Articolo
Are we boiling?
31 agosto 2023
Welcome to Uncommon Truths, Paul Jackson and Andras Vig’s regular in-depth look at the big topics impacting markets.
AI-related stocks are not alone in setting records. With global air and ocean temperatures hitting record highs in July, the UN Secretary General said "...the era of global boiling has arrived". Is he right?
- An update of Jackson’s temperature change model suggest that global average temperatures could rise by 3-4 degrees Celsius by the end of the century.
- The bad news is that this is likely to be accompanied by more volatile weather patterns (and damage), along with rising sea levels, less reliable food production, greater scarcity of water and mass migration flows. This will need a lot of adaptation spending (engineering and infrastructure work)
- The good news is that climate change is likely caused by human activity, suggesting that we can do something to limit its extent. This will require large investments in carbon-reducing and carbon-removing technology, as seen recently in the US. Much more is going to be needed, which will boost economic activity over the coming decades.
So, while we may not be boiling it’s likely we’re at least simmering.
All data as of 25 August 2023
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FAQs
The optimal portfolios are theoretical and not real. We use optimisation processes to guide our allocations around “neutral” and within prescribed policy ranges based on our estimations of expected returns and using historical covariance information. This guides the allocation to global asset groups (equities, government bonds etc.), which is the most important level of decision. For Uncommon Truths, the optimal portfolios are constructed with a one-year horizon.
We’ve chosen to include equities, bonds (government, corporate investment grade and corporate high-yield), real estate investment trusts (REITs, to represent real estate), commodities and cash, on a global level. We use cross-asset correlations to decide which decisions are the most important.
Using a covariance matrix, based on monthly local currency total returns for the last five years, we run an optimisation process that maximises the Sharpe Ratio. Another version maximises Return subject to volatility not exceeding that of our Neutral Portfolio. The optimiser is based on the Markowitz model.
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EMEA3089366/2023
