Weekly: Quality Plays Offer Shelter Amid the Storm

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Chief Investment Office21 Jun 2022
  • Equities: Elevated oil prices and new regulations fuelling EV adoption
  • Credit: Quality credit offers shelter amid the storm, at record high yields
  • FX: USD could come off its high like in the 1994 Fed hike cycle but the process will be slow
  • Rates: 3M/10Y segment of US Treasury curve can provide signals of impending recession
  • Thematics: Hospitality S-REITs – Sun is shining again
Photo credit: iStock

Rising oil prices – Beyond geopolitical tension. After languishing at 20Y lows in the depth of the pandemic, oil prices have since surged to recent highs as the Russia-Ukraine crisis rages on. While the disruption in Russian oil exports plays a major role in driving prices higher, oil prices have, in fact, been rising steadily since the signing of the Paris accords in 2016. Indeed, from the start of the Paris agreement till the Russia-Ukraine conflict, Brent crude oil price has risen by 152%. On the other hand, the prevailing RussiaUkraine crisis has only pushed prices higher by 27%.

With most major economies pledging to reach carbon neutral by 2050, new regulations and policies are targeting the energy sector which produces about three quarter of global greenhouse gas emissions, while the US, EU, and China make up c.76%. Faced with onerous regulations from governments and shareholder pressure for more aggressive corporate climate targets, oil majors like BP and Shell have pledged to cut future oil production and invest in renewables instead.

Elevated oil price driving the shift to EVs. With energy prices staying elevated, the percentage of consumers surveyed planning to switch to Electric Vehicles (EVs) has doubled from 4% in 2019 to 11% in 2022. In another survey conducted, 25% of the respondents mentioned that they would change their vehicle if fuel price soar higher. Taken together, it is evident that consumers are starting to reassess their options and becoming more receptive towards EVs as costs continue to fall while charging infrastructure becomes more developed.

We have highlighted in CIO Vantage Point: Electric Vehicles (16 June 2021) our positive view on the industry and our view stays. According to the International Energy Agency, EV sales are forecasted to grow at a compound annual growth rate of 25% from 3m units in 2020 to 28m units by 2030. EVs are also projected to represent 22% of total car sales in 2030 from a mere 4% in 2020.

Figure 1: Rising price of oil

Source: IEA, DBS

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