QUARTERLY COMMENTARY

2023 | Q4

NatureAsAssetClass_CoverImageV2

Natural Capital

The Ultimate Asset Class

Welcome to the Anthropocene: where humans were once a part of nature, we are now a force of nature.

Published January 15, 2024

 

What is Natural Capital?

As defined by the Scottish Wildlife Trust, “Natural capital can be defined as the world’s stocks of natural assets which include geology [metal and minerals], soil, air, water, and all living things. It is from this natural capital that humans derive a wide range of services, often called ecosystem services, which make human life possible.”1

This idea is not new. A statement attributed to Chief Seattle in a speech given in 1854 exemplifies the value placed on the environment long before the current Environmental, Social, and Governance (“ESG”) movement: “Man did not weave the web of life, he is merely a strand in it. Whatever he does to the web, he does to himself.”2

When our earliest ancestors walked bipedally, our limited population and resource use did not pose a threat to the planet’s ecosystem. Fast forward two million years and eight billion people later, homo sapiens have transformed the planet, stressing and exhausting the very ecosystem that allowed us to initially flourish. CO2 concentration, biodiversity loss, ocean acidification, deforestation, and pollution are just some of the fundamental planetary boundaries3 that we have breached or are in the process of breaching, threatening nature and human existence along with it. We do not exist in a vacuum and depend on our natural environment to survive. The increasing severity of the climate crisis coupled with the lack of mitigating action suggests either a lack of awareness or perhaps that humans consider themselves somehow separate from the natural order and immune to the effects of their actions. We are not. 

 

NaturalCapital_CircleChart

75
%

of the Earth’s land surface has been significantly altered by human actions, including 85% of wetland areas.

66
%

of ocean area is impacted by human activities, including from fisheries and pollution.

~
40
%

of the global population is adversely affected by land degradation.

Why is Natural Capital Under Threat?

Consumption, production, and growth are the primary reasons. Most goods and services are not sustainably produced or rendered. Carbon emissions, water usage, chemical usage, natural resource usage, biodiversity loss, and waste management/recycling are nowhere near the levels needed for sustainable production and consumption. It has been estimated that humanity is using the resources of 1.6 Earths, while developed nations are on track to use that of 4 Earths4 (the developed nations of North America and Europe account for less than 1/8 of the Earth’s population). If the remainder of the planet’s population in emerging economies achieve the standard of living of developed economies without sustainable production and consumption, the results would be catastrophic. Fight Club’s Tyler Durden’s critique of consumerism articulates the issue rather bluntly, “... advertising has us chasing cars and clothes, working jobs we hate, so we can buy sh*t we don’t need...” If the world is to continue to be habitable and ultimately investable, humanity needs to assign a significantly higher value to ecosystem services relative to consumer goods.

NaturalCapital_DollarSign

 

US:
thecontrol-columnchart-gms-equity-market-performance
The recession forecasted by economists in late 2022 failed to materialize in 2023, as the US economy, carried by a resilient consumer sector, overcame a remarkable number of macroeconomic headwinds.  The US ended the year in the remarkable position of having sustained economic growth, downward trends in inflation, higher interest rates, and steady unemployment. Buoyed by expectations that interest-rate cuts may be imminent, markets ended the year just short of the record highs set in early 2022.  Meanwhile, optimism over economic factors and labor supported gains in consumer confidence across all groups.  Forward-looking measures of business activity were more middling, with the ISM Services Purchasing Managers' Index (PMI) remaining in expansionary territory but down from earlier in the year, and manufacturing PMIs still in contractionary territory but showing signs of improvement with an uptick in production and employment. Following a difficult internal struggle to elect a new speaker of the house, the US House of Representatives passed another short-term spending bill averting a government shutdown; this was quickly approved by the Senate and signed into law. The stopgap spending bill extends funding for military construction, veterans’ benefits, transportation, housing, urban development, agriculture, the Food and Drug Administration, and energy and water programs through January 19, while remaining silent on contentious spending cuts and border-security measures sought by some Republicans.
 
 thecontrol-columnchart-gms-credit-market-performance
The Federal Open Market Committee (FOMC) met in November and December.  At both meetings, it agreed to maintain the federal-funds target rate corridor at 5.25-5.50%.  At the December meeting, the Summary of Economic Projections (SEP) was updated: the most noteworthy change was that Federal Reserve (Fed) officials decreased the median projection for the federal-funds target rate at the end of 2024 from 5.1% to 4.6%.  The FOMC made no changes to its balance-sheet reduction plans ($95 billion per month), but the minutes of the December meeting indicated that the FOMC is soon likely to “begin to discuss the technical factors that would guide a decision to slow the pace of (balance-sheet) runoff”; the Fed’s balance sheet fell from $8.1 trillion to $7.8 trillion to close out 2023.
 
