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Green Global View 2nd Quarter 2020
Cover: Päijänne National Park, Finland
Contents
Foreword
Climate change: Do we have a choice? 3
Economic Forecast Update
Virus disruption a bump in the road 5
Central Banks & Climate Change
“Green” revolution at the ECB 9
Country Ratings & Climate Change
The climate risk of government bonds 13
Global Real Estate & Climate Change
Real estate: climate change adaptation is transforming a growing industry 15
Corporate Sectors & Climate Change
How do companies align themselves with the Paris Agreement? 19
Financial Market Forecast Update
Looking through the near term 21
Asset Allocation
Resilience in the face of turbulence 24
Market & Forecast Overview 26
Contacts 28
Foreword
Foreword
Climate change: Do we have a choice?
The main topic of discussion at this year’s global rise in temperatures with the corre-
World Economic Forum (WEF) in Davos was cli- sponding physical risks caused by increasing
mate change. Economic leaders worldwide are storm damage, rising water levels, uninhabita-
becoming increasingly alarmed about the ir- ble areas, forest fires and declining biodiver-
refutable evidence of man-made global warm- sity.
ing. The potential economic consequences
were discussed: how will global growth be af- A combination of these two extremes is the
fected in future? What impact will climate most likely outcome. But the lack of political
change have on portfolio returns and what are clarity is causing a high degree of economic
the associated investment risks? How can uncertainty. This makes it even more im-
companies prepare themselves, or play their portant to collect vital data and prepare our-
part in helping to mitigate the effects of global selves for all eventualities. This is a global task
warming? And last but not least: what oppor- of epic proportions. In this “green issue” of the
tunities will present themselves for investors? Global View, we describe how climate change
is linked to the performance of companies,
With climate change already so well advanced, countries and real estate and consider how in-
we no longer have the luxury of a scenario vestors can prepare themselves for the effects
where there is unlikely to be any material im- of climate change. We also look at how central
pact on the global economy and investments. banks can adjust their policy framework to
According to the projections in the 2018 Spe- support the fight against climate change and
cial Report of the Intergovernmental Panel on what economic consequences are to be ex-
Climate Change (IPCC), we must limit our CO2 pected as a result.
emissions to 420 gigatons in order to stay be-
low the global warming limit of well below 2 de- I hope you enjoy reading this edition.
grees set by the Paris Climate Agreement in
2015. The remaining global CO2 budget would
be exhausted in ten years if the current rate of
resource consumption were to continue.
In fact, climate change presents the world
community with an unsolvable dilemma. Hu-
manity can now only choose between two
evils. In one scenario, political decision-mak-
ers engineer a radical change of direction. This
new direction can only be achieved through
sweeping regulatory measures and would in- Best wishes
evitably cause corresponding economic dis-
ruptions. In the other scenario, policymakers
drag their heels in advocating sustainable eco- Dr. Jan Amrit Poser
nomic activity. The consequence would be a Chief Strategist & Head Sustainability
Global View | 3
Economic Forecast Update
Economic Forecast Update
Virus disruption a bump in the road
The unprecedented reaction by policymakers in Beijing to the outbreak of Coronavirus means
that China’s economy is likely to contract in the first quarter, with negative spill over effects to
the rest of the world. However, much of the lost output in the global economy ought to be re-
couped once the virus is contained, meaning that the cyclical upturn that we anticipated should
still unfold as the year progresses. As such, we doubt the ECB and Fed will cut rates again.
China’s economy may contract in Q1 As a result, we would not be surprised if
Economic forecasts for 2020 were upended China’s economy contracts by 1% quarter on
before the year got started after the outbreak quarter in the first quarter, which would be
of Coronavirus in January. In a bid to contain enough to knock 0.2%-points off global GDP
the virus, the Chinese authorities took the un- growth.
precedented step of imposing travel bans in
large swathes of the country, while the na- However, there is a lot of uncertainty about
tional Lunar New Year holiday was also ex- how big the economic damage will be. At least
tended. Neighbouring countries also imposed some restrictions are likely to remain in place
restrictions on movement and activity. until the spread of the virus has been con-
tained. This, along with the usual distortions
There seems to be little doubt that the severe caused by the Lunar New Year holiday, sug-
policy response will have had a major negative gests that financial markets will have to con-
impact on economic activity in China. The out- tend with significant further revisions to ana-
break of SARS delivered a heavy blow to activ- lysts’ expectations for economic growth and
ity in 2003, and the services sector will have corporate earnings in the months ahead. As
suffered an immediate loss of output this time such, risky assets, which have so far been rel-
as holiday plans were abandoned. Meanwhile, atively insulated from the outbreak of the vi-
manufacturing and real estate activity is likely rus, are vulnerable to a correction, while down-
to have ground to a halt during the most dis- ward pressure is likely to remain on long-term
ruptive phase of the virus outbreak. interest rates in Q1.
The outbreak of SARS caused major eco- China will recover once the virus is contained
nomic disruption in 2003 If, as we assume, the virus is contained and
500
restrictions are lifted in the second quarter,
400 activity should normalise and drive a strong re-
300
bound in China’s economy. This is what usu-
ally happens once pent up demand is released
200
in the wake of natural disasters and was ob-
100 served after the SARS pandemic in 2003.
0
What’s more, the People’s Bank has been pro-
-100
2002 2003 2004 2005 2006
active in cutting interest rates and injecting li-
China Railway Passengers (% y/y) quidity into the financial system. Looser mon-
China Airline Passengers (% y/y) etary policy, coupled with a probable increase
Source: Datastream, J. Safra Sarasin, 13.02.2019 in public spending, ought to cushion the blow
Global View | 5
Economic Forecast Update
to activity. Not all of the lost demand in the ser- Asian economies are most exposed to China
vices sector will be immediately recouped 35
once travel restrictions are lifted given that 30
there will not be another national holiday pe- 25
riod. However, virtually all of lost output in the 20
manufacturing and real estate sectors ought
15
to be recovered once disruptions ease.
