As the threat of climate change grows, the race is on to power low-carbon economies through energy efficiency, innovation and infrastructure. At the core of this drive toward sustainability is the engineering of future mobility. In the following insight, Tim Crockford, Portfolio Manager of the Hermes Impact Opportunities Fund, identifies four key areas of innovation in future mobility creating a sustainable direction of travel for transport and long-term investment opportunities.
Rapid urbanisation, decaying infrastructure, population growth and the effects of climate change continue to challenge our world’s cities.
While government must play its part in addressing the problems we face by providing much-needed resources, we are now seeing public markets awaken to the innovative role they can play in creating more efficient and resilient low-carbon economies.
The sheer scale of public markets makes them powerful agents of change in generating a positive impact on society and the environment. At the forefront of impact investing, is the philosophy of moving beyond traditional screening methods to capture those companies that are the sustainable leaders of tomorrow. This is the process of driving long-term portfolio returns by unearthing purposeful companies with innovative solutions to meet society’s needs.
This provides investors with the ultimate active edge: finding systematically undervalued companies that create long-term solutions to the challenges societies face. As part of our investment process, we align each of our investments with eight key impact themes – one of which is future mobility. This theme illustrates where sustainability trends in transport are unearthing compelling impact opportunities through efficiency, safety and intelligent technology.
With 25% of CO2 emissions produced by transport and the health implications of diesel fuel becoming broadly understood only in the last few years, vehicular decarbonisation is one of the clearest opportunities to reduce our carbon count.
Electric vehicles (EVs) now offer a viable alternative to those powered by either petrol or diesel. The cost of lithium-ion batteries used to fuel these vehicles has dropped 65% since 2010. This is set to fall further, dropping below $100kwh in the next decade. Lower battery costs should help drive EV usage to about 700gwh by 2030, enabling EVs to help prevent further climate change and air pollution.
To access this theme, we invest in Umicore. The company produces cathode material, a critical component for EV batteries. However, it also manufactures emissions control technologies, which help reduce the environmental impact of internal-combustion engines. It is this dual-impact of Umicore, combined with strong financials reflected in 15% profit growth year-on-year in 2017, which makes the company particularly attractive as an impact opportunity.
Making vehicles more intelligent can unlock new efficiencies and enhance safety. Core to realising these objectives is in sensor usage. Sensors can improve powertrain and engine management, including oil and petrol-tank pressure, throttle and torque, which contribute to a lower aggregate fuel requirement. The social benefit of sensor technology comes through improvements to vehicle safety, achieved by employing dynamic braking, side airbags and rollover sensors.
To capitalise on this opportunity, we invest in Valeo, which manufactures sensors related to safety and vehicle comfort. These include ultrasonic sensors, radars and cameras that can detect obstacles; rain, light and humidity sensors that can, for example, prompt the car to switch headlights on; and finally, blind-spot sensors, that reduce risks during parking and turning manoeuvres.
Sharing the burden
By 2040, shared mobility is expected to account for about 80% of miles driven in the US. This explosive forecasted growth underlines the potential of this theme to transform lives.
The primary long-term drivers for innovation in shared mobility are urbanisation and the need for environmentally-friendly transport, as well as flexibility for the consumer and lower costs than those associated with car ownership.
We believe an exponential rise in vehicle sharing will reshape cities. With fewer private vehicles, land currently used for parking will be available for other uses, such as housing. Furthermore, a reduction in vehicles on the road reduces the environmental impact of transportation.
Shared mobility also plays into the rise of EVs. For example, in China, 95% of the estimated 30,000 shared vehicles currently in operation are either electric or plug-in hybrid cars.
Technology is accelerating the development of connected vehicles, enabling them to understand their global position and communicate with the surrounding environment.
From a safety perspective, improved technology has enabled systems to provide live information about road, traffic and weather conditions helping drivers anticipate risks and consequently preventing accidents.
Perhaps most notably, innovative technology is also fuelling the development of autonomous driving. In this brave new world, technological innovation will be key in avoiding accidents and preventing passenger and pedestrian injuries as semiconductors and sensors replace eyes and ears.