Among the sectors of the economy most sensitive to rates, the spotlight remains on commercial real estate, as higher interest rates continue to present challenges for commercial real-estate debt reaching maturity.  Across all sectors, data-provider Trepp estimates that a total of $550 billion of commercial real-estate loans will come due in 2024, followed by $530 billion in 2025.  The extent to which lenders will continue to work with borrowers remains in focus, as borrowers faced with rolling debt face higher debt-service costs upon refinancing.  The office sector continues to draw attention, as office delinquencies remain in the headlines.  According to Trepp, the CMBS office delinquency rate surged from 1.58% in December 2022 to 5.82% in December 2023.  Refinancing office properties continues to prove markedly challenging as lenders continue to exercise caution in this sector. 
 
Meanwhile, the residential housing market has maintained its strength despite higher interest rates.  Driven by a scarcity of inventory, the S&P CoreLogic Case-Shiller Housing Price Index achieved a record high in October 2023.  In December 2023, Fannie Mae’s Home Purchase Sentiment Index reached its highest level since April 2022, driven by softening interest-rate expectations.
 
EUROPE:

According to data from Eurostat, economic growth across the Eurozone declined (-0.1% quarter over quarter) in the third quarter, as the region faced headwinds from inflation, rising interest rates, and tightened fiscal policies.  Among the larger economies, France, Spain, and Belgium experienced growth while Germany contracted from persistent inflation, high energy prices, and weak foreign demand.  Forward-looking economic indicators weakened for the region; the HCOB's final Composite PMI came in at 47.0.  Manufacturing activity continued to contract and demand for services declined as consumers pulled back on spending.  However, there was some signs of improvement in the manufacturing sub-indices tied to new orders and purchasing activity.  Additionally, Eurozone unemployment remained at a record low of 6.4%; employment increased in both services and construction, offsetting weakness in the manufacturing sector. Overall, job vacancy rates have come down from their peaks but remain relatively high by historical standards.

After declining for much of the past year, the rate of inflation across the Eurozone rose to 2.9% in December. The uptick in inflation was primarily due to technical factors, as the impact of base effects and the timing of government subsidies overwhelmed slower price growth for other goods. (Note, core inflation, which doesn’t include energy, food, alcohol, and tobacco prices, ended the year at 3.4%, down from its 2022 peak.) In its last meeting of the year, the European Central Bank (ECB) reaffirmed its benchmark interest-rate policy and announced plans to phase out the last of its COVID-19 era bond-buying programs. The ECB also changed its language around inflation—from describing it as “expected to remain too high for too long,” to saying that it will “decline gradually over the course of next year.”  In her statements following the meeting, ECB President Christine Lagarde assumed a more measured tone and argued against calls for imminent cuts to interest rates, stating that it’s too early to “lower our guard” and that the bank is “data dependent, not time dependent.”

 
CHINA:

China’s economic data in Q4 2023 presented a mixed picture.  Industrial output experienced a significant rebound, growing by 4.6% (year on year) in October and an impressive 6.6% in November.  This growth—the fastest pace since February 2022—underscored the sector’s recovery and contribution to the economy.  On the other hand, already affected by a downturn in the property sector, reduced land sale revenue, and a slowdown in export manufacturing, consumer spending was further impacted by household deleveraging.  Credit cards and mortgage loans saw a decline, indicating caution among consumers.  Overall spending remained below pre-COVID levels, suggesting a slow and gradual path towards recovery.

