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Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

A 56-page Morgan Stanley report called The Turbulence of Transition effectively put some numbers to the shift to renewable power and how much fossil fuel demand, and for how long, will happen as the transition takes place,

“Although climate models are highly complex, the math behind ‘Net Zero by 2050′ is straightforward: the world’s average temperature has already increased by around 1.1 degrees Celsius, relative to a preindustrial baseline taken during 1850-1900. This has coincided with a rise in CO2 in the atmosphere from 290 to currently 415 parts-per million (ppm). To limit global warming to ‘well below 2 degrees’, the concentration of CO2 in the atmosphere will need to stay below 430-450 ppm. According to the latest IPCC report, this leaves somewhere in the range of 420-580 billion tonnes of carbon that can still be emitted into the atmosphere. Emissions from fossil fuels are currently in the order of 37 billion tonnes per year. Therefore, to stay with the ‘carbon’ budget, these need to decline, more or less in a straight line to zero, over a period of around 30 years – hence ‘Net Zero by 2050 … The International Energy Agency (IEA) has recently calculated that consumption of oil and natural gas would need to decline by 29% and 10% respectively by 2030 to meet these objectives … Investment in oil & gas field development declined from around $740bn in 2014 to $475bn in 2019, and took another step down in 2020 to $353bn. This has not materially increased in 2021 and, according to Rystad Energy, will still run at just $360bn in 2022 as well. To put this in context, the IEA has calculated that even in its ‘Net Zero by 2050′ scenario – in which oil demand falls by 29% by 2030 – annual investment in oil & gas field development still needs to run at $365bn a year over the remainder of the decade… the average person in North America consumes 12 times as much energy as the average person in India. It would be a tough ask of those that already consume very little energy per person to consume even less. But then, that is a large share of the world’s population.”

“@SBarlow_ROB From Morgan Stanley’s excellent The Turbulence of Transition [to renewable power]” – (research excerpt) Twitter

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Scotiabank strategist Huge Ste Marie warns of more pain to come for bond investors,

“Although bond yields have experienced wild swings this year, returns of most major Canadian and US bond indices are underwater. For instance, the Bloomberg US Aggregate Total Return index is down 1.1% YTD and its Treasury counterpart is off 2.1%. In Canada, the FTSE Canada Universe Bond index is posting a loss of 4.4% this year - on a total return basis – which would mark its first decline since 2013 and its worst performance since 1994 (-4.3%). Indices tracking Canadian long-term bonds are faring even worse, flirting with double-digit declines. Unfortunately for bond investors, we believe there’s more to come. The re-opening and sustained inflation pressures could certainly push bond yields even higher in months to come. It’s worth keeping in mind that US 10-yr bond yields were hovering at much higher levels in pre-pandemic years. For most of the 2012-2019 period, US 10-yr yields traded in a wide range between 1.5% and 3.0% despite subdued inflation. "

“@SBarlow_ROB Scotiabank: More pain to come for bond investors” – (research excerpt) Twitter

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Credit Suisse quantitative analyst Patrick Palfrey recaps the past year in U.S. sector valuations,

“P/Es for Cyclicals have contracted by -3.3x over the past year, -8.0x since May 2020. By contrast, TECH+ P/Es have jumped 2.9x and 4.9x. The gap between these 2 groups is the widest in over a decade. Small-Caps trade at a -5.6x discount to Large-Caps, the cheapest they’ve been—on a relative basis—in over a decade. Historically, they’ve traded at a 1.3x premium. TECH+ trades at a 10.1x multiple point premium to the market, more than 2 standard deviations above its historical premium of 2.3x. All other major groups trade at a relative discount.”

I wish Mr. Palfrey had expanded more on the implications here (he might have already done so in a report I missed). He seems to be saying that cyclicals and small caps are undervalued but doesn’t straight-out recommend buying them.

“@SBarlow_ROB CS: “P/Es for Cyclicals have contracted by -3.3x over the past year, -8.0x since May 2020. By contrast, TECH+ P/Es have jumped 2.9x and 4.9x”” – (research excerpt) Twitter

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Diversion: “NASA Delays Moon Landing to 2025, Blames Jeff Bezos and Congress” – Gizmodo

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