10
5
Any loss of economic activity in China during
0
Q1 should be recouped later in the year
Mal
Bra
Jpn
Idn
Hun
Kor
Rus
Cze
Eur
UK
US
Chl
Tha
Ind
SA
Phl
HK
Mex
Twn
4 9
8 Goods Exports to China (% GDP, 2018)
3
7
Source: Datastream, J. Safra Sarasin, 13.02.2019
2 6
5
1 However, a temporary economic shock
4
0 3 caused by the outbreak of Coronavirus should
2 not derail the upturn in the global business cy-
-1
1
cle that we anticipated. Most of the output lost
-2 0
2019 2020 2021 in the industrial sector is likely to be recovered
later this year once disruptions end and
China GDP (% q/q, LHS) % y/y (RHS)
should allow for the upswing in the global
Source: Datastream, J. Safra Sarasin, 13.02.2019: manufacturing cycle to resume its course.
A difficult start to the year might still be enough Fundamentals were clearly improving before
to cause the annual rate of GDP growth in the outbreak, with the global manufacturing
China to slump to just 5% this year, the weak- PMI rising to a 13-month high of 50.4 in Janu-
est pace of expansion since the early 1990s ary. A turnaround in the inventory cycle to-
and more than 1 percent lower than our initial wards the end of last year indicated renewed
forecast for growth of 6.3%. Nonetheless, if dynamism in the manufacturing sector, while
the economy returns to more normal rates of our leading indicators are consistent with the
quarter-on-quarter expansion in the second headline index climbing further. As such, we
half of this year and beyond, that would be have marginally revised down our GDP fore-
enough to lift the annual rate of GDP growth in casts for advanced economies for 2020.
the first quarter of next year to 8% and 6.5%
for 2021 as a whole. Leading indicators point to further upside for
the global manufacturing PMI
The world can withstand a temporary shock Index (50 = no expansion) 3m ann. change (%)
60 4
Factory closures in China will cascade through
2
the global economy via weaker demand and 55
disruptions to global supply chains. Indeed, 0
50
the country has become a key player (account- -2
ing for 13% and 11% of world exports and im- 45
-4
ports respectively) and is by far the largest
40 -6
trading hub in Asia. As a result, there is likely
2004 2007 2010 2013 2016 2019
to be some near-term pull back in global man- Global manufacturing PMI
ufacturing activity, which will be a particular 6-month ahead forecast implied by real M1
OECD global LI (adv. 6m) (RHS)
concern for countries in Asia and Europe that
form key parts of China’s supply chain. Source: Datastream, J. Safra Sarasin, 13.02.2019:
6 | Global View
Economic Forecast Update
A wait-and-see approach by central banks US. Nonetheless, the turnaround in leading in-
All of this suggests that the further monetary dicators there had been particularly impres-
easing that has been priced into European and sive up until January. Still the economy has
US bond markets since the turn of the year is been growing below its potential for some time
unlikely to materialise. If anything, the recent and the onus is very much on governments to
easing of global financial conditions after a de- loosen fiscal policy to boost demand. The
cline in bond yields should offer more support. ECB’s easing package last year bought them
the fiscal space to do so.
The market has already ‘eased’ policy
Per cent Per cent
Europe has some extra fiscal space to use
3.0 1.0
4.0
2.6 0.8 3.0
0.6 2.0
2.2 1.0
0.4
0.0
1.8
0.2 -1.0 -0.3 -0.3 -0.6 -0.2
-0.6 -0.9 -0.9
1.4 -2.0 -1.2 -1.2 -1.2
0.0 -1.5 -1.3
-3.0 -1.9
1.0 -0.2
BEL
FRA
GRC
CHE
FIN
DEU
ESP
ITA
NLD
AUT
PRT
LUX
IRL
Jan-19 Apr-19 Jul-19 Oct-19 Jan-20
US 10y real yield (RHS)
Current gross interest payments in % of GDP
US 10y breakeven inflation rate
US 10y treasury yield Savings (% GDP) if debt is refinanced at current yields
Current bond yield (average over all maturities)
Source: Datastream, J. Safra Sarasin, 13.02.2019:
Source: Datastream, J. Safra Sarasin, 13.02.2019
Admittedly, a key lesson from last year is that
a more aggressive decline in market interest The US economy is relatively closed and
rates and inflation expectations would proba- should therefore be less affected by short-
bly force central banks into action. A more pro- term problems in China. While employment
longed outbreak of Coronavirus than we cur- and consumption growth are likely to moder-
rently anticipate could be that catalyst. How- ate from elevated levels, the jobless rate
ever, much of the recent rally in US and Euro- should remain low pushing wages somewhat
pean bond markets appears to have been higher. Low mortgage rates and healthy
driven by safe haven flows which should re- household balance sheets should further sup-
verse once the epidemic is contained. port the building recovery in the housing mar-
ket. Finally, the ‘Phase One’ trade deal with
More generally, solid labour markets insulated China also relieved some of the uncertainty
broader economic activity from problems in that weighed on corporate investment. With
the manufacturing sector last year. Unemploy- fears of a US recession that dogged markets
ment is low and wage growth has been edging last year becoming a distant memory, atten-
up, all of which should underpin domestic de- tion will now increasingly turn to the presiden-
mand even in the face of a further pullback in tial election in November.
industrial production in the near term. Central
bankers have so far signalled a willingness to David Rees
look through any temporary disruption to activ- Emerging Markets Strategist
ity and thus a resumption of the easing cycle
in developed markets seems unlikely. Raphael Olszyna-Marzys
International Economist
The export-dependent euro area, where indus-
try ended last year in the doldrums, is more
vulnerable to supply chain problems than the
Global View | 7
Central Banks & Climate Change
Central Banks & Climate Change
“Green” revolution at the ECB
In its upcoming strategy review the European Central Bank will discuss how they can address
environmental, social and governance issues. Resulting changes might lead to a more political
central bank but also one whose policy is better understood by the European population.
