Climate Transition Global Investment Grade Credit Strategy

Henrietta Pacquement: I have three takeaways for 2024. Number one, global temperatures averaged over 1.5 degrees over pre-industrial temperatures for an unprecedented 12-month period. Number two, our much-criticized central bankers have defied the odds and engineered an economic soft landing—no mean feat given historical precedents. But this wasn't enough to save many elected officials, as number three, voters across the globe generally made governments pay for post-COVID war-induced inflation. How did that translate into global investment grade? A return of bond-like returns, a call we made at the start of 2024. Spreads tightened as consumers proved resilient. Rates were volatile, but they regained their diversification powers as inflation normalized. What did we get right? The recovery of the real estate sector. Our overweight benefited from corporate balance sheet repair. How does that sector fit into a climate strategy? Well, real estate is a key transition sector, given its end use status for temperature regulation. The resilient consumer—risk overweights in financials, consumer sectors, and technology helped performance as financial spreads converged towards non-financials. What's the climate angle there? Financials are facilitators of transition and adaptation. 2025 will be about living with the electoral choices of 2024. Geopolitics and redefining global trade relations are likely to loom large and have the potential to spill over into financial markets. Voters have generally asked for change. In the anglosphere, this has yielded clear mandates. In continental Europe, unstable coalitions and split parlements. In addition, three long-term themes will continue to disrupt. As we experience more climate change-driven amplification of natural phenomena, companies are going to continue to assess investments required for both transition and adaptation. AI exuberance is going to evolve from infrastructure spend to implementation. We'll be reviewing how AI gets integrated into corporate processes. Healthcare and wellbeing will be supported by demographics. Aging populations are looking to increase longevity in good health. We’ll be living at the tights. Low corporate spreads and high interest rates reflect healthier private sector balance sheets compared to more spendthrift governments. How are we going to be investing in that context? We'll be harvesting all-in yields. These are looking attractive. We'll be focusing on sectors supported by long-term themes, as we think they bring visibility. We'll also keep an eye on fundamentals as the cycle progresses. And we'll be maintaining flexibility to benefit from potential new issue premia widening and invest in most challenged cyclical sectors should the opportunity present itself.