In response to the property market's challenges, the Chinese government rolled out several initiatives, including reducing down-payment thresholds and mortgage interest rates, and easing restrictions on second-home purchases.  Such measures were designed to ease financial pressure on homebuyers and stimulate market activity.  Another notable development was the provision of low-cost financing, amounting to CN¥1 trillion, for urban village renovations and affordable housing projects.  This significant investment is intended to support the real-estate sector, a critical component of China's economy.  Early indications suggest a positive reception from homebuyers, particularly in major cities, signaling a potential upturn in the real-estate market.

The November 2023 meeting between Chinese President Xi Jinping and US President Joe Biden was a landmark event.  Key topics included curbing illicit fentanyl production and military cooperation, alongside a dialogue on artificial intelligence emphasizing the importance of managing risks and safety issues.  Described as ‘constructive and productive,’ the meeting underlined both leaders' desire for peaceful coexistence and the necessity of avoiding miscommunication.  While it did not resolve all critical geopolitical issues, the meeting was viewed as a positive step towards stabilizing US-China relations.  The meeting's conciliatory tone and focus on cooperation in specific areas signaled a potential easing of the strained relations between the two nations.

 

JAPAN:

Japan’s economy contracted at an annualized growth rate of 2.9% in the third quarter, as a decline in private consumption, which makes up more than half the economy, weighed on economic growth. Although nominal salaries rose year over year, higher prices and inflation wiped out the wage growth in real terms, negatively impacting consumers' purchasing power. In November, Prime Minister Fumio Kishida’s administration announced a new economic stimulus package (approximately $113 billion), aimed at helping households with rising costs. The packages included cuts to income and residential taxes, direct benefits to low earners, extended fuel and electricity subsidies, and funds to support the semiconductor sector.

Japanese business sentiment continued to improve during the quarter as measured by the Tankan survey.  Results were especially strong among large manufactures; automakers' moods brightened as the industry benefited from a weak yen and an easing of supply constraints.  Non-manufacturing sentiment was positive as well, improving for the seventh straight quarter; recovering inbound tourism gave a significant boost to non-manufacturers.  Year to date through November, foreign visitors to Japan topped 20 million for the first time since 2019.

December data showed consumer core inflation trending downwards.  Energy and fuel prices declined due to a combination of government subsidies and base effects.  However, services inflation persists, driven primarily by demand for accommodations and food.  The Bank of Japan (BOJ) ended the year with its low-interest polices in place.  In his statement following the BOJ’s December meeting, Governor Kazuo Ueda cooled speculation about future rate hikes, stressing that more data is needed to confirm a positive wage-inflation cycle and the uncertainty surrounding inflation’s sustainability.

 

COMMODITIES:

The S&P Goldman Sachs Commodity Index (SPGSCI) ended the quarter down with a total return of 10.73%, driven mainly by price gains for industrial metals and precious metals failing to offset weaker prices for energy, agriculture, and livestock.  Contrary to Q3 2023, energy (16.74%; S&P GSCI Energy—SPGSEN) underperformed all other SPGSCI sub-index constituents, with sharply lower prices for crude oil, natural gas, and gas oil.  These detractors to performance occurred despite output cuts from OPEC+. Agriculture (0.73%; S&P GSCI Agriculture—SPGSAG) ended the quarter with higher prices for soybeans, coffee, wheat, and cocoa failing to offset considerable price declines for sugar, corn, cotton, and Kansas wheat.  The precious metals segment outperformed all other commodity constituents during the quarter (10.99%; S&P GSCI Precious Metals—SPGSPM), as both gold and silver achieved robust price gains during Q4 2023.  The industrial metals segment realized a modest gain during the quarter (0.82%; S&P GSCI Industrial Metals—SPGSIM), as prices for aluminum, copper, and zinc offset weaker prices for nickel and lead.   

Following a relatively quiet period in Q2/Q3 2023, the digital-assets market performed well during Q4.  The premier digital token, Bitcoin, was up 57% in Q4 2023, while the second most-popular digital token, Ethereum (ETH), was up 37%, bringing the yearly returns to 155% and 91%, respectively.  Speculation over the approval by the Securities and Exchange Commission (SEC) of a US spot Bitcoin exchange-traded fund (ETF) was a significant driver of price movements during the period; this was subsequently approved in January 2024.

