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How big is the renewable energy opportunity for investors?

The world is at a tipping point; responsible investment, ESG and stewardship, once seen as the preserve of niche green investors is now mainstream, challenging accepted investment fundamentals, as well as investors, asset owners and companies to do better.

We are now in the tail end of the second quarter of an already eventful year, with investors facing a range of stark choices.

In this episode of Amplified Saker Nusseibeh, Chief Executive Officer and Eoin Murray, Head of Investment, discuss why there is more reason to be optimistic about emerging economies than developed.

Investors scanning the risk universe observed traces of volatility in February and then calm skies until the end of the third quarter. The scenario has changed, with equity markets flaring in October and November.

Investors scanning the risk universe observed traces of volatility in February and then calm skies until the end of the third quarter. The scenario has changed, with equity markets flaring in October and November. Seasoned asset-gazers may not be surprised – in our view, market pressures have been building for some time amid slowing growth and trade tensions – and we continue to recommend that investors consider the full gamut of risks and commit to a long-term view as they chart a course ahead.

Trump, tariffs, trade wars, terrorism and tech: a decade on from peak global financial crisis, this is where we are today. The more important question for investors, however, is where to next.

In his latest note, Eoin Murray, Head of Investment at Hermes Investment Management, discusses the four words he dreads more than anything. There are plenty of words people in investment use to convince themselves – or others – that things are going to be OK. “This trade can’t fail”, “the market is rational”, “equities always go up”, are prime examples. But for me, the worst is: “This time it’s different.” Why? It invariably isn’t. The latest use of this maxim is by people unconcerned about the possibility of the yield curve inverting. The yield curve tracks short and long-term interest rates that fuel the traditional banking model. Short-term rates are usually lower, so it is cheaper for banks to take deposits, and the longer-term rates are higher, so they can issue loans and take a turn on the difference. Any disruption to this system sees the model break down. An inversion of the yield curve occurs when short-term interest rates are higher than long-term ones – it has been a reliable predictor of recessions. Of course there are many different ways of measuring the steepness of the yield curve, or the term spread. A recent paper by the Federal Reserve Bank of San Francisco suggests that it doesn’t actually matter whether we use 30-year minus 3-month, 10-year minus 2-year, or even attempt to include expectations:

“There are as many worlds as there are kinds of days, and as an opal changes its colours and its fire to match the nature of a day, so do I.” In 1960, Nobel Prize-winning US author John Steinbeck set out on a road journey around his home country to see what he could see; to note any changes in the vast nation he hadn’t observed up close for decades. Aged 58 and in ill-health, Steinbeck was nonetheless willing to confront the reality of a rapidly-changing US from the driver’s seat of a jerry-built house truck and only a ‘middle-aged poodle’ called Charley for company. While his best-selling recount of the trip was tinged with nostalgia and tips for poodle maintenance, the writer didn’t let the past blot out a clear-eyed view of the present. “A journey is a person in itself; no two are alike,” Steinbeck wrote. Investors would do well to bear this advice in mind as they venture through the second half of 2018. In the latest Hermes Market Risk Insights report, Journeying through a changing risk environment, Eoin Murray, Head of Investment at Hermes Investment Management, explores the six key risks investors must navigate through during the latter part of the year.

Risk is amorphous, creating investment opportunities and threats to capital at each stage of the cycle. In response, investors must watch for familiar patterns and new disruptions amid streams of financial indicators. Models based on statistical history can serve as useful, if inexact, guides to the future. But we need to use all the tools at hand, going beyond number crunching to consider geopolitical tensions and sustainability concerns, to separate meaningful signals from the noise. We recommend tracking the following six indicators to recognise risk in its current form – and identify where opportunities lie.

US author John Steinbeck championed the ability of individuals to adapt to new environments. Investors should be similarly adaptive. Volatility may have declined in Q2 after a jumpy start to the year, but our forward-looking indicators suggest that markets are tiring at the end of a long cycle: US equity valuations are stretched relative to history and asset-class correlations are primed for decoupling. Markets are vulnerable to shocks, and investors should be ready for new colours and fire.