Brave New World - Edition 8

Carbon Credits : The New Asset Class?

• New asset class that has born out of regulation – Carbon credits is witnessing surging fund flows in an ESG dominated volatile situation this year.
• Number of companies with net-zero targets has jumped ~200% between 2019 & 2020, up from 500 to 1,565. As per McKinsey’s estimates the market for voluntary carbon credits could be worth upward of $50bn in 2030 (Source: Visual capitalist)
• The buyers of this credit are starting from energy & utility firms to corporate entities looking to put their green foot forward, to retail & speculative investors trying to catch the parabolic rise as price & volatility increases.

• Carbon credits are an allowance that works on a ‘cap & trade concept’ regulators cap the amount of carbon emissions & then allow emitters to trade the credits.

Water ETFs: $111 Billion For Water Infrastructure

• By 2025, it is estimated that 66% of the world will live in water-stressed areas according to the World Resources Institute. This is not just usual drought of California, North India (whose groundwater loss can be seen from space) or the Arabian Peninsula either, but a worldwide mismatch that will see a 40% gap between demand and supply emerge over the next 15 years.
• A significant issue in the Western world comes in the form of an ageing infrastructure that is prone to springing leaks. In the US, 13.7% of daily household water usage is lost through leaks, while almost a quarter of the UK’s public supply goes the same way.
• Barclays Capital analysts forecast global freshwater requirements for food production to increase 40% by 2030. The global consumer staples sector faces a $200bn impact from water scarcity and is the most exposed of all sectors to the water risk.

SPR release by US: Do we see triple digit in Oil coming soon?

• The US has already released a significant amount of oil from SPR with drawdowns accelerating lately – falling off a cliff in 2021. The most US can even sell is ~50-60 mpd which is only enough to soak up a few hours of global demand. Total global demand is touching 100mbpd. Total US demand is 20mbpd.
• The Strategic Petroleum Reserve (SPR) is an emergency stockpile of petroleum maintained by the United States Department of Energy (DOE). It is the largest known emergency supply in the world.

Active Management still didn’t win in 2021

• For decades, active managers have claimed that in boring markets, don’t expect them to outperform.  If there ever was a year active management should have outperformed passive indexed strategies, 2020 (most turbulent times since the great recession) and the first half of 2021 should have been it.
• As per a recent report from S&P Dow Jones Indices : Over the 12-month period ending June 30, 58% of large-cap funds, 76% of mid-cap funds and 78% of small-cap funds trailed the S&P 500, S&P Mid Cap 400 and S&P SmallCap 600, respectively. (Source: CNBC)
• The performance of active managers gets much, much worse when you look at longer time horizons: over a 10-year period, only 25% of all active funds beat their passive counterparts, according to the Morningstar report.
• It’s even worse among large-cap equity funds, which are what most investors hold: Only 11% of actively managed large-cap funds outperformed their passive peers over 10 years. (Source: CNBC)

Asset allocation accounts for a whopping 88 percent of volatility and returns, according to Vanguard and the simplest and cost effective measure to gain exposure to any asset class is via ETFs. There are approximately 2200 ETFs/ETPs listed in the US markets with an AUM of $7.7 trn.

Stock Market leverages spike: What will reverse this trend?

• Stock market margin debt spiked to another all-time high of $936 billion in Oct, up by 42% from a year ago and up by 67% from October 2019. Margin debt is a big accelerator both on the way up and way down for markets.
• While the direction of the market sentiments is difficult to predict but when this market starts going down, it will trigger massive bouts of forced selling as margin calls get triggered and leveraged investors have to sell stocks to pay down their margin debt, which then pushes down prices further, which then triggers more forced selling, and more fears of forced selling, as portfolios are being liquidated, thereby accelerating the swoon.
• In the financial stability report, Fed mentioned – ‘The median leverage ratios of younger retail investors are more than double those of all investors, leaving these investors potentially more vulnerable to large swings in stock prices, as they have a larger debt service burden’

With hedge fund managers announcing closure, fresh signs of lockdown emerging, dollar index gaining strength – we treat ‘Cash’ as an important asset to be deployed opportunistically.

Team

Management

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