The new President of the European Central Box 1: The Treaty on the Functioning of the
Bank, Christine Lagarde, made it very clear EU should guide the ECB in addressing ob-
that she intends to put a strong weight on en- jectives other than pure monetary policy
vironmental, social and governance (ESG) is- Article 127(1) stipulates that “without prej-
sues. Therefore the review of the ECB’s strat- udice to the objective of price stability” the
egy which was formally launched in January Eurosystem should also “support the gen-
will address a broad range of issues from the eral economic policies in the Union with a
inflation target to how central banks could view to contributing to the achievement of
help to lower the risks associated with climate the objectives of the Union”. These include
change more actively. In the following, we dis- inter alia “full employment” and “balanced
cuss the most important topics from an ESG- economic growth”. These provisions would
perspective. allow the ECB to support policies mitigating
climate change if those are a clear objective
Environmental aspects and monetary policy of the EU and do not conflict with the pri-
In principle, there are six main ways how the mary goal of the ECB. Additionally, Article
ECB could address the topic and support cli- 127(5) of the EU Treaty says: “The ESCB
mate change mitigation policies or “green” shall contribute to the smooth conduct of
companies that are engaged in this field: policies pursued by the competent authori-
(1) Incorporate climate change and its risks in ties relating to the prudential supervision of
economic models and forecasts. credit institutions and the stability of the fi-
(2) Make it mandatory that banks’ stress tests nancial system.” Hence, the ECB should
include risks from climate change and address climate change if it regards it as a
counter possibly remaining systemic risks source of risks for financial stability. How-
originating from it. Make results public ever, the ECB should also act in a market-
such that rating agencies and markets can neutral way which means that its policy
incorporate their results appropriately. Ad- should not favor one company over an-
dress remaining systemic risks by macro other. The strategy review should for exam-
prudential tools. ple clarify how far that remains the case if
(3) Tilt its own portfolios that are held for non- some companies or sectors operate with
monetary reasons like its pension fund to- significant negative externalities such that
wards assets of “green” companies. neutrality is not given in the first place.
(4) Buy bonds or equities from “green” com-
panies in its Asset Purchase Program.
(5) Demand a smaller haircut when the bonds Supporting “green” policies should not be in
of “green” companies are used as collateral conflict with other goals of the EU like, for ex-
for refinance operations of the ECB. ample, high employment, balanced growth
(6) Provide specialized lending or other mone- and energy security. In most cases achieving
tary policy facilities for “green” companies. one political goal makes it more difficult to
Global View | 9Central Banks & Climate Change
achieve another. That is why it is the role of negatively affected by climate change or poli-
elected policy makers and not independent cies that try to prevent it. As a result, their bond
agencies like central banks to consider politi- prices should also be lower than comparable
cal trade-offs and make political but less risky companies. The
decisions. With the above amount the ECB recog-
principles in mind we nizes as collateral in its
would support options refinance operations
1, 2, 3 and 6 as ways «Investing depends on the mar-
how the ECB can pension funds ket price from
address climate which a haircut de-
change. In particu- along sustainable pending on its rat-
lar, favoring criteria is a good ing is deducted.
“green” assets in Hence, “green”-
the non-monetary
idea – not only companies would
policy portfolios of for the ECB» already benefit from
the ECB like its pen- a lower haircut that is
sion fund would not con- deducted from a poten-
flict with its monetary policy tially higher market price.
goals.
Social aspects and monetary policy
We would recommend that the ECB does not Monetary policy has lost public support as
make the political decision regarding which many people fail to understand the economic
companies are sustainable and should be rationale for negative rates and their benefits
supported and which should not. This decision – like falling unemployment rates. They also
might make political considerations necessary criticize the effects that low rates have on the
and is better made by another EU-body. distribution of wealth within a society, in par-
ticular through increasing house prices. These
In addition, the ECB should not tilt its asset – some critics argue – would imply that infla-
purchase program in a way to support “green” tion is not correctly measured.
assets (option 4). This would imply using its cy-
clical policy tools, with which it intends to fulfil The strategy review can address those con-
its primary mandate, for secondary structural cerns in two ways: (1) A stronger focus on a
policy goals. Instead, the ECB should keep the better communication with the broader public.
option to liquidate its assets if needed to In particular, national central banks should
achieve its primary objective without being use their ability to communicate in their own
constrained by the possibility that selling language and cultural context more inten-
bonds from “green” companies would conflict sively. (2) The other way is by assigning hous-
with its secondary goals. ing costs a higher and more appropriate
weight in the price index. This could be done
The ECB should also not demand a lower hair- by including the costs of owner-occupied
cut if assets from “green” companies are used housing – the so-called imputed rent – in the
as collateral in its refinance operations (option price index, as done in the US already. So far
5). Actually, the ECB already has a built-in sys- only actual rents are included in the European
tem that favors less risky companies. If ade- measure of inflation. This neglects that real
quate regulation and stress tests make trans- estate (excluding the value of the land) should
parent the risks from climate change that be regarded as a long-term consumer good
companies face, rating agencies will be able to and as such belongs into the index of
assign lower ratings to companies that are consumer prices. As a result, weights of all
10 | Global ViewCentral Banks & Climate Change
consumer goods would change in the price in- one made by a single ECB-President. Presi-
dex as can be seen in Germany. The national dent Trichet incorporated these reasons by try-
German consumer price index includes owner- ing to speak for the whole GC. In contrast,
occupied housing while the German index that President Draghi tried to lead and to convince
is harmonized by Eurostat does not. In the na- the GC of policies he thought would be appro-
tional index, rents including imputed rents priate. His strong leadership might have saved
have a weight of 20.7% while rents have a the euro area, but at times it probably frus-
weight of only 10.7% in the European index. A trated GC members and constituents of coun-
higher weight of housing costs, however, does tries of their origin as they found that their di-
not automatically result in a higher inflation verging views were not taken into account. As
rate that would allow for a less expansionary it is, in the GC there is a natural bias towards
monetary policy. the views of the Chief Economist that first pre-
sents available policy options and of the Pres-
«Lower inflation and policy ident that chairs the meeting, summarizes the
rates could also result from a discussion and concludes. The increasing size
higher weight of housing of the GC from 17 members in 1999 to cur-
costs in the inflation basket» rently 25 makes discussions naturally more
difficult. This is even the case if not everyone
For example, if house prices are falling while has the right to vote in each meeting. Given
other consumer prices are increasing; the re- that the remit of the ECB has risen since the
sulting lower policy rates might stabilize house financial crisis to include for example macro-
prices at the expense of higher consumer prudential policy it is also natural that not all
prices and therefore lower real incomes. Alter- GC members are ‘hard-core’ specialists in
natively, rapidly increasing house prices could monetary policy. As a result, some members
call for a restrictive policy even if wages and might be less active when the committee dis-
consumer prices are stable. The distributional cusses the monetary policy stance but would
consequences in both examples are politically still like to have an impact on the decision that
difficult. is eventually made. Voting would help to as-
sure everyone has a voice that is taken into ac-
Governance and monetary policy count. It increases accountability by making
So far, monetary policy decisions in the gov- decisions more transparent. This might pre-
erning council (GC) of the ECB are made with- vent monetary policy decisions by the GC from
out formal votes. The strategy review should being the result of “horse-trading” where the
discuss the experiences with this. The mone- support for a certain policy is given with the
tary policy decision was assigned to the GC in- view to receive support for another non-mone-
stead of the ECB-President for good reasons: tary policy decision. We would support a for-
(1) committees often arrive at better decisions mal voting procedure for monetary policy deci-
than individuals and (2) a monetary policy de- sions.
