Current States - Unrest, Climate Change & Bonds
For the purposes of this Current States post I will presume that Climate Change is happening, and it is not great for the world. And that this obviously has implications for investing.
The current strikes and protests in France end we need to think about what it means in a global context. The complaint that started it is that taxes for petrol are going up, and the common working class cannot afford these new taxes. The reason that the French State decided to change the tax structure around oil/gas was twofold: to increase tax revenue and to hit the CO2 emissions targets under the Paris accord.
If this is the reaction we have in France, what will be the reaction we have across the world as governments (hopefully) band together to mitigate climate change? Taxes on consumption of a good is one of the easiest ways to get a purchaser to internalise a negative externality - or so I was taught in my Introduction to Microeconomics subject at university. In non-jargon terms, a tax like the petrol tax makes people pay for the problems they cause through their consumption of a good/service, as otherwise it is too cheap to use the good in relation to the problems it can cause. It's also why we force miners to clean up their environmental mess when they leave a mine (usually to no effect & further reading).
For those of our species not in the developed countries they see our standard of living. They see how we live. Can you imagine for the sake of climate change they do not want to join the global middle class? The global middle class is the main cause of pollution and for many outside of that middle class it is their dream to live like the west - with our air conditioning and TV's. And worse of all emerging market countries are most exposed to the damages of climate change.The Paris Accords of 2015 means that in combating CO2 emissions we could be slowing down the rise of EM countries joining the DM countries in their standard of living. Again I ask, do we imagine that people will accept this slowing down of them catching up to the West?
The Economist had a good article that to understand EM bonds we have to understand how WILLING a country is to pay back its' debt holders. So let us tie it all together.
Climate Change is happening → we should probably try and mitigate its effects → people won't be happy with that political action → unhappy populations force politicians to make decisions that do not always favour EM bondholders.
Case in point - also pointed out in the Economist article - is that Mexico has elected a populist leader Andrés Manuel López Obrador other wise known as AMLO and one of the first policies he has enacted was the scrapping of a US$13bn airport that was paid for with debt. Sure, the airport was widely unpopular but giving into populism over the real need for the airport as well as the wishes of bondholders is not a great way to start a presidency (funny video on the topic).
At the moment we are seeing more populism, and as climate change changes the earth and we most likely get more fires, floods, droughts and etc; we could see more social unrest. That may not just be due to the disasters themselves, it could also be due to famine, drought, access to clean water, access to safe land for some other examples. The willingness for people to pay for climate change mitigation outside of leafy socialist enclaves is low. Especially when the standard of living can change.
As we make ever more contentious policy, and as populism spreads further we can expect to see the willingness question come up more often. And this is just one of the many opportunities/issues we have with the future of investing in the shadow of climate change. Other issues include scarcity of resources and the opportunities of renewables. Both of which may help drive alpha in longterm investors portfolio.
WJD