We invest in both technology and shared mobility through German systems manufacturer Hella. The company develops smart lighting systems for vehicles, which helps them to process and communicate information, thereby improving safety and reducing energy consumption. It also develops innovative camera and radar products, helping to increase the safety of autonomous vehicles.
The multiple sources of innovation driving shared mobility has created a rich seam of companies succeeding in their core purpose: to generate value by creating positive and sustainable change. These impactful businesses are directly exposed to sources of enduring demand by meeting society’s unmet needs – and we believe will be powerful agents in driving long-term investment outperformance.
The above is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instrument. The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other Hermes communications, strategies or products.
UK might need negative rates if recovery disappoints – BoE’s Vlieghe
By David Milliken and William Schomberg
LONDON (Reuters) – The Bank of England might need to cut interest rates below zero later this year or in 2022 if a recovery in the economy disappoints, especially if there is persistent unemployment, policymaker Gertjan Vlieghe said on Friday.
Vlieghe said he thought the likeliest scenario was that the economy would recover strongly as forecast by the central bank earlier this month, meaning a further loosening of monetary policy would not be needed.
Data published on Friday suggested the economy had stabilised after a new COVID-19 lockdown hit retailers last month, while businesses and consumers are hopeful a fast vaccination campaign will spur a recovery.
Vlieghe said in a speech published by the BoE that there was a risk of lasting job market weakness hurting wages and prices.
“In such a scenario, I judge more monetary stimulus would be appropriate, and I would favour a negative Bank Rate as the tool to implement the stimulus,” he said.
“The time to implement it would be whenever the data, or the balance of risks around it, suggest that the recovery is falling short of fully eliminating economic slack, which might be later this year or into next year,” he added.
Vlieghe’s comments are similar to those of fellow policymaker Michael Saunders, who said on Thursday negative rates could be the BoE’s best tool in future.
Earlier this month the BoE gave British financial institutions six months to get ready for the possible introduction of negative interest rates, though it stressed that no decision had been taken on whether to implement them.
Investors saw the move as reducing the likelihood of the BoE following other central banks and adopting negative rates.
Some senior BoE policymakers, such as Deputy Governor Dave Ramsden, believe that adding to the central bank’s 875 billion pounds ($1.22 trillion) of government bond purchases remains the best way of boosting the economy if needed.
Vlieghe underscored the scale of the hit to Britain’s economy and said it was clear the country was not experiencing a V-shaped recovery, adding it was more like “something between a swoosh-shaped recovery and a W-shaped recovery.”
“I want to emphasise how far we still have to travel in this recovery,” he said, adding that it was “highly uncertain” how much of the pent-up savings amassed by households during the lockdowns would be spent.
By contrast, last week the BoE’s chief economist, Andy Haldane, likened the economy to a “coiled spring.”
Vlieghe also warned against raising interest rates if the economy appeared to be outperforming expectations.
“It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
Higher interest rates were unlikely to be appropriate until 2023 or 2024, he said.
($1 = 0.7146 pounds)
(Reporting by David Milliken; Editing by William Schomberg)
UK economy shows signs of stabilisation after new lockdown hit
By William Schomberg and David Milliken
LONDON (Reuters) – Britain’s economy has stabilised after a new COVID-19 lockdown last month hit retailers, and business and consumers are hopeful the vaccination campaign will spur a recovery, data showed on Friday.
The IHS Markit/CIPS flash composite Purchasing Managers’ Index, a survey of businesses, suggested the economy was barely shrinking in the first half of February as companies adjusted to the latest restrictions.
A separate survey of households showed consumers at their most confident since the pandemic began.
Britain’s economy had its biggest slump in 300 years in 2020, when it contracted by 10%, and will shrink by 4% in the first three months of 2021, the Bank of England predicts.
The central bank expects a strong subsequent recovery because of the COVID-19 vaccination programme – though policymaker Gertjan Vlieghe said in a speech on Friday that the BoE could need to cut interest rates below zero later this year if unemployment stayed high.
Prime Minister Boris Johnson is due on Monday to announce the next steps in England’s lockdown but has said any easing of restrictions will be gradual.