cision that all national central bank governors
have an impact on is likely to find broader sup- Dr. Karsten Junius
port in the euro area member countries than Chief Economist
Global View | 11Country Ratings & Climate Change
Country Ratings & Climate Change
The climate risk of government bonds
Current international research provides a relatively clear picture of which country contributes
most to climate change and how much it will be affected by the consequences. These findings
form the basis of international climate protection policy and also clearly highlight the risks asso-
ciated with government bonds. Smart investors should therefore make sure they take these cli-
mate risks into consideration when investing in government bonds.
Climate risks as the new dominant factor Physical risks and transition risks
Government bonds form the lion’s share of The climate risks linked to government bonds
fixed-income investments worldwide and to can basically be divided into two categories.
some extent are considered to be safe havens. The first is the question of how strongly a coun-
Just how safe they actually are depends on the try will be affected by the consequences of cli-
ability of the issuing country to refinance its mate change and how it can deal with them. It
debt. International rating agencies such as is therefore a matter of vulnerability, which is
S&P, Fitch and Moody‘s assess creditworthi- made up of the so-called physical risks and re-
ness in terms of credit ratings. However, these silience.
ratings frequently ignore vital data. In particu-
lar, the analysis should include environmental, The second category of climate risks looks at
social and governance (ESG) ratings for coun- a country’s ability to manage the transition to
tries so as to provide a better assessment of a climate-friendly economy. The basic idea be-
the creditworthiness of government bonds. As hind this is that sooner or later the pressure
a pioneer in sustainable investments, Bank J. from society and the international community
Safra Sarasin already produced the first ESG (e.g. from trading partners or international de-
ratings for countries back in 2002, integrated mand) will eventually become so great due to
them in its investment process and continu- the physical consequences of climate change
ously developed them ever since. that it will be impossible to avoid this transi-
tion. The transition is coming, like it or not, and
Our ESG analysis of countries screens and brings with it costs and consequences. How-
rates a large number of data points and indi- ever, those who start the process earlier and
ces about the environment, society, business more consistently will be more likely to benefit
and politics. These range from water stress from the economic opportunities and run a
and land usage to the educational standards smaller risk of uncontrolled change with harsh
of the population, unemployment rates, cor- consequences and even higher costs.
ruption and basic rights. Various data on cli-
mate change have been part of these ratings Nature fights back
for some time, but are increasingly evolving Climate change has a broad impact on the
into one of the dominant factors. The reasons most diverse natural systems on Earth. In ad-
for this are quite diverse and range from dition to higher average temperatures, global
greater social awareness of climate change, to warming brings with it temperature swings, ex-
first-hand experience of its impact and a grow- treme weather events, droughts, rising sea
ing realisation of the need for political action levels and much more. These represent the
and tighter regulations. physical risk. It is important to understand that
Global View | 13Country Ratings & Climate Change
these effects will be felt differently from region Transition risk of fossil resources
to region. Some regions will be harder hit by
the individual impacts than others. In Switzer-
land, for example, we already know that the
rise in temperature will be twice as strong as
the predicted global average. Another example
of the regional difference in impacts, which is
also incorporated in the country ratings of J.
Source: J. Safra Sarasin based on SEI, IISD, ODI, Climate An-
Safra Sarasin, is the Climate Risk Index pro-
alytics, CICERO, and UNEP, 2019; EIA, CIA, World Nuclear
duced by German Watch. It analyses how se- Association; 2019
verely countries are affected by climate-re-
lated weather extremes such as storms, flood- With global demand for coal, crude oil and nat-
ing, heatwaves, etc. But the index also takes ural gas continuing to fall – and are likely to
into account the human consequences (num- decline even more sharply in future – the as-
ber of mortalities) and the direct economic sociated revenues will plummet as well. These
losses (loss statistics) for the period 1990- in turn often tend to be an important compo-
2018. nent of public finances, or at least a significant
part of the national economy. In the case of
Climate-linked weather risks coal, oil and gas, the term “stranded assets” is
often used. As a look at the world atlas shows,
here too the risks are spread unevenly across
the planet. Apart from a country’s dependence
on environmentally harmful industries, the
plans and efforts of governments to reduce
this dependence and to tackle the transition
consistently and at an early stage are also im-
Source: J. Safra Sarasin based data from German Watch, portant factors. A forward-looking climate pol-
icy and ambitious reduction targets therefore
Apart from physical risks, there is also the have a clearly positive influence.
question of resilience: How well can countries
absorb the consequences of climate change? Climate change is one of the biggest – if not
Here the richer and also more flexible and di- the biggest – challenges which humanity will
versified economies generally have an ad- have to tackle over the coming years. This will
vantage. inevitably have an impact on the return from
government bonds. Investors therefore need
Early and controlled avoidance, rather than to carefully analyse climate risks linked to gov-
abrupt action ernment bonds when making their investment
Alongside vulnerability, the transition risks decisions.
should not be ignored and their significance can
vary from one country to the next. In addition, Nico Frey
they can also be actively shaped. The key ques- Sustainable Investment Analyst
tion is the extent to which the country and its
economy is dependent on industries with a high
carbon footprint. The most direct concern here
is of course the role of fossil resources.
