, if the cost of food climbs from drought and flooding? How can we model economic growth if emerging markets see their productivity decline due to extreme heat and other climate impacts?”

“Investors are increasingly reckoning with these questions and recognising that climate risk is investment risk. Indeed, climate change is almost invariably the top issue that clients around the world raise with BlackRock.”

Week Past

UK Gross Domestic Product (GDP) – The UK economy contracted by 0.3% in November, Economists had expected zero growth, but the manufacturing and production sectors declined more than expected. The weak data weighed on the pound. [1]

UK industrial and manufacturing production – The latest production figures from the industrial and manufacturing sectors showed real weakness. Industrial production fell 1.2% per cent during November, while manufacturing dropped 1.7%. Services shrank just 0.3%. [1]

UK high street – Retail sales fell 0.1%, in 2019, the first annual sales decline in 25 years, according the British Retail Consortium (BRC) with November and December particularly weak. The BRC blamed political uncertainty over Brexit and the General Election for the weakness. [2]

China inflation (December) – China’s consumer prices rose by 4.5% year on year, marginally lower than expectations of a 4.7% rise. Soaring pork prices were the main driver of higher inflation amid an African swine fever crisis. [3]

US initial jobless claims (w/e 4 January) – Claims for state unemployment benefits dropped to 214,000, against expectations of a fall to 219,000. However, there were signs that the labour market was cooling, with the number of Americans on unemployment rolls surging to its highest level in 18 months at the end of 2019. [4]

US inflation – US consumer prices grew at 0.2% in December from the previous month — its weakest reading since September. This gives the Federal Reserve scope to keep rates on hold. Economists had forecast a 0.3% increase. However, the Federal Reserve Bank of New York survey, a closely watched gauge of inflation expectations, rose modestly in December. [5]

Week Ahead

UK inflation (December) – Consumer price inflation is expected to remain at 1.5%, with a small drop in core inflation. [6]

UK retail sales (December) – UK retail sales are expected to rise from 1% to 3.8% month on month, but still show weakness year on year after a tough Christmas season for retailers. [6]

UK wages and employment – UK wage growth has been slowing in recent months but remains ahead of inflation. The consensus expectations are for wage growth (including bonuses) of 3.4%. [7]

US-China trade deal – The US and China are expected to sign their much-awaited ‘phase one’ trade deal. Any delay may unsettle markets. [6]

China GDP – China’s GDP growth is expected to fall from 6% to 5.9%, with industrial production and retail sales weaker. [6]

US manufacturing production (December) – the US manufacturing sector is expected to show weakness with production falling from -0.8% to -2.7%. [6]

References

  1. UK GDP: Pound slips on unexpectedly weak growth figures, City AM, January 2020
  2. Worst year for retail in 25 years, says trade body, BBC, January 2020<
  3. China’s pork price rockets 97 per cent in December, keeping inflation at eight-year high, South China Morning Post, January 2020
  4. Weekly jobless claims fall but number of unemployed surged to a more than 1 1/2-year high, CNBC, January 2020
  5. US consumer prices rise less than forecast in December, Financial Times, January 2020
  6. IG Index, week ahead, January 2020
  7. FX Street, economic calendar, January 2020

The opinions expressed are as of January 2020 and are subject to change at any time due to changes in market or economic conditions. The above descriptions are meant to be illustrative only.