rethink sustainability
Three must-see charts this month
Forces of change are at play all around the world. Three of the biggest take the spotlight in the latest in our monthly series of must-see charts. First is AI, which is one factor helping support tech stocks: a 100% rise in the share prices of the ‘Magnificent Seven’ (Tesla, Meta, Amazon, Alphabet, Microsoft, Nvidia and Apple) in 2023 far outpaced the 26% increase seen across the S&P 500. Second is the reshaping of the world’s energy systems, with the steadily rising uptake of electric cars just one sign of a shift towards 70% economy-wide electrification by 2050. Third is climate change, which has played a part in cocoa bean shortages and record price spikes this year. Agriculture needs to change as a result; regenerative farming methods can help preserve crop yields for the long term.
1. Can tech stocks stay on top?
The threat of a big stock market correction has been a concern for investors for over a year. The S&P 500 is dominated by a handful of tech giants dubbed the ‘Magnificent Seven’. US equity market concentration is at levels last seen just before the tech bubble burst, and before that in the late 1920s before the Great Crash and Depression. Historically, such high concentration levels have tended to ‘mean revert’, with markets correcting to long-term averages. However, today’s stock market ‘winners’ enjoy potentially greater support than in the past: high profit margins and the transformative promise of AI, as well as strategic importance for the US amid intense geopolitical rivalry.
Our analysis of bull markets shows that they tend to be led by a concentrated group of stocks. In the current environment, it can be tempting for investors to focus narrowly on the winners. But for us, stock market concentration underscores the importance of active investment management – to try and identify the leaders; and of appropriate portfolio diversification – to increase the chances of including rising stars and to minimise risks should a reversal happen. We have over 200 investment professionals working across the globe to manage portfolios, generate innovative investment insights and employ them within a robust and nimble asset allocation framework. Missing out on winners on the way up can be costly, but those at the top don’t stay at the top forever.
Read also: Will tech’s stock market concentration last?
2. The road ahead for electric vehicles
Electric vehicle (EV) adoption has been heading in only one direction for much of this decade. Recent slowdowns in the US and Europe1 have been much talked about, but we see this as only a bump in the road. Our research2 forecasts that EVs will account for more than half of the world’s passenger vehicle sales by 2030, with China accelerating from its already leading position to over 80% EV adoption. Europe started this decade with higher EV penetration than China, but we forecast it ending the decade with 60% of the market having switched to electric.
The US appears to be on track to lag far behind. It recently relaxed its targets on cutting vehicle emissions3 and this is expected to slow the pace of EV purchases. We see EVs having a market share of 35% in the US by 2030, although its compound annual growth rate of 26% would beat that of China and the EU, as is typical of regions earlier in their adoption cycle. Plug-in hybrids are likely to sell fastest, as their combination of two fuel sources makes them better suited to first-time EV buyers. The rapid rollout of electric vehicles is part of why Lombard Odier believes electrification has reached a tipping point.
Read also: Towards an electric future: investors at the heart of a new industrial revolution
3. Why cocoa prices are climbing and how agroforestry can help
Cocoa prices have risen to record levels this year, climbing by over 120% in New York and London between January and April. The cause is plunging production in Ghana and Ivory Coast, which account for over half of global output.4 Unfavourable weather conditions amid changing climate patterns have been an issue, but output has also been hit hard by the spread of swollen shoot virus disease, according to the International Cocoa Organization.
Using agroforestry rather than monocultures to grow cocoa beans could be one way to tackle this; shade from other tress has been shown to help reduce the severity of swollen shoot virus disease.5 The ecosystems services that nature provides are critical, and at Lombard Odier, we believe nature is currently the world’s most underpriced asset class. We see corporate demand for regenerative commodities – those produced in harmony with nature – driving the biggest revaluation of this century.
Read also: Building a sustainable chocolate supply chain
1 Industry pain abounds as electric car demand hits slowdown | Reuters
2 holistiQ Research (2024)
3 US to soften tailpipe rules, slow EV transition through 2030 | Reuters; Relaxation of Emissions Limits | US EPA
4 Cocoa-Market-Report-March-2024.pdf (icco.org)
5 Agroforestry systems can mitigate the severity of cocoa swollen shoot virus disease - ScienceDirect
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This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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