14 | Global ViewGlobal Real Estate & Climate Change
Global Real Estate & Climate Change
Real estate: climate change adaptation
is transforming a growing industry
The demand for high quality space in combination with the regulatory trends create new stand-
ards for the real estate industry, while more attention is drawn to the income component and the
net cash flow of the investments.
Realising the effects of climate change on the focus on the income component of total re-
real estate markets and the unique oppor- turns and the capital expenditure (Capex).
tunity to act Throughout recent years an increase of the
In 2015, the landmark Paris climate agree- Capex and thus a decline of net cash flows is
ment was signed by over 195 countries, pledg- observed. This happens due to higher indoor
ing to curb global warming. In the years since quality expectations of the tenants as well as
then, urgent calls for action have only gained sharpening energy efficiency standards. This
momentum, especially in the finance and as- trend is expected to continue, as the regula-
set management industry. Real estate too, tors impose further climate protection related
has a pivotal role to play in efforts to move to- requirements. Our view is that real estate
wards a more sustainable future. The UN esti- funds should take into consideration these
mates that real estate consumes around 40% regulatory trends and gain a competitive ad-
of the world’s energy and contribute up to 30% vantage by implementing 10-year strategy on
of annual greenhouse gas emissions1. There- a property and portfolio level, in order to re-
fore, properties offer huge potential to reduce duce costs, CO2 emissions, engage with the
harmful emissions and increase energy sav- tenants and increase the value of the proper-
ings. ties.
Global energy consumption Sustainable Development Goals for Real Es-
tate
1%
Buildings Implement integrated water re-
sources management
28% 39% Industry
Transport Increase substantially the share of
renewable energy
Other
32%
Double the global rate of improve-
Source: IEA/UNEP Global Status Report, December 2018 ment in energy efficiency
In the meanwhile, regulators across the world Reduce the adverse per capita en-
continue to sharpen the energy efficiency re- vironmental impact by waste man-
quirements for new, as well as, existing build- agement
ings. In order to assess the impact of climate Source: United Nations 2019
change on real estate returns, investors should
1
UNEP Finance Initiative, 2016.
Global View | 15Global Real Estate & Climate Change
Investment managers should use the sustain- Portfolio CO2 emissions and energy usage
able development goals as a framework to monitoring
tackle the climate challenges within their real
estate funds. As an example, real estate funds
should extend the monitoring of properties
and portfolio reporting to follow up on the
above elements. In order to have a more valu-
able understanding and impact, fund manag-
ers should dig a level deeper to the sustaina-
ble development goals and assess the indica-
tors that are dedicated to each goal. In our
view, life cycle management is essential to in-
crease the value of a property in the long-term.
At Bank J. Safra Sarasin, we monitor and ana- Source: Bank J. Safra Sarasin as of December 2019
lyse the properties of the sustainable real es-
tate funds with the aim to identify value added As a conclusion, real estate managers and
measures. owners have a key role to play since buildings
are major contributors to greenhouse gas
Going into detail regarding a standard 10-year emissions, Integrating sustainability into the
property upgrade plan real estate investment process and asset
The main focus, when it comes to improve- management, allows fund managers to create
ments, for commercial properties is on elec- a positive impact, and accomplish superior re-
tricity, lighting and ventilation. Real Estate turns over the longer run.
funds that focus on value creation and long
term income growth should set a strategy for Where will real estate markets head in 2020?
upgrading the infrastructure of the properties In order to integrate a long term strategy within
and switch to LED lighting. As a first step, fund a real estate fund and invest within the prop-
managers should switch to renewable energy erties a detailed liquidity planning is an im-
providers for the common areas, while enter- portant element. In this case we see real es-
ing into a dialogue with the tenants in order to tate markets being supportive, by providing
switch the energy providers for the whole stable returns and further income growth.
building. In this case real estate funds may go
one step further and negotiate better pricing Global real estate markets have continued
with energy providers on behalf of their ten- to perform well, and indicators like vacancy
ants. Finally, an important part of a long term and income growth remain supportive. De-
property management strategy is the imple- spite the relatively high valuations, we ex-
mentation of water and waste management pect markets, and especially Europe, to
monitoring as well as the related recycling cat- continue providing positive results into
egories. 2020, with leasing activity and transaction
volumes expected to soften but remain
The following diagram is an example of Bank’s slightly above their 10-year averages.
J. Safra Sarasin monitoring system for sustain-
able real estate funds in order to identify inef- In the US, property returns were mainly driven
ficiencies. In the diagram the annual energy by the income component. Capital apprecia-
consumption and CO2 output of selected prop- tion has stabilized close to the levels of infla-
erties is presented. The relative analysis is tion. The total unlevered 2019 annual return
based on previous year’s consumption and on for the NCREIF Property Index was 6.24%, with
design values or energy certificates. cities from the west coast driving returns. The
16 | Global ViewGlobal Real Estate & Climate Change
office vacancy rate remained stable at 14.5%, of 2.1%. As fundamentals remain strong and
compared to 5.4% for Europe and 10.3% in total cost of debt for office investments in Eu-
Asia Pacific. Looking ahead, we expect the US rope is at 1.5%-2%, we expect investment ap-
office market to deliver moderate rental petite to remain high.
growth and stable valuations, helped by a low
unemployment rate in the country. The de- European real estate is attractive for income-
cline in interest rates has eased the upward oriented investors with moderate upside on the
pressure on cap rates, as the spread over 10 capital appreciation component. Going for-
year government bonds is back at average ward, the low interest rate environment and
levels. Overall, we see potential in cities that healthy supply/demand ratio will continue to
provide positive long-term rental growth pro- support rental growth, with total returns for the
spects. mainly driven by the income component.
