INSIGHTS
The Pacific Pension & Investment Institute (PPI) convened in Westlake Village, California and online on February 23-25 for its 2022 Winter Roundtable. Members gathered to address the investment implications of accelerating trends associated with technology and the energy transition. Inflation and its impact on pension liabilities and assets remained a top concern. These discussions were soon clouded by the late-breaking news of Russia’s invasion of Ukraine, as the stunning developments in Europe brought geopolitical risk to the fore.
The (geopolitical) bear in the room
Russia’s invasion of Ukraine has far-reaching consequences, most notably in the shift to a multipolar world, where geopolitical conflicts are more likely and frequent. Spheres of influence will rise and create risk implications for portfolios, while this particular event exacerbates inflation, especially in energy and food commodities. Geopolitically, the sanctions on Russia will push it into greater dependence on China, and the impact on Europe will be profound. In particular, the twin shocks from the Donald Trump presidency in the U.S. and now the Russia-Ukraine crisis will prompt a rethink of European strategic autonomy in the long run.
Inflation
A surge in aggregate demand and limitations in aggregate supply have converged into a perfect storm of rising prices. Anxiety is rising over the nature and duration of the current inflationary environment. Responses by the U.S. Federal Reserve and international trends, including globalization, demographics, income inequality, technological disruptions, and geopolitics, will have varying impacts.
For pension plans, the nature of their liabilities will influence how they structure their portfolios to manage the effects of inflation. Strategies vary among plans. Funded status and board governance play key roles too.
Technology
SEMICONDUCTORS
Fueled by technology-driven demand, semiconductors have become strategically important to global and national economies. Geopolitical dynamics will require investors to manage the risks and opportunities, particularly concerning critical markets like China. That said, no one country can marshal all the resources – including raw materials and talent – to build an entire ecosystem that will ensure self-sufficiency across the supply chain. Interdependency will persist, and businesses will seek to mitigate unpredictability by moving away from just-in-time inventory and seeking greater vertical integration with chip manufacturers.
WEB3 AND THE METAVERSE
The Internet has evolved from Web1 (content consumption and experience accessed at the computer) to Web2 (a dynamic web experience and the mobile Internet). The next iteration is Web3 – a decentralized platform for a fully immersive digital experience and durable digital identities and possessions. The metaverse represents such an immersive experience through virtual or augmented reality, and the applications range from gaming to business.
Such new platforms and applications can disrupt legacy businesses, technology governance, and societal behavior. They will also require significant time to mature and thus patient investments.
Energy needs and climate change
As the world moves away from coal and other fossil fuels, there is a need to look beyond solar, wind, and hydropower for renewable energy sources that offer clean and continuous base loads. Large-scale hydrogen projects are one such source, and an example is the world’s largest green hydrogen hub spanning Utah and southern California. The U.S. Department of Energy also supports the development of advanced nuclear energies and smaller and more efficient reactors. While public safety concerns remain, nuclear facilities are now better equipped scientifically to dispose of waste safely.
A massive financing gap persists in the climate transition. Opportunities exist across all asset classes for a shift in funding, particularly from brown to green energy. An obvious opportunity is the greening of the real estate sector, contributing 40 percent of global emissions. Certain commodities (metals) are needed to facilitate the energy transition, which would have inflation implications. The inflationary pressure would be exacerbated by cramming trillions of dollars of climate spending in the next two decades.
Environmental, social, and governance (ESG) gaps
The transition to net-zero will invariably produce winners and losers among workers, communities, and customers. Through initiatives such as the Just Energy Transition: A Framework for Company Action and Climate Action 100+, businesses, investors, regulators, and other stakeholders need to work together to address the socio-economic impacts of the transition from legacy sectors to renewables.
On environmental, social, and governance (ESG) issues more broadly, there is a gap in addressing such concerns in the global supply chain, including the role of women. Companies increasingly recognize the business case for empowering women as positive contributors to the global economy. Investors can help close this gap by asking the right questions of companies, demanding greater transparency, and using that data to drive business decisions.
Asia Spotlight: India
Societal shifts, changes in consumer behavior, and technological disruptions are giving rise to new investment themes in India. Domestic investors have become a significant source of liquidity in public listed markets. Private equity is generating excess returns by adding value, and some local PE firms are benefiting from the internationalization of the Indian exit market. The digital economy boosts the venture capital ecosystem, with opportunities in areas from financial services to gaming and education technology.