2023, 2024, and the Road Ahead

In 2023, the dichotomy of our future became starker: a potential utopia or a daunting dystopia. Our path hinges on collective decisions, particularly in financial investments. Money, as a potent agent of change, directs economic growth. Where we choose to invest can either propel innovations that solve critical problems, fostering economic expansion and societal progress, or lead us toward detrimental outcomes. The key lies in aligning our financial resources with sustainable and innovative ventures that promise a brighter, richer, and more abundant, more equitable future. What were 2023’s key milestones of hope and despair? Let’s review.

First: Depair. Key negative events in 2023 that affected and continue to pose economic and market risks:

  1. Ongoing and worsening climate crisis. 2023 was a tough year for the climate. The world faced intensifying challenges, particularly with climate change transitioning in general awareness from a future model to an immediate, everyday struggle. We witnessed record-breaking heat, widespread wildfires, and devastating floods and storms. Even global icons like Taylor Swift felt the impact, having to postpone a show in Brazil due to extreme heat. Scientists warn that we’re pushing Earth’s limits in critical areas like water availability, biodiversity, and carbon emissions, signaling a pressing need for action.

    And while progress is being made, which we will review below, the trajectory and volume of investments show that the problem is going to get worse before it gets better. The world is lavishing $7 trillion in direct and indirect government subsidies on the fossil fuels industry, and investing another $1+ trillion annually in the form of direct private investment. Together, this eight-point-something trillion dollars of annual investments for the fossil fuels industry represents a difficult to believe 8+% of global GDP. This annual fire hose of cash being showered on the fossil fuels industry will inevitably result in further entrenchment of the industry, locking in decades of further emissions, pollution, and the suffering, death, and climate chaos that comes with it. Whatever reassuring words may have been gaveled through at Cop28 are essentially meaningless in the face of this scale of financing.

    Overall then, we are still losing the climate race: fossil fuel use and therefore emissions are still rising. Still not sure these are economic risks? Consider developments like State Farm’s recent decision to stop issuing new home insurance policies in California, a reaction to escalating wildfires, and exemplary of a broader trend among insurance companies. They’re increasingly withdrawing from areas severely affected by climate-related events, signaling a shift in how the industry is responding to the growing risks associated with climate change. This is even scarier than it sounds: without insurance, many people will have no safety net under their life savings. Again, phenomena like this are going to get worse before they get better, as long as society keeps investing more in the cause of the climate crisis than in the technologies capable of defusing the climate bomb.

    As far as the short-term climate view goes, 2024 will see the world enter a second consecutive year of El Niño, leading climate scientists to call for more extreme weather events. Expectations are for even higher temperatures, leading to an increase in severe storms, wildfires, and floods. The ocean’s sustained warmth suggests 2024 might rank among history’s most active hurricane seasons. Additionally, there’s a keen focus on polar regions, where ice melt rates have been alarmingly high. Economic risks will ensue.

  2. Geopolitical conflicts. In 2023, the increase in violent conflict around the world was large and awful. As reported by the FT, “A recent report by the International Institute for Strategic Studies documented 183 ongoing conflicts around the world, the highest number in more than three decades. And that figure was arrived at before the outbreak of the war in Gaza.” To understand the recent increase in violence, one approach is to consider various factors, as suggested by the FT. These include intelligence and deterrence failures, weakened state authority, and the perception of declining Western power. Each of these elements contributes to a complex historical context. Modern conflicts are driven not only by local struggles for resources and power but also by the evolving international dynamics involving the U.S., Russia, China, and regional powers like the Emirates and Saudi Arabia. This situation represents a shift towards internationalized intrastate conflicts, a trend that goes beyond the narrative of a weakened or isolationist or disinterested West. Exogenous market shocks via geopolitics could undermine an otherwise potentially resilient year for economic growth.
    • Israel-Hamas war. Without wading into the politics of this devastating and tragic situation, the risks to the global economy are clear. The involvement of not just the two currently warring parties but also potentially the US, Iran, Lebanon and others could lead to a spread of the conflict that would disrupt shipping (remember the pandemic supply shocks that were a key cause of inflation?), disrupt energy supplies and make fossil fuels more expensive, and sink too much of the world’s blood and treasure into a sinkhole from which they will never be recovered.
    • Russia-Ukraine war. As 2023 ends, and despite a large-scale Ukrainian counter-offensive, Russian troops still occupy 18% of Ukraine’s territory. As the horror of unprovoked war drags on, Vladimir Putin appears confident that he can outlast NATO’s support for Ukraine. One of Putin’s best shots at victory would be the reelection of Donald Trump, which Putin will therefore work tirelessly and spend lavishly to accomplish. This will connect us to our third key risk for 2024.
    • These two conflicts are, unfortunately, representative of a rising incidence of interstate and civil conflagrations worldwide. The globe has been destabilizing the last few years, which obviously is damaging and destabilizing to economies, to say nothing of the human tragedies involved. Political scientists are striving to understand the trend, and most seem to be converging around some version of reversion-to-historical mean as the U.S.’ ability or willingness to enforce the international order has become diminished.