Cap Rate Spreads for Office Investments re- In Switzerland, the office sector continues to
main attractive stabilise, as the ratio between supply and de-
6% mand remains favourable and vacancy rates
5% dropped. In the residential sector we see a
4%
1.9% slight decline in rental levels. Nevertheless,
2.4% 3.4% 3.2%
3%
the negative interest rate environment will
3.5% 3.4%
2%
3.1% provide further cap rate compression and as a
2.6%
result, we expect higher valuations and higher
1%
total returns than in previous years, while va-
0%
cancies and rental levels continue to remain
-1%
under pressure.
Switzerland
Germany
US
France
Australia
Japan
UK
China
As a conclusion, the outlook for Europe and US
is positive, as we continue to observe market
Cap Rate Spread 10 Year Govt. Bond
characteristics of a late cycle environment that
Source: Bank J. Safra Sarasin, DataStream, Cushman &
will extend to the coming quarters. Europe is
Wakefield, Deka Immobilien, Savills, as of December 2019
driven by positive fundamentals, while the low
interest rate environment and healthy sup-
In the European Union, office leasing activity ply/demand ratio will continue to support
remains strong and has continued to rise, rental growth. The US office market is ex-
while prime office yields fell further in Q3 2019 pected to deliver moderate rental growth and
to 3.45%, according to Savills. The vacancy stable valuations.
rate dropped further to 5.4% from 6.1% a year
ago. Office rental growth remained positive at Alexandros Gratsias
3.3% for 2019, which is slightly lower than the Sustainable Investments
latest peak but still above its 10-year average Real Estate Research
Global View | 17Corporate Sectors & Climate Change
Corporate Sectors & Climate Change
How do companies align themselves
with the Paris Agreement?
Even if we are not able to gauge its speed and impact with certainty, we cannot ignore the effects
of climate change. Increasingly frequent extreme weather events are prompting us to reflect on
what we can do to protect our planet and our economy. Companies must rethink their strategies
in order to adapt to the risks, issues and opportunities related to the climate challenge. Those
that fail to take the problem into consideration will be confronted quickly with constraints that
directly undermine the sustainability of their activities. For this reason, climate should not be
perceived as a constraint but rather as an investment opportunity.
Reading the temperature US$ 3.5 trillion each year between now and
In its 2020 report, the WEF assessed that the 2050 for a successful transition to occur.
main risks facing society are environmental.
Among such threats, climate change stands at The heat will be on those companies at the
the forefront – with the failure of the energy bottom of the class
transition, the occurrence of extreme weather We are also convinced that companies that fail
disasters and the worsening of biodiversity. to take the climate challenge into considera-
Climate change strongly influences our organ- tion in their strategic decisions will soon be
isations at several levels. Its implications in- faced with major constraints that will directly
clude melting glaciers, rising sea levels, the undermine the sustainability of their activities.
disruption of our ecosystems, increasing Indeed, we can already see that governments,
droughts, the deformation of the ozone layer, businesses and activists have placed the en-
disruption to our consumption patterns, the ergy debate at the centre of discussions. New
implementation of government reforms and tax measures are being discussed in order to
the creation of new taxes. penalise energy-intensive companies and to
support new players offering innovative solu-
“Ours can be the first generation tions to the climate problem – these would
to end poverty, and the last have an immediate impact on their financial
generation to address climate results. As a consequence, it makes sense for
change before it is too late.” companies to integrate the climate factor into
Ban Ki-Moon their investment philosophies. Firstly, in the
case of poorly positioned companies, in order
The Paris Agreement, which 103 countries rat- to avoid the risk of losses. Secondly, in the
ified in 2016, lays the foundations for the en- case of those that have already prepared their
ergy transition debate by setting greenhouse transitions, in order to benefit from their com-
gas reduction targets in order to contain rising petitive advantage.
temperatures by 2100 and achieve carbon
neutrality. The climate equation is simple, ac- How are companies to be ranked in relation to
cording to the IPCC – only a 45% reduction in the Paris Agreement?
global emissions by 2030 will limit global We believe that it is essential that all economic
warming to 1.5°C. The International Energy players participate in the reduction of green-
Agency has estimated that investments in the house gas emissions. A successful energy
energy sector will need to reach an average of transition can only be achieved if all forces
Global View | 19Corporate Sectors & Climate Change
converge towards a common goal. In order to credit to the commitments that are entered
select the best performers, we assess each into. We nevertheless look at whether they are
company’s awareness of the energy transi- sufficient to comply with the Paris Agreement.
tion. To do this, we have created a carbon If not, we calculate the temperature scenario
score that combines a company’s exposure to that would be realised if the company were to
risks related to greenhouse gas emissions and continue with the same reduction effort as in
the ability of its management to take these the past. We prefer to adopt a conservative
risks into account in its strategy. We believe approach as we are aware that the potential
that the more a company is exposed to the impact of a distorted rate on the scenario
problem of reducing its CO2 emissions, the would be considerable if we overestimated a
more its management will be called upon to company’s ability to reduce its carbon inten-
take specific actions to respond to the poten- sity.
tial challenges that may affect its industry in
the years to come. This carbon score is a com- This methodology thereby enables us to select
ponent of our final ESG score. The more a companies that have taken the step of intro-
company is exposed to the carbon threat, the ducing the climate factor into their strategy
more prominent this component will be in our and that – thanks to both their past efforts
final ESG score. This ESG score defines our in- and their future targets – are in line with the
vestment universe. Below a certain threshold, Paris Agreement. We define the climate posi-
which is more or less severe depending on the tioning of our final portfolio as the weighted av-
industry, companies will be barred from our erage of the different climate scenarios of the
potential investments. companies it encompasses.
