Adding further to our cautious outlook is the fact that, despite clear signs of the global economy being impacted by higher interest rates, equities have risen back to valuation levels that are around one standard deviation above the long-term average since 1995. This naturally lowers the long-term risk-reward ratio in equities.
The green transformation is squeezed by higher bond yields and geopolitics
As stated in our introduction to this Quarterly Outlook, real interest rates are too high to support the green transformation, acceptable living costs for new home buyers, and consumers with low savings rates using credit to consume. The higher interest rates and higher commodity prices have drastically altered the assumptions behind offshore wind power, which was otherwise seen as one of the key energy sources to deliver on the green transformation. Many offshore wind projects in the global pipeline were negotiated on assumptions of permanently low interest rates and cheap industrial metals.
As the world has turned upside down after the pandemic and Russia’s invasion of Ukraine, these projects are no longer viable, forcing Orsted, the world’s leading offshore wind developer, to take significant write-downs. Siemens Energy has struggled with faulty designs on its wind turbines, taking significant charges, and Vestas, the world’s largest wind turbine manufacturer, has seen its business stagnating. However, it is not only wind, but all things related to the green transformation that have been hit hard by the changing landscape. The three worst-performing theme baskets over the past year are renewable energy, green transformation and energy storage.