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We have integrated the available industry-level climate change transition research from multiple sources and included climate change transition as the fourth long-lasting trend in Mira ABM*, along with automation, ageing population and globalisation/trade conflicts.

The transition of our economy in response to the climate change has begun in the earnest and is likely to continue in the years to come. The ultimate physical impact of climate change is arguably still uncertain, not least because it depends on the speed and extent of the policy reaction of major countries. Yet, there are energy transition facts that are already having significant impact on global supply chains, economic development and consequently, on asset pricing. Most importantly, these transition facts will continue to have impact on asset pricing in the foreseeable future, which qualifies climate change as the fourth long-lasting trend included in Mira ABM – our strategic asset management platform, along with ageing population, automation, and globalisation/trade conflicts.

 
Attempts to account for climate change in asset pricing so far have been focused on top-down macroeconomic analysis. Such analysis often misses the complexity of the underlying supply chain shifts. At the same time, there are detailed industry-specific studies covering climate change; however, they are fragmented and focused on individual industries. In this report, LINKS have tried to combine the body of knowledge on climate change from multiple industries into a single supply chain picture and draw conclusions with respect to asset prices.

In the six years since LINKS first covered risks of excessive leverage in the Chinese economy, both understanding of and dealing with leverage has been a key focus for the government of China. Despite this focus and even though the debt is domestically funded, the results of deleveraging are less than encouraging. Sustainability of this debt is further away, which has major consequences for global investment portfolios.
In 2012 LINKS Analytics wrote about the looming debt crisis in China (Global Systemic Risks, 2012). At that time, we estimated the size of the local government finance vehicle (LGFV) debt at $4.2 trillion, or nearly double the size of Moody’s estimate. The conclusion was that the size of this debt was too large to grow out of (as China had previously done).
Through the following six years China’s policy makers continued to balance the demands of managing the mounting debt on one hand and delivering the economic growth on the other. China’s economy did not implode under the debt burden but judging by the now widespread recognition of the problem, the debt issue did not go away.
We believe It is now time to revisit the issue of systemic risks posed by China’s economy, focusing specifically on the following questions:

1. Is China still inefficient and is debt still accumulating?
2. If so, is it more or less sustainable in 2019 compared to 2012?
3. What are, if any, signs of imminent distress?
4. What would be the impact on balanced portfolios in case of an economic collapse?

To answer the last question, we use scenarios in LINKS Mira Agent-Based Model (ABM), which enables assessment of system-wide impact of scenarios on investment portfolios.

Some sources of inflationary risk are more benign than others. Given the structural headwinds that the global economy faces, a broad inflation hedging programme can be expensive and unnecessary. On the other hand, the likelihood of unexpected inflation driven by regulation or supply shocks is increasing. This points to a more targeted approach when managing inflation risk.
Continuously low interest rates in the face of very low unemployment rate justifiably raise inflationary concerns. Protecting institutional portfolios against inflation does not come cheap – sensible hedge against inflation comes with increasing volatility and adds to the risk of the portfolio. It is therefore worthwhile to consider whether at least in the typical “core” scenarios of pension funds, inflationary concerns are truly justified.
The persistent low-trending levels of inflation in the past two decades are likely to be the effect of the emergence of global value chains and automation. Although there is significant political push-back against globalisation that can in theory reverse its effect on inflation, i.e. cause domestic price increases, our estimates suggest that the disinflationary effects of automation and ageing population in the coming years more than make up for the difference. In fact, if anything, the combined effect of long-term structural trends point at ~ 90 bp lower demand-driven inflation going forward. An active inflation hedging program for demand-driven inflation is therefore likely to cost more than its potential benefit.