Scientific results allow us to determine the Positioning of our portfolio in relation to differ-
percentage greenhouse gas reduction efforts ent climate scenarios
required for each company to fall in line with a
180
scenario of a 1.5°C, 2°C or 3°C increase by
Greenhouse gas emissions GtCO2e/year
2050, thereby gauging each company’s align-
130
ment with the Paris Agreement. To determine
Current scenario
whether a company will assume its share of re-
80
sponsibility for the energy transition, we look Scenario with current
commitments
at the carbon reduction targets its manage-
30
ment has set. According to our philosophy, set- Paris Agreement Proposed portfolio
ting a numerical target is necessary but not and IPCC
-20 scenarios
enough to be retained in our investment uni-
1990
2000
2010
2020
2030
2040
2050
2060
2070
2080
2090
2100
verse. Many companies engage in “green-
washing”, a practice of cosmetically enhanc- Source: http://climateactiontracker.org
ing their publications in order to boost their im-
age and attract capital. We analyse past emis-
sion trends in order to appraise the credibility Robin Rouger
of the ambitions that are formulated. If these Sustainable Investment Analyst
are in line with the stated objectives, we give
20 | Global ViewFinancial Market Forecast Update
Financial Market Forecast Update
Looking through the near term
The outbreak of the Coronavirus poses risks in the short term and will negatively impact the
Chinese and the global economy in Q1 2020. Once the outbreak is contained, we expect the
nascent global recovery to gain traction and bond yields to rise moderately until year-end along
with a recovery of the Euro. Central banks will continue to provide ample liquidity, which should
sustain further equity market gains in 2020. We favor Swiss and US equities with a preference
for IT and the defensive real estate and consumer staples sectors.
Global bond yields have not carried their up- Global bond yields have started to respond to
ward momentum into 2020 an expected improvement in global growth
The rise in global bond yields since September 1.0% 1.0
last year has stalled and partly reversed in
0.5% 0.5
2020. The uncertainty about the extent of the
Coronavirus and its negative effects on the 0.0% 0.0
Chinese and the global economy has led in-
-0.5% -0.5
vestors to buy safe-haven assets. The current
outbreak clearly presents a risk to the global -1.0% -1.0
recovery, at least in the short term. Whether it 2011 2013 2015 2017 2019
will create significant headwinds for the global Global leading indicators, 6m change (3m adv.)
economy will depend on how quickly the G7 10y government yield, detrended, r.h.s.
spread of the virus can be contained.
Source: Macrobond, Bank J. Safra Sarasin, 17.02.2020
More signs that the global manufacturing sec-
tor is turning Global bond yields to rise only moderately
The improvement in global growth that we However, we doubt that bond yields will rise
have been expecting for quite some time substantially: The key reason is that this recov-
seems to be finally playing out. The latest data ery will be probably be shallower than in previ-
show that the global manufacturing is showing ous cycles. The expected increase in inflation
signs of a broader based rebound. Even the will also not be strong enough to justify signifi-
widely followed ISM manufacturing index for cantly higher bond yields. In addition to that,
January has shown a marked improvement. our scenario of a cyclical recovery and loose
We therefore expect that the global recovery monetary policy should be a favorable environ-
will gain traction over the coming months. ment for risk assets and government bonds
Bond yields are in part driven by the economic will therefore continue to enjoy steady de-
cycle and an acceleration in growth is typically mand for risk-management purposes along
accompanied by upward pressure on bond with asset- and liability managers.
yields as required real rates of return rise and
inflation expectations pick up. Consequently,
as incoming economic data confirm that the
cyclical recovery is unfolding, we expect bond
yields to rise moderately.
Global View | 21Financial Market Forecast Update
FX Markets The SNB still intervenes at the FX market,
Particularly safe havens benefited recently though it recently seems more “cautious”
With the spread of the Coronavirus, safe ha- 4 1.05
vens such as gold and the Swiss franc (CHF) 3 1.07
have appreciated. The US dollar (USD) has 2
1.09
also benefited while the Euro (EUR) has weak-
1
ened against most currencies amid the recent 1.11
0
risk-off sentiment.
-1 1.13
Coronavirus likely defers global recovery and -2 1.15
Jan-19 May-19 Sep-19 Jan-20
so far particularly hurt cyclical EUR
Weekly change in SNB sight deposits, CHF bn, lhs
Despite their limited comparability, it is evi-
EURCHF spot, rhs
dent that the Coronavirus’ economic impact
has already exceeded SARS. China’s imposi- Source: Macrobond, Bank J. Safra Sarasin, 17.02.2020
tion of restrictive measures to get the out-
break under control will have a negative effect Eventual post-Brexit EU-UK trade agreement
on growth in the first quarter of 2020, which to push GBP higher vs USD
will likely create headwinds to the global re- There have been few directional drivers for the
covery and particularly affect economies with British pound (GBP) since the UK left the EU on
a large manufacturing sector. Consequently, January 31. While the GBP should benefit from
the Euro area’s strong reliance on Chinese fiscal stimulus, the negotiations on the post-
growth should translate into a weaker EUR vs Brexit trading relationship with the EU will be
USD throughout the first half of 2020. Yet, we protracted. Nevertheless, we expect an even-
expect the EUR to appreciate once the global tual agreement that should push GBP higher
economic recovery materializes in the second vs the USD towards the end of 2020.
half of 2020. Furthermore, a narrowing rate
differential and less expansionary monetary More upside for safe havens JPY and gold
policy favor the EUR vs USD. While the Japanese yen’s (JPY) January gains
turned out to be rather short-lived, we expect
Going forward, SNB should allow CHF to ap- the currency to benefit from the cyclical recov-
preciate modestly ery and during the US Presidential Election
By contrast, the Swiss franc fared well since campaign in the second half of 2020. Gold
the beginning of the year. Although the SNB should remain well supported at current levels
has continued to counter recent CHF appreci- as we expect market uncertainty to remain el-
ation, FX interventions (indicated by the evated in 2020. We expect persistent safe ha-
weekly change of average SNB sight deposits) ven flows to push gold to around USD 1’800
seemed more cautious ever since Switzerland towards year end.