  3. American political dysfunction. Joe Biden’s election as U.S. President was partly due to his commitment to addressing climate inequalities. However, if Donald Trump wins the upcoming election, the GOP’s “Project 2025” could dramatically roll back these efforts, targeting Biden’s environmental regulations and aiming to repeal the Inflation Reduction Act. This would position Trump alongside other climate skeptic leaders like Argentina’s Javier Milei and the Netherlands’ Geert Wilders, potentially altering the global climate action landscape. While we believe the transition to EVs and renewable energies is at this stage unstoppable, a regressive set of policies towards either could slow the transition, principally by making these decarbonization technologies more expensive, and thus making fossil fuels artificially appear more competitive. In portfolio terms, we would view this eventuality as limiting but not stopping shorter and medium term performance of these industries, but having little to no effect on long-term outcomes.

  4. China’s economic challenges. In the 2010s, China’s economic growth was a defining global force, but 2023 marked a shift. The country’s massive debt-to-GDP ratio, a staggering 280%, began showing its impact. This financial strain rippled through various sectors, notably the property market—a major investment for Chinese households—and employment opportunities for the younger generation, affecting even local government finances. This year, these challenges noticeably slowed China’s economic momentum, raising international concerns about the resilience of the world’s second-largest economy. In 2023, China experienced a significant outflow of foreign investment from its stock market. Initially, the net foreign investment had reached about Rmb235bn ($33bn) in August. However, growing skepticism about Beijing’s commitment to stimulating its slowing growth led to a sharp decline. By year-end, the net foreign investment has plummeted by 87%, resting at just Rmb30.7bn. All of this appears to have influenced Xi Jinping’s diplomatic stance towards the U.S., easing up in the U.S. face-off. This is the silver lining in China’s economic woes, because a relationship of positive-sum collaboration between the world’s two largest economies (by far) will be both more productive and beneficial than one of zero-sum confrontation. So while a Chinese economic recession or even depression would slow global growth, a more open, less confrontational China would accelerate it, particularly over the longer term.

    Clearly, the world has a lot of challenges, and a lot of work needs to be done if we want to get past those challenges without major economic and personal disruption. So, what are some markers of progress?

What IS Working?

  1. Large acceleration in renewable energy and electric vehicle adoption. The clean tech sector started 2023 on a high note, with global direct investments in green technology surpassing $1 trillion, equaling fossil fuels for the first time (of course, this ignores subsidy investments, see above). Even the International Energy Agency, historically cautious in its clean tech growth predictions, now acknowledges an “unstoppable” energy transition. In Europe, the momentum is evident with the EU’s ban on new internal combustion engine car sales by 2035 and moves towards fossil fuel phase-out. Oil giant Sinopec’s announcement that China has hit peak gasoline demand, largely due to a surge in EV sales, marks a pivotal moment. Analysts are even speculating that China might have already reached its carbon emissions peak. The country’s commitment to solar energy is world-leading, with plans to add 150 gigawatts this year, surpassing the cumulative solar capacity of the U.S. Additionally, a rare cooperative moment between the U.S. and China saw both countries agreeing to increase their investment in renewable energy sources (see China’s economic challenges, above).

    EV adoption is soaring, with over 40 million EVs on the road. This surge in popularity is fueled by a wider range of choices for consumers, a result of increasing competition among manufacturers. This competition leads to more innovation and diversity in EV models, reducing prices and extending ranges, a key factor for buyers. The consistent drop in battery pack costs, and the emergence of cheaper alternatives like sodium-ion batteries, are further driving down prices. Given these trends and the increasing drawbacks of internal combustion engines (“ICE”) vehicles, a significant shift towards EVs could happen within a decade once 10-15% of new car sales are electric.

    In 2023, the U.S. EV market has also evolved dramatically, if not as rapidly as in China. We’re seeing an unprecedented boom, with 2023 sales poised to hit 1.44 million, a figure mirroring the total sold from 2016 to 2021. This growth is underpinned by a stark contrast in available models and capabilities. For instance, compare the Hyundai Ioniq 6 and the 2018 Nissan Leaf: The Ioniq 6, debuting this year at around $40,000, offers a remarkable 360-mile range, a significant leap from the Leaf’s sub-200-mile range at a similar price point in 2018.