 

UnderConstruction_shutterstock_415850113 [Converted]
EUROPE

According to data from Eurostat, economic growth across the Eurozone declined (-0.1% quarter over quarter) in the third quarter, as the region faced headwinds from inflation, rising interest rates, and tightened fiscal policies.  Among the larger economies, France, Spain, and Belgium experienced growth while Germany contracted from persistent inflation, high energy prices, and weak foreign demand.  Forward-looking economic indicators weakened for the region; the HCOB's final Composite PMI came in at 47.0.  Manufacturing activity continued to contract and demand for services declined as consumers pulled back on spending.  However, there was some signs of improvement in the manufacturing sub-indices tied to new orders and purchasing activity.  Additionally, Eurozone unemployment remained at a record low of 6.4%; employment increased in both services and construction, offsetting weakness in the manufacturing sector. Overall, job vacancy rates have come down from their peaks but remain relatively high by historical standards.

After declining for much of the past year, the rate of inflation across the Eurozone rose to 2.9% in December. The uptick in inflation was primarily due to technical factors, as the impact of base effects and the timing of government subsidies overwhelmed slower price growth for other goods. (Note, core inflation, which doesn’t include energy, food, alcohol, and tobacco prices, ended the year at 3.4%, down from its 2022 peak.) In its last meeting of the year, the European Central Bank (ECB) reaffirmed its benchmark interest-rate policy and announced plans to phase out the last of its COVID-19 era bond-buying programs. The ECB also changed its language around inflation—from describing it as “expected to remain too high for too long,” to saying that it will “decline gradually over the course of next year.”  In her statements following the meeting, ECB President Christine Lagarde assumed a more measured tone and argued against calls for imminent cuts to interest rates, stating that it’s too early to “lower our guard” and that the bank is “data dependent, not time dependent.”

UnderConstruction_shutterstock_415850113 [Converted]
CHINA

China’s economic data in Q4 2023 presented a mixed picture.  Industrial output experienced a significant rebound, growing by 4.6% (year on year) in October and an impressive 6.6% in November.  This growth—the fastest pace since February 2022—underscored the sector’s recovery and contribution to the economy.  On the other hand, already affected by a downturn in the property sector, reduced land sale revenue, and a slowdown in export manufacturing, consumer spending was further impacted by household deleveraging.  Credit cards and mortgage loans saw a decline, indicating caution among consumers.  Overall spending remained below pre-COVID levels, suggesting a slow and gradual path towards recovery.

In response to the property market's challenges, the Chinese government rolled out several initiatives, including reducing down-payment thresholds and mortgage interest rates, and easing restrictions on second-home purchases.  Such measures were designed to ease financial pressure on homebuyers and stimulate market activity.  Another notable development was the provision of low-cost financing, amounting to CN¥1 trillion, for urban village renovations and affordable housing projects.  This significant investment is intended to support the real-estate sector, a critical component of China's economy.  Early indications suggest a positive reception from homebuyers, particularly in major cities, signaling a potential upturn in the real-estate market.

The November 2023 meeting between Chinese President Xi Jinping and US President Joe Biden was a landmark event.  Key topics included curbing illicit fentanyl production and military cooperation, alongside a dialogue on artificial intelligence emphasizing the importance of managing risks and safety issues.  Described as ‘constructive and productive,’ the meeting underlined both leaders' desire for peaceful coexistence and the necessity of avoiding miscommunication.  While it did not resolve all critical geopolitical issues, the meeting was viewed as a positive step towards stabilizing US-China relations.  The meeting's conciliatory tone and focus on cooperation in specific areas signaled a potential easing of the strained relations between the two nations.

UnderConstruction_shutterstock_415850113 [Converted]
JAPAN

Japan’s economy contracted at an annualized growth rate of 2.9% in the third quarter, as a decline in private consumption, which makes up more than half the economy, weighed on economic growth. Although nominal salaries rose year over year, higher prices and inflation wiped out the wage growth in real terms, negatively impacting consumers' purchasing power. In November, Prime Minister Fumio Kishida’s administration announced a new economic stimulus package (approximately $113 billion), aimed at helping households with rising costs. The packages included cuts to income and residential taxes, direct benefits to low earners, extended fuel and electricity subsidies, and funds to support the semiconductor sector.

