According to the IMF, the outcome for the global economy in the wake of COVID-19 during 2020 was a GDP contraction of about 3.5 percent. Vaccination has already begun worldwide, which will enable faster normalisation than expected. The IMF is projecting global growth of 5.5 percent in 2021, although this will depend on the speed of the vaccination rollout. Swift and substantial monetary and fiscal policy support has been an important and largely successful strategy during the pandemic. This was a lesson learnt during the earlier financial crisis. Several central banks and governments have also recently increased and extended the stimulus and relief programmes.

Although GDP may approach pre-pandemic levels in 2021, the trend is fragile. A dangerous virus mutation or policy error in which stimulus support is withdrawn too early and causes a large wave of bankruptcies and job losses would once again damage the economic outlook. At present, the trends are pointing in the opposite direction. At the same time, surprisingly swift vaccination programmes combined with continued and substantial economic stimulus and relief could generate faster recovery than expected.

The risks of overheating and rising inflation are further away, especially because the labour markets are soft, but long rates have begun to rise. The central banks are struggling to push up inflation, are giving no signs of austerity and are not forecasting rate hikes in 2021 or 2022. Additionally, inflation in Europe is very subdued.

 

Controlled restart
An upturn in long-term rates from record-low levels will not necessarily be a problem for the economy or the stock market, as long as it occurs under controlled conditions. In general, the Nordic economies have generally weathered the pandemic better than others, partly due to less drastic lockdowns and restrictions, and because our economies are more dependent upon exports and industry than on the service sector and tourism.

Industrial supply chains have not broken down, which was critical for keeping activity up. Strong public finances in the Nordic countries have provided good opportunities for fiscal policy support and economic stimulus. It is also a relief that there is now, four years after Brexit, an agreement between the EU and the United Kingdom, as the UK is an important trading partner for the Nordic countries.

The pandemic is accelerating existing megatrends like digitalisation, automation and climate and sustainability work. Remote working and digital communication have also taken giant steps forward, which is probably subduing business travel and has, by extension, also affected the structure of the real estate market. Global supply chains are being reviewed and if companies become more inclined to insource production, in spite of higher costs at home, this will further drive automation. There is much to indicate that retail stores, hotels, air travel and offices will recover. The big question is how far the pendulum will swing.

Sustainability and renewable energy are the really big and accelerating trends. They are driven not only by more urgent awareness of the climate situation, but also technological progress and cost advantages. This is especially true for the EU, which is an important market for the Nordic countries. The post-pandemic fiscal policy measures are to a great extent more future-oriented than those taken after the financial crisis, with investments in digitalisation and more sustainable societies, which is positive.

Transformation pressure on established companies is increasing, which is also creating fertile ground for new enterprises in areas including cleantech, gaming, technology, fintech and new energy. This is creating a need for growth financing and there is a lively IPO market on the Nordic stock exchanges for small and high-growth companies that has few equals in the rest of Europe. At the other end, the EU, US and China are pressuring the major platform companies on matters related to taxation and market dominating positions. Ultimately, this may lead to new regulations or to the forced break-up of large, dominant companies.

Perhaps most surprising of all, it seems like China is moving the fastest. These processes take time, but increased competition often promotes economic productivity and development. If new standards and regulations were to come, it could create entirely new opportunities and exciting changes like those happening in the banking system with fintech and the digitalisation of healthcare.

 

The green megatrend
ESG is the biggest trend going and it affects all investments. The pandemic has had a serious impact on how we live our lives and has given us new perspectives, which also apply to corporate executives and decision-makers. More importantly, we have realised that we can in fact change course and change our behaviour very quickly if we have to. The understanding that companies must have sustainable business models has grown during the pandemic. If you have a business model that is not currently sustainable, it will take profound change for the company to remain relevant to its customers in the future.

Focus on sustainability is a critical element of being a knowledge-driven bank and providing optimal advisory. To a great extent, ESG is about communication, information and education that equip people to make the right long-term decisions. There is much to be done, and through our sustainability expertise we can be involved and influence companies and investors – and really make a difference. It is important to us that our clients have access to the best available information so that they can make decisions that are socially sustainable in the long run. That is where we can help.

The pandemic is accelerating existing megatrends like digitalisation, automation and climate and sustainability work

As far as investments go, among both institutions and private clients, the focus is increasingly on the opportunities, rather than the risks. The point is no longer what one should avoid owning, but rather which companies and sectors will profit by a climate transformation and thus have a bright future ahead.

Carnegie has carried out an extensive project to determine where Nordic companies stand ahead of the new EU Taxonomy. The results of the analysis show that several companies that the market previously considered green did not perform as well, while others that had been overlooked suddenly became green darlings. This is due to the Taxonomy rewarding companies that are investing in the green transition, meaning that these companies earn high scores with their future-oriented initiatives.

We have been working actively with ESG in our advisory. Carnegie Private Banking became a signatory to the UN Principles for Responsible Investment (UNPRI) in 2020.

UNPRI is a well-known framework that results in greater transparency surrounding ESG efforts. Carnegie checks and evaluates all funds and fund managers that are included on the bank’s recommendation list and are the basis for discretionary management, combined with Carnegie’s own products.

We are working proactively in our wealth management to identify long-term, structural growth trends, which we translate into thematic investments. Our ambition is to either identify themes in an early phase or find niches within megatrends like healthcare, technology and the environment. We aim to look at the entire value chain rather than simply buy the biggest companies that the market already associates with the trend.

 

Is water the next big trend?
In recent years, the themes we have identified have included 5G, cyber security, robotisation and automation, artificial intelligence, biotech and the pharmaceuticals of the future. In the ESG segment, we see attractive investment opportunities in areas including renewable energy, sustainable food and water supply.

We have observed a distinct trend in the last year where the market has bumped up the value of companies that focus on ESG. In some cases, the flows have contributed to bubble valuations of companies that are clear winners in the environmental trend – especially in clean energy. The somewhat more defensive water companies are not such obvious winners and have been a little overlooked.

Investor focus on sustainability is a structural trend that will potentially benefit the water companies. Right now, everybody is talking about the carbon footprint, but the water footprint could be the next trend, for both companies and consumers.

Four billion people struggle with water shortages every day. The supply of fresh water is finite, unevenly distributed among geographical regions and shrinking due to pollution and climate change. Demand is rising in pace with population growth, urbanisation and growing prosperity – most rapidly where there are already water shortages. We are already seeing conflicts related to water.

In the western world, more resource-efficient management of fresh water would save money. In Africa, it would save lives. Drastic cuts to consumption would also be very attractive from a sustainability perspective. Resolving the water shortage problem will require major investments in infrastructure and new technology to secure access to water for the world population.

The widening gap between supply and demand is the most important driver of water as an investment theme. The global demand for water is growing twice as fast as the global population and is expected to double again in the next 15 years. The need for water is also being driven by urbanisation and higher consumption of goods that require a great deal of water in their production. India, China and other emerging countries in Asia will account for a large share of the demand growth until 2050, according to the OECD.

In short, nearly $500m a year needs to be invested to give all people access to clean water by 2030, and urbanisation and growing prosperity will further increase the need for water.