    The one million+ new EVs on U.S. roads are not just a change in vehicle preference; they’re redefining our entire concept of what a car is. Now, cars are starting to be seen more like the gadgets we use daily – devices that we plug in and charge. It’s like the best aspects of our computers are now being integrated into our cars, a shift that’s both fundamental and perhaps even existential* in its implications (*note to GM: instead of pretending EVs aren’t happening and therefore diverting $10 billion to share buybacks, maybe think about investing in new and better EV production).

    It seems we may have reached the zenith of global fossil fuel consumption. Coal, the backbone of the industrial revolution, is on a downward trajectory. The transition to technology-driven energy systems, like solar power, is ushering in a new era of declining energy costs, independent of the fluctuations typical in commodity-based energy. Solar capacity is surging, with the dramatic drop in Chinese solar panel prices this year reinforcing solar energy’s viability. The rapid advancement in solar technology is reshaping energy economics, making forecasts increasingly challenging and necessitating frequent upward revisions.

    The shift towards stable and declining electricity prices, independent of the volatility in fossil fuel markets, will have a significant impact. This stability will encourage long-term investments in areas that are currently under-electrified, such as heating and industrial processes. As demand in these sectors grows, they’ll likely experience the benefits of learning curve effects, further enhancing their efficiency and viability. In 2024, the global growth of renewable energy is set to continue, propelled by government incentives, policy support, and the drive to decarbonize economies. Solar energy, now more affordable than ever, is expected to continue its price declines, with China leading the market, as per BloombergNEF. Although wind energy installations are also anticipated to reach new heights, their growth might be slower compared to solar, with challenges such as higher interest rates and supply chain costs affecting wind developers.

  2. Amazing advances in biotechnology. Eleven years ago, gene therapy leaped into public consciousness, thanks to CRISPR-Cas9, a revolutionary DNA editing tool. Originating from bacterial immune systems, this technology made precise genetic manipulation a reality, sparking imaginations about designer babies and potential cures for diseases. Jennifer Doudna and Emmanuelle Charpentier’s 2012 study was pivotal, demonstrating how CRISPR-Cas9, guided by RNA, could target and edit specific DNA sequences, a breakthrough in gene therapy.

    Gene editing is revolutionizing medicine. The U.S. has greenlit the first gene-editing therapy using Crispr technology, marking a potential transformation in healthcare. This technique, by editing the genetic code, can rectify mutations causing diseases. The inaugural therapy, “exa-cell,” treats sickle cell disease. With around 280 gene therapies in development, and over 1,500 clinical trials for gene and cell therapies registered with ClinicalTrials.gov, Crispr’s ability to tackle the underlying causes of diseases holds promise for creating definitive cures, particularly for hereditary conditions like cystic fibrosis and certain cancers.

    CRISPR gene editing technology has also emerged as a promising avenue to accelerate the development of more sustainable and resilient agriculture practices. CRISPR-editing of crops can enhance yields and nutritional profiles to boost food security without expanding farmlands, fortify plant resistance to droughts/pests, reducing reliance on irrigation, fertilizers, and pesticides, speed breeding times from decades to months for adapted varieties to counter shifting local climates, remove allergens and toxins to improve food safety, confer tolerance of saline soils, opening up agriculture in once infertile seaside lands.

  3. The promise of AI. The biggest 2023 story in tech was the emergence of AI. With respect to Green alpha’s aim of de-risking the economy AI is huge: not only does it have the capacity to help us solve our largest problems around climate, pollution and disease, it also is having the effect of making the global economy much more productive (see the first pillar of Next EconomicsTM). AI doesn’t just raise strategic questions: it raises questions about the nature of computing, the future of society, and what it means to be human.

    AI has been under development for years, and we’ve all been interacting with it via social media and online shopping for some time now, but it wasn’t until 2023 and OpenAI’s LLMs were unleashed that that the mainstream became aware of the technology’s potential power. Yet we’re just starting to integrate AI infrastructure into our economies. The demand for computing will rise sharply, even as we become more conscious of the resource and energy costs associated with machine learning. Nvidia won’t be able to single-handedly meet the demands of this AI-driven society. In data centers, AMD, Alphabet, Intel, and perhaps startups like Cerebras might have a short-term advantage. However, AI will also be embedded in devices closer to us, like AI-powered cars, where Nvidia competes with Qualcomm and Intel’s Mobileye. Apple, Qualcomm, and Huawei dominate mobile devices. The pick and shovel trade in AI therefore will remain interesting for some time, with over-and-under valuations occurring frequently as enthusiasm and the frothiness of AI related companies continues to drive a market narrative.