Japanese business sentiment continued to improve during the quarter as measured by the Tankan survey.  Results were especially strong among large manufactures; automakers' moods brightened as the industry benefited from a weak yen and an easing of supply constraints.  Non-manufacturing sentiment was positive as well, improving for the seventh straight quarter; recovering inbound tourism gave a significant boost to non-manufacturers.  Year to date through November, foreign visitors to Japan topped 20 million for the first time since 2019.

December data showed consumer core inflation trending downwards.  Energy and fuel prices declined due to a combination of government subsidies and base effects.  However, services inflation persists, driven primarily by demand for accommodations and food.  The Bank of Japan (BOJ) ended the year with its low-interest polices in place.  In his statement following the BOJ’s December meeting, Governor Kazuo Ueda cooled speculation about future rate hikes, stressing that more data is needed to confirm a positive wage-inflation cycle and the uncertainty surrounding inflation’s sustainability.

UnderConstruction_shutterstock_415850113 [Converted]
COMMODITIES

The S&P Goldman Sachs Commodity Index (SPGSCI) ended the quarter down with a total return of 10.73%, driven mainly by price gains for industrial metals and precious metals failing to offset weaker prices for energy, agriculture, and livestock.  Contrary to Q3 2023, energy (16.74%; S&P GSCI Energy—SPGSEN) underperformed all other SPGSCI sub-index constituents, with sharply lower prices for crude oil, natural gas, and gas oil.  These detractors to performance occurred despite output cuts from OPEC+. Agriculture (0.73%; S&P GSCI Agriculture—SPGSAG) ended the quarter with higher prices for soybeans, coffee, wheat, and cocoa failing to offset considerable price declines for sugar, corn, cotton, and Kansas wheat.  The precious metals segment outperformed all other commodity constituents during the quarter (10.99%; S&P GSCI Precious Metals—SPGSPM), as both gold and silver achieved robust price gains during Q4 2023.  The industrial metals segment realized a modest gain during the quarter (0.82%; S&P GSCI Industrial Metals—SPGSIM), as prices for aluminum, copper, and zinc offset weaker prices for nickel and lead.   

Following a relatively quiet period in Q2/Q3 2023, the digital-assets market performed well during Q4.  The premier digital token, Bitcoin, was up 57% in Q4 2023, while the second most-popular digital token, Ethereum (ETH), was up 37%, bringing the yearly returns to 155% and 91%, respectively.  Speculation over the approval by the Securities and Exchange Commission (SEC) of a US spot Bitcoin exchange-traded fund (ETF) was a significant driver of price movements during the period; this was subsequently approved in January 2024.

CPI
CPI

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3% in December, following a 0.1% increase in November.  The all-items index rose 3.4% before seasonal adjustment over the previous twelve months.  Over the past twelve months, the major contributors include transportation services, up 9.7% (driven by motor-vehicle insurance, up 20.3%), tobacco and smoking products, up 7.8%, and shelter, up 6.2%.

GDP
GDP

During Q3 2023, real GDP rose at an annual rate of 4.9% followed by a 2.1% increase in Q2 2023.  The increase was driven by consumer spending and inventory investment; imports also increased. Overall, 14 of 22 industry groups contributed to real GDP growth in the third quarter; the value added from private goods-producing industries was particularly strong at 10.2%.

Retail Sales
Retail Sales

Total retail and food sales increased 0.3% and 4.1% month-to-date and year-to-date ending November 2023, respectively.  Total sales from September through November 2023 were up 3.4% compared to the same period one year ago; the percentage change over the same period was up 0.4%.  Significant contributors include non-store retailers and food services and drinking places. 

Unemployment
Unemployment
A total of 494,000 jobs were created in the fourth quarter of 2023, which did not outpace the previous quarter’s gains of 710,000.  The US economy added 216,000 jobs in November, which is below the twelve-month average monthly gain of 225,000. December’s notable job gains occurred within the following industries: government (+52,000), health care (+38,000), social assistance (+21,000), and construction (+17,000).
 
The unemployment rate remains unchanged from the previous quarter’s average at 3.7%.  The number of unemployed persons (6.3 million) experienced minimal net movement as well.  The labor force participation rate decreased by 0.3% in December (62.5%).
VIX
VIX

Market volatility, as measured by the VIX Index, had an average close in Q4 2023 at 15.29, trending up from Q3 (15.01) and down from Q2 (16.48).  The index has dropped below its five-year average of 20.58, reflecting positive investor sentiment and a high level of comfort with the overall direction of the economy.