Official data for January underscored the impact of the latest lockdown on retailers.
Retail sales volumes slumped by 8.2% from December, a much bigger fall than the 2.5% decrease forecast in a Reuters poll of economists, and the second largest on record.
“The only good thing about the current lockdown is that it’s no way near as bad for the economy as the first one,” Paul Dales, an economist at Capital Economics, said.
The smaller fall in retail sales than last April’s 18% plunge reflected growth in online shopping.
BORROWING SURGE SLOWED IN JANUARY
There was some better news for finance minister Rishi Sunak as he prepares to announce Britain’s next annual budget on March 3.
Though public sector borrowing of 8.8 billion pounds ($12.3 billion) was the first January deficit in a decade, it was much less than the 24.5 billion pounds forecast in a Reuters poll.
That took borrowing since the start of the financial year in April to 270.6 billion pounds, reflecting a surge in spending and tax cuts ordered by Sunak.
The figure does not count losses on government-backed loans which could add 30 billion pounds to the shortfall this year, but the deficit is likely to be smaller than official forecasts, the Institute for Fiscal Studies think tank said.
Sunak is expected to extend a costly wage subsidy programme, at least for the hardest-hit sectors, but he said the time for a reckoning would come.
“It’s right that once our economy begins to recover, we should look to return the public finances to a more sustainable footing and I’ll always be honest with the British people about how we will do this,” he said.
Some economists expect higher taxes sooner rather than later.
“Big tax rises eventually will have to be announced, with 2022 likely to be the worst year, so that they will be far from voters’ minds by the time of the next general election in May 2024,” Samuel Tombs, at Pantheon Macroeconomics, said.
Public debt rose to 2.115 trillion pounds, or 97.9% of gross domestic product – a percentage not seen since the early 1960s.
The PMI survey and a separate measure of manufacturing from the Confederation of British Industry, showing factory orders suffering the smallest hit in a year, gave Sunak some cause for optimism.
IHS Markit’s chief business economist, Chris Williamson, said the improvement in business expectations suggested the economy was “poised for recovery.”
However the PMI survey showed factory output in February grew at its slowest rate in nine months. Many firms reported extra costs and disruption to supply chains from new post-Brexit barriers to trade with the European Union since Jan. 1.
Vlieghe warned against over-interpreting any early signs of growth. “It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
“We are experiencing something between a swoosh-shaped recovery and a W-shaped recovery. We are clearly not experiencing a V-shaped recovery.”
($1 = 0.7160 pounds)
(Editing by Angus MacSwan and Timothy Heritage)
Oil extends losses as Texas prepares to ramp up output
By Devika Krishna Kumar
NEW YORK (Reuters) – Oil prices fell for a second day on Friday, retreating further from recent highs as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather.
Brent crude futures were down 33 cents, or 0.5%, at $63.60 a barrel by 11:06 a.m. (1606 GMT) U.S. West Texas Intermediate (WTI) crude futures fell 60 cents, or 1%, to $59.92.
This week, both benchmarks had climbed to the highest in more than a year.
“Price pullback thus far appears corrective and is slight within the context of this month’s major upside price acceleration,” said Jim Ritterbusch, president of Ritterbusch and Associates.
Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude production and 21 billion cubic feet of natural gas, analysts estimated.
Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.
Companies were expected to prepare for production restarts on Friday as electric power and water services slowly resume, sources said.
“While much of the selling relates to a gradual resumption of power in the Gulf coast region ahead of a significant temperature warmup, the magnitude of this week’s loss of supply may require further discounting given much uncertainty regarding the extent and possible duration of lost output,” Ritterbusch said.
Oil fell despite a surprise drop in U.S. crude stockpiles in the week to Feb. 12, before the big freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]
The United States on Thursday said it was ready to talk to Iran about returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons. Still, analysts did not expect near-term reversal of sanctions on Iran that were imposed by the previous U.S. administration.
“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” said StoneX analyst Kevin Solomon.
(Additional reporting by Ahmad Ghaddar in London and Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; Editing by Jason Neely, David Goodman and David Gregorio)
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