    Note that at Green Alpha, we are not blind techno optimists, but neither are we techno-doomers. AI, like fire before it, is an innovation with enormous potential to not only dramatically improve lives and address multiple needs, even existential ones, but also to change the course of our evolution. Like biotech, and especially in combination with biotech, the transformed nature of the world science is giving rise to is inestimable. While these powerful technologies carry significant risks, the benefits are so substantial that overlooking their potential would be a disservice. Not only do they play a crucial role in making civilization and the global economy safer, but they also offer promising returns for us and our clients as these sectors continue to experience exponential growth.

  4. Market conditions appear to be improving for growth, innovation, and sustainability-oriented companies. After a difficult 2022 and first months of 2023, the stage is (finally) set for markets to appropriately value the solutions to the world’s key risks:

    • Many of the stocks in Green Alpha’s systemic risk-fixing portfolios have become undervalued on a quantitative basis.

    • Ending 2023, the global economy is defying expectations. The U.S. has dodged a recession, is demonstrating solid growth, and unemployment remains low. Inflation is also on the decline globally. However, the ripple effects of higher interest rates, global conflicts, and increasing climate disasters are real. In 2024, the macroeconomic landscape will continue to be challenging, posing essential questions and themes for investors to monitor as they step into the new year.

    • As investment has increasingly piled into the Magnificent Seven technology giants, an uneasy reckoning looms. Together, these seven tech titans make up an outsized portion of major stock indices given their trillion+ dollar market capitalizations and influence. For example, these seven account for over 27% of the S&P 500 Index, so centering the hypothetical on their ongoing concentration is salient. Will this intensive consolidation into Apple, Amazon, NVIDIA, Meta, Netflix, Microsoft, and Alpha resolve by broadening back out? Or will holdings cluster fatally into this narrowing tech upper crust—leaving the rest of the stock market to wither? In other words: with money rapidly consolidating into a few phenom tech firms, a precarious fork in markets exists.

      With $27 of ever $100 invested in the S&P 500 Index going to these select few stocks, do the Magnificent Seven soak up more wealth indefinitely? Or does concentration coronating Big Tech ultimately hit a ceiling—spurring capital to even out across more companies again? Surely, history and reason show that it will be the latter. Green Alpha believes that markets, although plainly not efficient, over time and with many notable digressions and misallocations, do end generally assigning value where it is most due. Thus, today Green Alpha has limited exposure to two of the Magnificent Seven and that is solely within our least actively-managed investment portfolios. As the valuations of these firms become more realistic, index fund managers will be forced to sell (as the S&P 500 is market cap weighted), and the owners of the other 493 stocks will benefit. The owners of the many innovative, fast-growing stocks whose companies are solving the globe’s biggest risks will benefit even more.

      Finally, a key question for investors in 2024 is the destination of the surge in money-market fund assets, now exceeding $6 trillion. There’s ongoing debate about whether this capital will remain in these funds or shift elsewhere. Some speculate a portion could fuel consumer spending in areas like entertainment and dining, while others suggest the lion’s share might flow into the stock market, as reported by the WSJ. Of those dollars seeking investment return on equities, most are likely to use classic risk-return analyses, and therefore may end up in strategies that share Green Alpha’s approach of hunting down fast-growing firms that are at reasonable valuations.

As always, there is a lot to think about and try to assimilate as we look at the picture for global economics, markets, and sustainability. In a world brimming with uncertainties and exponential change, those of us who invest capital need to continually rethink our strategies. This calls for embracing scenario planning, diversifying our approaches, and prioritizing flexibility and resilience. It’s about making judicious decisions and being prepared.

Here at Green Alpha, we generally run analyses in five-plus year time horizons, but to momentarily focus on the shorter term, here’s what we see as we look ahead to 2024: money will continue to be more expensive relative to the low rates of the past decade. This change is part of a broader shift where geopolitics is reshaping global economics, again, requiring, above all, adaptability on the part of the asset manager. Because, simultaneously, the swift pace of technological advancement is not just creating new opportunities but also rendering many existing resources and infrastructures obsolete. This includes natural assets like unextracted oil and man-made structures, including outdated business models and infrastructures, which are being rapidly overtaken by new innovations. Some parts of the economy will grow very rapidly, others will stagnate, and others will shrink. Assembling portfolios of companies growing faster than underlying GDP and addressing the world’s greatest risks remains an exercise in future casting, back-casting, premortem analyses, scenario planning, rigorous fundamental analyses, and imagination. This is the challenge that Green Alpha is here for.

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