GMS Table Templates
  Q4 2023 YTD   Q4 2023
YTD
Title
0%
0%
Title
0%
0%
Title
0%
0%
Title
0%
0%
Title
0%
0%
Title
0%
0%

 

  Q4 2023 YTD   Q4 2023
YTD
Large Cap Value
0%
0%
Large Cap Growth
0%
0%
Mid Cap Value
0%
0%
Mid Cap Growth
0%
0%
Small Cap Value
0%
0%
Small Cap Growth
0%
0%

 

  U.S. Large Cap U.S. Mid Cap U.S. Small Cap
  Q4 2023 YTD Q4 2023 YTD  Q4 2023 
YTD
Title
0%
0%
0%
0%
0%
0%
Title
0%
0%
0%
0%
0%
0%
Title
0%
0%
0%
0%
0%
0%
Title
0%
0%
0%
0%
0%
0%
Title
0%
0%
0%
0%
0%
0%
Title
0%
0%
0%
0%
0%
0%
Title
0%
0%
0%
0%
0%
0%
Title
0%
0%
0%
0%
0%
0%
Title
0%
0%
0%
0%
0%
0%
Title
0%
0%
0%
0%
0%
0%
Title
0%
0%
0%
0%
0%
0%
Title
0%
0%
0%
0%
0%
0%
Title
0%
0%
0%
0%
0%
0%

 

  Header Header
Header Q4 2023 YTD Q4 2023 YTD 
Title1
0%
0%
0%
0%
Title2
0%
0%
0%
0%
Title3
0%
0%
0%
0%
Title4
0%
0%
0%
0%
Title5
0%
0%
0%
0%

 

  Header Header
Header Q4 2023 Q4 2023
Title1
0%
0%
Title2
0%
0%
Title3
0%
0%
Title4
0%
0%
Title5
0%
0%

 

Country Best Performing Style
Title1
Value
Title2
Value
Title3
Value
Title4
Value
Title5
Value
Title6
Value
Title7
Value
Title8
Value
Title9
Value
Title10
Value
Title11
Value
Title12
Value
Title13
Value
Returns by style
  Q4 2023 YTD   Q4 2023
YTD
Large Cap Value
0%
0%
Large Cap Value
0%
0%
Mid Cap Value
0%
0%
Mid Cap Value
0%
0%
Small Cap Value
0%
0%
Small Cap Value
0%
0%

 

  Q4 2023 YTD   Q4 2023
YTD
Large Cap Value
0%
0%
Large Cap Growth
0%
0%
Mid Cap Value
0%
0%
Mid Cap Growth
0%
0%
Small Cap Value
0%
0%
Small Cap Growth
0%
0%

 

SECTOR Returns BY CAPITALIZATION
  U.S. Large Cap U.S. Mid Cap U.S. Small Cap
  Q4 2023 YTD Q4 2023 YTD  Q4 2023 
YTD
Basic Materials
0%
0%
0%
0%
0%
0%
Consumer Goods
0%
0%
0%
0%
0%
0%
Consumer Services
0%
0%
0%
0%
0%
0%
Financials
0%
0%
0%
0%
0%
0%
Health Care
0%
0%
0%
0%
0%
0%
Industrials
0%
0%
0%
0%
0%
0%
Oil & Gas
0%
0%
0%
0%
0%
0%
Real Estate
0%
0%
0%
0%
0%
0%
Technology
0%
0%
0%
0%
0%
0%
Telecommunications
0%
0%
0%
0%
0%
0%
Utilities
0%
0%
0%
0%
0%
0%
Source: Russell Investments & Industry Classification Benchmark
Large Cap: Russell Top 200 Index | Mid Cap: Russell Mid Cap Index | Small Cap: Russell 2000 Index

 

us valuations
  Quarter Ending 12/31/2023 Quarter Ending 9/30/2023
US Large Cap Equity Value Growth Value Growth 
Price/Earnings Ratio
0%
0%
0%
0%
IBES LT Growth (%)
0%
0%
0%
0%
1 Year Forward P/E Ratio
0%
0%
0%
0%
Negative Earnings (%)
0%
0%
0%
0%

