A transformation with investment prospects: The decarbonization of the economy

The decarbonization of the global economy is in full swing. This Supertrend is attracting a great deal of capital – particularly for companies that are involved in the expansion of the necessary infrastructure. This is resulting in interesting prospects for investors in connection with what are known as "pork cycles."

The mechanism of shortages and surpluses in the global economy

At present, the impact of the pandemic's interruption of supply chains worldwide serves as a perfect example of the phenomenon known as a "pork cycle." These trigger supply bottlenecks and price increases, such as those seen for freight, semiconductors, energy, and other goods, while simultaneously attracting capital from investors with rising prices.

Since the expansion of supply is not immediate, however, such shortages often give way to a surplus after a period of time. Rising prices are then followed by a delayed drop in prices. These long cycles in price and supply are referred to as pork cycles. That said, the current global bottlenecks are likely to give way to a gradual normalization.

Capital-intensive Supertrend: The decarbonization of the global economy

With the approach of the envisioned global energy transition and the decarbonization of the economy, including by means of the Paris Climate Agreement, the global community stands at the beginning of the greatest transformation the industrial economic order has ever experienced. Due to its capital- and time-intensive nature, this transformation could also be seen as an extreme example of a pork cycle.

For example, goals such as the "net zero emissions" (NZE) target of the International Energy Agency (IEA), accompanied by political framework conditions, are now aiming to reduce the CO2 emissions of major polluters in the fields of energy production, industry, transportation, and buildings to zero over the next 28 years. This is accompanied by an inevitable hunger for capital, which has been triggered mainly by the expansion of electrical grids and renewable energy production.

Decarbonization is drawing capital towards Asia

A glance at the geography involved reveals that Asia will account for a major portion of the necessary investments. This most notably includes China, followed by India. For investors, this is likely to serve as another reason why Chinese investments are worthwhile. This is due to the fact that the greatest wave of investment in history, in absolute terms, is being triggered here. Furthermore, out of all of the Supertrends that the Investment Committee of Credit Suisse is following, the decarbonization of the economy (climate change – towards a greenhouse gas-free economy) is undoubtedly the most capital-intensive.

Total investment necessary for decarbonization

Sources: IEA, World Energy Outlook 2020, Credit Suisse

What the decarbonization of the economy means for investors

Three thoughts for investors:

1. The process of decarbonization and the energy transition will most likely be accompanied by shortages, surpluses, and price fluctuations across all segments of national energy markets. This can be expected to lead to occasional polarizations, particularly in cases where rising prices in areas like construction, transportation, and energy become sociopolitical flashpoints. That said, investors should not lose sight of the big picture. Decarbonization will advance at different speeds, but a reversal of the process is highly improbable.

2. The capital intensity of this wave of investment stands to interact positively with global key interest rates and capital market returns. Specifically, as a result of the fact that countries and companies will need so much capital in the future, monetary policy worldwide is finding itself in a situation that will not allow for any noteworthy interest rate turnaround for the foreseeable future.

3. Ultimately, investors would be well advised to concentrate mainly on equities from companies that are involved in the transition. Unlike the more volatile prices of energy and commodities, equities offer systematic risk premiums and thus a better risk/return ratio. They are also attractively valued at the moment.

The Clean Energy Index offers considerable potential in the context of decarbonization

Last data point: October 12, 2021

Source: Credit Suisse

Historical performance indicators and financial market scenarios are not reliable indicators of future performance. 

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