Written by the Mackenzie Betterworld Team
Equities continue to record a third month of declines in October as rising bond yields stoke investor fears. Broad indices finished in negative territories for the month. The S&P/TSX declined 3.2%, S&P500 slid another 2.2%, while the MSCI World dipped just 0.3% in Canadian dollar terms. Rising bond yields continued to dominate investor worries as the US 10-year treasury yield peaked just shy of 5%.
The third quarter earnings season passed the halfway mark and results have been reporting better than expected with aggregate earning ahead by 1.3% at the end of October. Overall, the bigger earnings beats seem to be coming from the Financials, Energy and Technology sectors while Healthcare, Utilities and Real Estate have generally not been meeting earnings estimates so far.
Worries/what keeps us up at night?
The renewable energy and clean technology areas of the market have been significantly impacted by the high interest rate environment and the recent surge in bond yields. The long-term case for growth in renewables remains attractive, in our view. The necessary demand to achieve net-zero emissions by 2050 has not changed. With government bonds generally considered as a risk-free asset, rising bond yields reduce the perceived attractiveness of short term returns for renewable power producer who have locked in long term power purchase agreements. Why purchase a risky asset when you can lock in a risk-free return? Positioning in renewable power companies for the eventual normalization in rates has us contemplating the questions of how much and when to emphasize this area of our portfolio to capture the recovery.
From the summer highs at the end of July, US markets have now pulled back 9%. We think that this reset creates some breathing room for equities. If we see bond yields normalizing and an increasing level of confidence in the central banks having completed their rate increases, we see a case where the environment improves for companies with solid fundamentals who were caught up in the broad-based pull back.
This year’s annual committee of parties (COP) to the UN Framework Convention on Climate Change (UNFCCC) – referred to as COP28 – is scheduled to begin on November 30, 2023 in Dubai. The two week conference is still viewed as the pinnacle of executive-level global climate discussions, and as the forum for discussing the implementation of the 2015 Paris Agreement.
A lot has occurred since the 2022 COP held in Sharm El Sheikh, Egypt: war, inflation, and fractured global supply chains add new pressures on a system which already required delicate diplomacy, and trillions of dollars in funding.
The questions we hope to gain a better understanding from COP28 are:
Will meaningful progress be made towards decarbonization?
Will a loss and damage fund come to fruition?
Will steps be taken to reduce global methane emissions?
In October, the Betterworld team participated via proxy in 1 company meetings.
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