was again added to the US Treasury’s monitor-
ing list of potential currency manipulators in Equity Markets
January. Going forward, we expect the SNB to Plentiful liquidity likely to lift equity markets
allow for modest appreciation of the Swiss Equity markets enjoy the impetus from an im-
franc that should persist on the back of low in- proving manufacturing cycle and accommoda-
flation and relative structural advantages. tive monetary policy. Earnings prospects for
Moreover, the CHF’s safe haven characteris- 2020 have brightened after the release of Q4
tics may cause it to over-shoot during phases 2019 figures, especially in the US. Equity risk
with high volatility. premia of equities over government bonds re-
main elevated. They provide a cushion in the
event of market corrections and are likely to
22 | Global ViewFinancial Market Forecast Update
sustain further equity market gains in 2020. posure to cyclical sectors. Yet the uncertainty
The Coronavirus outbreak probably dented about possible second round effects caused
Chinese economic activity and international by virus containment measures on the Chi-
trade flows in Q1 and its lagged effects might nese economy and the Asia Pacific region will
still cause some market jitters in Q2. Central complicate the timing of a cyclical trade which
banks are likely to lean on the side of caution might turn out to be both short and shallow.
and maintain an ample supply of liquidity to
prevent both excessive equity market volatility We favor US and Swiss equities
and an economic slowdown. At the regional level, we anticipate that inves-
tors will keep allocating primarily money in
The Fed balance sheet will keep expanding, growth and quality companies with little expo-
providing lift to equity markets into Q2 sure to Asia. This seems likely to sustain fur-
2’600 4’300 ther outperformance of US and Swiss equities.
4’200 We expect the S&P 500 index to peak in Q2
close to 3’400, to pause till mid-summer and
2’400 4’100
then to resume its uptrend going into the pres-
4’000 idential election. Cyclical regional equity mar-
2’200 3’900 kets like the euro area and Japan will probably
lag. We still expect EM equities to deliver at-
3’800
tractive returns in 2020, yet current conditions
2’000 3’700 will probably delay a lasting rally into Q2. At the
Jul 2019 Jan 2020
MSCI World sector level, we favor information technology,
Fed balance sheet (USD bn, 4W lead, rhs) communications services and some defensive
Source: Datastream, Bank J. Safra Sarasin. industries such as real estate and consumer
staples. We maintain a defensive stance on
Leadership of information technology compa- most cyclical sectors such as materials, auto-
nies to persist into Q2 2020 mobiles, hotels, travel services, airlines and
Against such a backdrop, investors are likely to energy.
maintain their focus on US large capitalization
equities, mainly in the information technology
sector. Since Chinese authorities might main- Alex Rohner
tain sanitary measures restricting the move- Fixed Income Strategist
ment of people and goods into Q2, investors
will probably start buying cyclical stocks ex- Claudio Wewel
posed to Asia at steeply discounted prices by FX Strategist
mid-March, when credible evidence of virus
containment emerges. A slow recovery of bond Cédric Spahr
yields in early Q2 might warrant increasing ex- Equity Strategist
Global View | 23Asset Allocation
Asset Allocation
Resilience in the face of turbulence
An interview with Frank Härtel: He joined Bank J. Safra Sarasin in 2012 and has been Head of
Asset Allocation since 2014. He was responsible for input to the investment committees and
implementing tactical allocation for mandate profiles. Before joining J. Safra Sarasin he held a
similar role working with private and institutional clients at GMO, LGT and UBS. Frank Härtel has
a doctorate from the University of St. Gallen, and is also an econometrics expert and Certified
European Financial Analyst (CEFA). We talked about the most important current themes in the
area of asset allocation.
Global View: Mr Härtel, equity tive trends after negative figures more re-
markets have got off to a sur- cently. Company results published for the
prisingly good start to the year, fourth quarter have clearly beaten earnings
despite the current volatility. guidance, both in the US and Europe. The la-
What do you think are the bour market also still looks very solid. Both
main reasons for this? jobless claims and the number of new jobs
The start of the year was overshadowed by un- suggest that the economy is continuing to
certainty caused by the conflict between the grow.
US and Iran, which fortunately did not escalate
any further. Shortly afterwards we had the GV: Should investors now go for value equities?
global shock of the coronavirus. Initially, the No, value equities are cyclical and have signif-
outbreak triggered a sharp correction in equity icantly underperformed the market in recent
markets, especially in emerging regions and years. As I already mentioned, we are assum-
above all in China. However, it’s important to ing positive but slightly below average growth
remember that markets base their pricing on for the global economy. This is not the sort of
future expectations. Once it became clear at environment in which value stocks are ex-
the start of February that the increase in the pected to generate a decent return. As things
number of new infections was beginning to stand, investors should therefore focus on
slow, equity markets experienced a counter quality. Defensive blue-chip stocks in the sec-
movement. Some of them, such as the S&P tors of technology, healthcare and consump-
500 and Switzerland’s SMI Index, even tion are likely to benefit from the continuing
climbed to new record highs. generous supply of liquidity from central banks
and from persistently low interest rates.
GV: How do you see the future direction of the
stock market? GV: You mentioned liquidity supply. What are
At the start of February we have a more posi- the consequences for investment strategy?
tive stance on equities: we have raised our Central banks are likely to maintain their ex-
quota to neutral and will look to exploit any tremely loose monetary policies for the time
price dips to accumulate holdings. At present being. In addition, there are considerable ob-
we expect the economic recovery to weaken stacles standing in the way of raising interest
due to the virus epidemic, although economic rates. Through their actions, central banks
growth should not stall completely. On top of have created enough space for fiscal
that, corporates are also reporting more posi- measures to be implemented by governments,
24 | Global ViewYou can also read
