As we end one of the most challenging periods the markets have ever seen, I welcome forecasts in the UBS Year Ahead 2023: A Year of Inflections report that the transition to green energy could provide “attractive investment opportunities” in the year to come.
The global wealth management company has outlined what investors can expect at a time of high inflation and rising interest rates.
UBS chief investment officer, Mark Haefele, says even if we continue to be dependent on fossil fuels in the next ten years, “the move to a greener economy is likely to boost growth in the long-term”.
The report says a “more positive secular backdrop remains possible” and that’s explained by several factors – including the anticipated spurring of green investment and the “era of security”.
Energy in the era of security
So, against this backdrop, what are the long-term investment opportunities?
The transition to clean energy sources and Net Zero emissions was already underway at the start of the decade, but Russia’s invasion of Ukraine has increased the need for many countries to improve the security of domestic energy supplies; independence in strategically important areas like energy, food, and technology is becoming increasingly pressing.
These measures should incentivise public spending on infrastructure and on research and development (R&D), as well as reduce energy reliance on unstable sources.
The decade of transformation
As the decade of transformation progresses, greater capital investment in industrial metals and agricultural production could also be needed as the demand for Critical Raw Materials (CRMs) and foodstuffs, grows.
This is encouraging news for Norge Mining, as we continue to investigate EU CRMs vanadium and phosphate in southern Norway – ingredients needed for EV batteries and renewable energy storage.
However, while I welcome the UBS forecasts, I’m mindful of the uphill struggle that still lies ahead caused by continuing delays in supply.
Ongoing supply chain pandemonium
In an interview with Bloomberg, author Christopher Mims warns the pandemonium of the global supply chain we have seen post-COVID could be a dress rehearsal for future chaos caused by political unrest and the climate crisis.
His book Arriving Today investigates the global flow of goods and describes ongoing battles between importers over scarce capacity on trucks, ships and in warehouses that are creating additional backlogs.
Part of the problem is that the once-efficient pre-COVID supply chains were not battle-tested to withstand pandemics, wars, and extreme weather. Production delays have been further exacerbated by truck driver and dockworker disruption.
New business models
Combined, these factors are leading businesses to bring production in-house or move closer to where the resources are. Moves are already afoot in high-demand areas like CRMs to circumnavigate supply chain problems with some car makers going directly to mining companies to forge supply deals for the metals they need to power electric vehicles, as we have written about here.
When global chips are down
The global chip shortage (a result of the war in Ukraine), sanctions against Russia and COVID-induced shipping constraints are yet more factors affecting CRM supply.
The UBS report claims new US legislation to address this, like the US CHIPS Act (to promote semiconductor R&D and manufacture) and the Inflation Reduction Act (partly aimed at promoting clean energy), could also push up public and private expenditure in the next few years.
The flip sides
As we as an industry try to identify the turning points for inflation, rates, and growth, in my mind, it pays to remember the flip sides.
Firstly, the transformation to the green economy could lead to an increase in inflation. Secondly, while the age of security is likely to trigger new infrastructure spending, it could also result in slowing global economic growth if trade barriers are reintroduced as a safeguard. Thirdly, the technological transformation could lead to more political unrest for the economy and society especially if capital-intensive and “labour-saving” innovations result in concentrating wealth in a few hands.
Security & efficiency
Back to the UBS report and these words stand out in particular: “Prioritization of energy security, food security, and technological security by governments and businesses will be a key driver of major sectors in the years ahead. Efforts to improve efficiency across the broader food supply chain, for example, are expected to drive opportunities in several areas.”
For me, these ‘areas’ are both physical (the raw materials themselves) and geographical (namely, where the materials are discovered and produced). In the future, I firmly believe vertical value chains – where mining and production lines work in tandem, side-by-side – will provide a shelter from the economic and supply chain storms, that seems to be growing stronger. Security and efficiency, with no compromise to each other.