Unwelcome signals and the need for a green recovery – AXA IM column

Chris Iggo, CIO AXA Investment Managers Core Investments, analyzes whether the latest corona measures are affecting confidence in an upswing. He sees a possible move away by the Federal Reserve from intervening in the primary and secondary credit markets, and he believes that dealing with current debt levels in the long term will require significant economic growth centered on a “green” upswing:

Lockdown instead of cyclical hope

“It seems like the markets would like to continue following cyclical glimmers of hope, like after the US election and the first vaccine reports. But now they have to wait and see again. The western economies are again being restricted by the only measure that exists on the currently high COVID-19 infections – lockdowns. Market participants still believe in an upswing, but outside of the markets, society has been suffering from the past ten months. Investors must therefore continue to trust that politics will back up business and that science and technology will pave the way to a healthier and more efficient future. ”

Unwelcome signal from the US Treasury Department

“While the benefits of supportive fiscal policies continue to outweigh debt levels, there may come a point where debt actually becomes a problem. Either the central banks continue to actively contain interest rates and volatility – in this case interest rates remain low but could just about be positive – or there is a shift towards a gradual reversal of monetary policy. In this case, interest rates could turn negative. The worries about this do not only affect the holders of government bonds. Investors may therefore be concerned about the US Treasury’s recent announcement that it will end some of the emergency credit facilities. While this is likely to mean only a small minus for US lending overall, the response from the Fed to the Treasury Department suggests that the central bank sees this as an unwelcome signal. “

A green upswing is needed in the long term

“In the long term, economic growth is needed to deal with debt levels. Given the challenges of climate change, it is essential that some of this growth comes from investing in the energy transition and mitigating climate-related risks and costs. Public money has to be matched to private investments to subsidize the transition costs. Although the sustainability plans currently announced in Great Britain are still manageable in this regard, they could, together with a greener agenda in the USA, Europe and China, contribute to a global acceleration of the energy transition. The accelerated move away from fossil fuels and a global approach to using carbon prices would make renewable energy and alternative energy sources more attractive from an economic point of view. This would also make carbon reductions more realistic in sectors such as long-distance, air and sea transport and in certain industrial processes such as steel production. The result could be numerous investment opportunities in which Europe could play a leading role. Many companies that develop green hydrogen technologies, for example, come from the European materials and industrial sector. The green revolution will be critical to the longer-term performance of European and broadly cyclical stocks. ”

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