Imagine all the people living for a CO2 free world.

Our day to day life is understandably overwhelmed by the groundhog day of lockdowns and the pandemic and thankfully now vaccinations are being rolled out. On the brighter side, global COVID cases are ebbing, the US managed to inoculate more people in a day than the number of people testing positive, vaccine shortages should be gradually improving but the price to pay will be a poor quarter in terms of growth. Indeed upcoming economic data will likely be tepid and discouraging, all the more than China also has strict lockdowns this time around.

However there is a greater scheme at play, still difficult to truly understand in its sheer magnitude and force. The UN Secretary General is calling 2021 the “year of the quantum leap towards CO2 neutrality”, the Pentagon recently declared Climate a national security issue, the UN now estimates that over 65% of the world GDP and 110 countries have pledged carbon neutrality while close to 1200 companies have set up Paris-aligned goals as part of SBTi (Science Based Targets Initiative). These are genuinely impressive statistics that have equally, if not more, impressive practical consequences. It is more important than ever to conceptualise and consider this. All the more than some of the tell-tale signs are becoming increasingly apparent even though the world has barely gotten started.

The green recovery is likely to be a huge global construction site.

CO2 neutrality will require re-inventing, re-engineering, re-constructing, retro-fitting countless aspects of our economies from energy to transport to construction to agriculture to packaging...the world needs new energy sources, a massively upgraded electricity grid, green hydrogen powered mines and mills, new cars planes and boats, energy efficient buildings and homes, new green building materials, sustainable packaging...and negative emissions solutions. The task is monumental and will spread over a couple of decades but economically it could in some ways resemble reconstructing an economy after material devastations of a world war.

This giant project, unlike the internet revolution - which shaped the post GFC recovery, is very much physical in nature and will require vast quantities of capital and labor, very much like the previous post world war situations. For months now, in the Weekly Notes, we have highlighted a number of the tell-tales signs of anecdotal shortages or price inflation and we can only report that these just keep spreading: semiconductors shortages are now broadening well beyond automotive to electronics all the way to Apple reporting shortages and production delays; TSMC (the world largest semiconductor foundry) reported that its new 3 nano node technology is already fully booked to end 2024; the price of soft wood pulp is now up 45% in less than 3 months as use of plastic is increasingly banned and sustainable solutions are thought out; the shortages of containers vessels will likely result in structurally higher cost of marine transport (as per the chairman of Hapag-Lloyd, one of the largest global shipping companies); the price of solar glass went up 70% in 2020; Chinese home appliances makers are announcing notable price increases for the first time in decades, and finally, the US composite PMI input price component printed in January at the record highest level since data began in 2009.

Asset Allocation

In DMAF portfolio, we have kept our exposures broadly unchanged with equities at about 40%, safe duration at around 1.5y of which half remains in inflation protected format, and in FX we maintain our differentiated long short approach centred on fundamental valuations augmented by money creation.

Qualitatively we find ourselves evolving the portfolio slightly by increasing traditional sectors like forestry and shipping alongside the more futuristic world of autonomous enabling sensors cameras and LIDAR technologies. Of course the core of the equity portfolio is still powered by the Cyclicality 2.0 thematic alongside the exposure to High Quality basket. We anticipate and position for the recovery and evolve the portfolio seeking opportunities and looking at valuations discrepancies, always with a close eye on shorter term developments.