The surging attention on the global climate crisis and how the world needs to address this with urgency is creating a powerful investment theme, according to the team behind the £1.4bn JPM Global Macro Opportunities fund.
Last year was one when climate change was brought into sharp focus, with Swedish environmental activist Greta Thunberg becoming a household name, protests from the likes of Extinct Rebellion garnering much attention and the media covering the issue in depth.
This came against a backdrop where the real effects of climate change were all too easy to see around us. The World Meteorological Organization has confirmed that 2019 was the second hottest year on record after 2016, exacerbating problems such as wildfires and extreme storms.
These factors mean that an investment theme has emerging in how the world’s governments, companies and individuals respond to the challenges of climate change, said JPM Global Macro Opportunities manager Shrenick Shah.
Source: JP Morgan Asset Management, NASA Goddard Institute for Space Studies
The fund’s approach seeks to identify market mis-pricing of macroeconomic trends, with themes such as ‘widespread technology adoption’, ‘maturing US cycle’, ‘emerging market convergence’, ‘China in transition’ and ‘Japan beyond Abenomics’ currently being at play in the portfolio.
At the start of 2020, one new theme – ‘climate change response’ – was added. As well as JPM Global Macro Opportunities, it can also now be found in the other multi-asset mandates run by Shah and his team.
“The evidence is clear that global temperatures are rising and we can see that, as we stand today, average global temperatures are roughly one degree above the mid-20th century average,” the head of JP Morgan’s macro strategies team explained. “The evidence is also clear that this acceleration in temperature is due to greenhouse gases coming from human activity.”
The Paris Agreement, which was adopted by 187 members of the United Nations Framework Convention on Climate Change, aims to strengthen the global response to the threat of climate change by keeping a global temperature rise this century “well below” two degrees Celsius above pre-industrial levels. It also encourages countries to even further limit the temperature increase to 1.5 degrees Celsius.
The only significant emitters which are not parties to the Paris Agreement are Iran and Turkey, although the US is scheduled to pull out if Donald Trump wins the 2020 presidential election.
But Shah said the Paris Agreement’s aim to make governments responsible for taking action to addresses the impact of increased levels of greenhouse gases will have far-reaching effects.
“While progress has been slow, what’s increasingly drawing our attention is that the rate of response from governments – in particular through legislation – is accelerating quite quickly,” the JPM Global Macro Opportunities manager said.
Source: JP Morgan Asset Management, UN Principles for Responsible Investing
“When you overlay that with last year being a year clearly where public awareness with regards to climate change increased dramatically, the confluence of those two factors is going to accelerate quite quickly the rules and regulations, in particular in Europe, surrounding climate change.”
The FE fundinfo Alpha Manager highlighted the UK government’s pledge last year to bring all greenhouse gas emissions to net zero by 2050, making it the first major economy in the world to pass laws to end its contribution to global warming. He expects other governments to follow, which would create opportunities for investors.
“It’s clear that businesses, in light of the new legislation and developing attitudes, are going to have to shift their strategies somewhat,” he said. “In some sectors, business strategies are going to have to change quite significantly.”
A good example would be power generation as this sector is a major contributor to greenhouse gas emissions and legislation coming into force will push companies in the space to think about new ways of generating electricity.
This was seen recently in Germany, where the government and regional leaders last week agreed to phase out coal-fired power stations by 2038. The country already has over 250,000 people working in renewable energy, significantly more than are in its coal industry.
Shah said: “The companies that are ahead in this transition, the companies that are investing in renewables in the power generation sector, are already getting rewarded by markets.
“This is an important point: financial markets have a tendency to bring forward very quickly into the prices of securities actions that are going to be undertaken in the next five to 10 years. As we see an increased focus on these actions, price moves that are in response to climate change responses from the various agents are going to take place in financial markets sooner rather than later – and this is exactly where we see opportunities.”
There are other areas of opportunity within JPM Global Macro Opportunities’ ‘climate change response’ theme, with a notable one being consumer staples.
Consumer preferences appear to be changing to have a greater focus on sustainability, such as avoiding single-use plastics, and companies that are able to shift their product mix to reflect this are likely to be “winners in their space”. The manager highlighted Nestlé, which is a holding of the fund, as a consumer staples name that is doing this.
In addition, the fund is looking for opportunities to short the losers under its ‘climate change response’ team. An area of focus here is energy stocks, which are also seeing their cost of capital increase as banks and capital markets become less willing to fund oil and other ‘dirty fuel’ projects.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Shah has managed JPM Global Macro Opportunities since its launch in February 2013. Over that time, it has generated a total return of 54.90 against 17.17 per cent from its average IA Targeted Absolute Return peer. However, it has also been significantly more volatile than the sector owing to its ambitious return target.
The team at FE Investment said: “Although the fund has a higher objective than its absolute return peers (cash plus 7 per cent), we believe the team has the capacity to reach it. There is a strong focus on risk management as JP Morgan is one of the leading experts in this field, so we believe investors benefit from advanced risk management strategies.”
JPM Global Macro Opportunities has an ongoing charges figure (OCF) of 0.66 per cent.