Market commentary: Aug 2023
Portfolio performance
International equities were the outstanding performer over the year. This was largely driven by the soaring US share market and enthusiasm for breakthroughs in artificial intelligence. Interesting to note that these returns were concentrated among a small group of companies, such as Microsoft, NVIDIA, Meta and Alphabet. Unrealised losses on Fixed Interest and Property & Infrastructure were a drag on client portfolio returns overall but this was tempered by cash returns from International Fixed Interest of around 4%, NZ fixed interest around 3.5%, and Property & Infrastructure around 3%. Cash returns are predicted to strengthen as higher interest rates take full effect. All in all, a very ordinary year return-wise, but unrealised losses will correct as bonds mature and property prices recover.
Decarbonisation of the aviation industry
Aviation carbon dioxide (CO2) emissions are expected to be one of the fastest growing sources of carbon over the next few decades as demand for passenger aviation continues to rise. Companies are facing pressure to pursue lower carbon options quickly and it’s likely the industry will face pressure of carbon reduction policies.
The bulk of emissions cuts are anticipated to come from Sustainable Aviation Fuels (SAFs) but it’s early days. Currently, options fall into two categories:
Fuels made from plants or waste. These are already a proven technology and can be easily substituted for conventional jet fuel. Many airlines are trialling these fuels in small volumes and this is likely to be the primary decarbonisation option in future years.
Electrofuels (also known as e-fuels) are produced using renewable energy (wind, solar, nuclear) applied to captured carbon dioxide (CO2) or carbon monoxide (CO) which are a by-product of industry. This pathway remains commercially immature, and studies indicate that e-fuels are unlikely to become viable before 2040.
Some aircraft and engine manufacturers are considering liquid hydrogen-fuelled planes. As this would require new aircraft design and technology, hydrogen is not expected to play a role in long-range aviation until around 2050.
The bottom line for investors is that as regulatory pressure intensifies, and demand for low or zero-carbon fuels and technologies increases, this will create potential investment opportunities for incumbent SAF producers and refiners.
[This article is a summary of one of the many research papers written by the investment team at Capital New Perspective Fund. We like thorough in-depth research as the basis for making sound investment decisions.]Richard Grimes, CERTIFIED FINANCIAL PLANNER (CFPCM), Director and Financial Adviser