Sostenibilità. Facciamo sul serio.

Sustaining the momentum

market snapshot

8 December 2023 |
Active ESGMacro
This week, trade figures give rise to a more optimistic outlook for China and policymakers at COP28 step up to the plate.

Fast reading:

  • Chinese exports recorded their first increase in six months, while imports declined.
  • International trade in China has been challenged this year by rising rates and high global inflation, but the latest data indicates pressures could be easing.
  • The data comes days after Moody’s cut its outlook on China’s credit rating to negative.
  • Meanwhile, with the COP28 summit firmly underway in the UAE, it remains to be seen whether world leaders will deliver on their climate commitments.

Official figures reveal China’s exports rose marginally higher last month (Figure 1), marking the first increase since April and posting a positive signal for the recovery of the world’s second largest economy. 

The update is at odds with Tuesday’s downgrade of China’s credit rating by Moody’s on the risk of slowing economic growth and the ongoing challenges faced by the country’s property sector. The decision resulted in Mainland and Hong-Kong-listed shares dipping to a near-five-year low.

For Mohammed Elmi, Lead Portfolio Manager, Emerging Markets Debt at Federated Hermes, the question of China’s investability remains an important one, particularly for fixed income investors.  

 “In our opinion, the Chinese fixed income space in 2024 remains challenged and unattractive on a valuations basis,” he says. “Therefore, in our view, it’s hard to overstate the importance of looking beyond China, as recently highlighted by the outperformance in countries such as Mexico, Brazil, Peru, and Turkey.”

Figure 1: Chinese exports vs. imports

On a broader view on the outlook for equity investors in the coming year, Stephen Auth, CFA, Chief Investment Officer for Equities at Federated Hermes, shares his hopes for a return to normality in a post-Covid environment.     

“In today’s world of 24-hour news cycles, geopolitics, asynchronous micro and macroeconomic cycles, global trade wars and heavy involvement in the private economy by monetary, regulatory, and fiscal authorities, markets have a way of zigzagging up and down in ways that sometimes obscure the underlying trend,” he says. “And while 2024 is sure to have plenty of noise for the market to chew on daily, by this time next year at least, it may prove to be the most ‘normal’ year for equities since the pre-Covid era.”

 “Our outlook is only 9% above present levels, and if achieved, would be a rarity. Over the last 20 years, a single-digit positive return has only been recorded four times,” he adds.  

“After the wild ride of the last four years, 9% would be welcome in our books. More importantly for stock pickers such as our gang at Federated Hermes, the real action in the market is likely to happen beneath the surface, driven by smaller and mid-sized stocks that really haven’t participated until recently. This theme of a market that is more of a grind than a hockey stick led by these unappreciated stocks, and not the ‘Magnificent Seven’, is one we’ve been talking about since the summer.”

The real action in the market is likely to happen beneath the surface, driven by smaller and mid-sized stocks that really haven’t participated until recently.

COP28: The time for action is now

 In other news this week, this year’s UN Climate talks, COP28, are now at their midway point.

A key area for action at this year’s summit is the urgent need for continued progress on the energy transition. With greenhouse gas emissions at an all-time-high, the need to urgently scale up renewable energy solutions and reduce the consumption of traditional fossil fuels has reached a fever pitch. (see Figure 2, below)

Policymakers will also be addressing biodiversity loss at the summit, with the ambitious Kunming-Montreal Global Biodiversity Framework 30×30 target serving as the cornerstone of both climate change and biodiversity mitigation.

With an average of around 25% of species in assessed animal and plant groups at threat, and a suggested 1 million species facing extinction, the framework calls for the conservation of 30% of the planet’s land and sea by 2030 through conversation and protection.1

Leon Kamhi, Head of Responsibility and EOS, Federated Hermes Limited, who is attending the summit, shares his hope of seeing actionable commitments from governments, industry leaders and financial institutions to invest in a just transition.

“If the ever-increasing action gaps remain, economic losses from global warming will balloon, making the inevitable transition more painful. As we look ahead to 2024, it is clear that the next 12 months will be critical to delivering success.”

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