 

  Quarter Ending 12/31/2023 Quarter Ending 9/30/2023
US Mid Cap Equity Value Growth Value Growth 
Price/Earnings Ratio
0%
0%
0%
0%
IBES LT Growth (%)
0%
0%
0%
0%
1 Year Forward P/E Ratio
0%
0%
0%
0%
Negative Earnings (%)
0%
0%
0%
0%

 

  Quarter Ending 12/31/2023 Quarter Ending 9/30/2023
US Small Cap Equity Value Growth Value Growth 
Price/Earnings Ratio
0%
0%
0%
0%
IBES LT Growth (%)
0%
0%
0%
0%
1 Year Forward P/E Ratio
0%
0%
0%
0%
Negative Earnings (%)
0%
0%
0%
0%

 

international valuations
  Quarter Ending 12/31/2023 Quarter Ending 9/30/2023
International Equity Value Growth Value Growth 
Price/Earnings Ratio
0%
0%
0%
0%
IBES LT Growth (%)
0%
0%
0%
0%
1 Year Forward P/E Ratio
0%
0%
0%
0%
Negative Earnings (%)
0%
0%
0%
0%

 

  Quarter Ending 12/31/2023 Quarter Ending 9/30/2023
Emerging Markets Equity Value Growth Value Growth 
Price/Earnings Ratio
0%
0%
0%
0%
IBES LT Growth (%)
0%
0%
0%
0%
1 Year Forward P/E Ratio
0%
0%
0%
0%
Negative Earnings (%)
0%
0%
0%
0%
Source: Russell Investments Total Equity Profile

 

non-us developed / emerging cap & style
  Q4 2023 YTD   Q4 2023
YTD
Large Cap Value
0%
0%
Large Cap Value
0%
0%
Mid Cap Value
0%
0%
Mid Cap Value
0%
0%
Small Cap Value
0%
0%
Small Cap Value
0%
0%

 

  Header Header
Header Q4 2023 Q4 2023
Title1
0%
0%
Title2
0%
0%
Title3
0%
0%
Title4
0%
0%
Title5
0%
0%

 

Country Best Performing Style
Australia
Value
Brazil
Value
Canada
Value
China
Value
France
Value
Germany
Value
Hong Kong
Value
Indonesia
Value
Italy
Value
Japan
Value
Mexico
Value
Singapore
Value
Spain
Value
Thailand
Value

 

To Grow or Not to Grow?

With current consumption and production methods (extraction to landfill, simply put), increased growth correlates to increased stress on ecosystem services, pushing against or past safe, sustainable levels in relation to planetary boundaries. The current consensus view of a nation’s economic health is measured by its growth of gross domestic product (GDP). GDP is appealing due to its simplicity, but it is this very simplicity that masks critical issues concerning how that growth is achieved. For example, if a country’s GDP (essentially, income) is high/increasing, yet the cost of this increase is the degradation of that same country’s natural environment and resources, that country’s future prosperity and ability to generate wealth is at risk, a danger hidden by the relatively myopic view of GDP. A key tenet of neo-classical economics, GDP disregards biophysical dynamics5, such that the planet’s physical limitations are not considered and growth is considered de-facto infinite without environmental consequences. The following image demonstrates the neo-classical economic view versus the ecological economic view: the neo-classical view and the laws of nature are seemingly at odds.

The “future prosperity” idea, while easy to understand on an intellectual level, is the most difficult to truly grasp with urgency because the impact in the near term can appear non-existent to negligible. Among other reasons, short-termism, careerist political aspirations, and greed (coupled with relatively short human lifespans) result in elected officials and shorter-sighted, solely profit-focused companies doing very little to change the status quo. The UN Climate Change Conference of Parties has held 28 annual sessions thus far, but little has been achieved; the amount of atmospheric carbon dioxide has steadily increased over that timeframe.7 This proverbial kicking of the can down the road will only worsen the situation; the expected negative climate impacts of 2100 may arrive much sooner than anticipated due to accelerating feedback loops and the un-grasped complexities of the Earth’s climate system, which are not fully accounted for across climate models.

NaturalCapital_EcologicalEconomics

 

How Should We Value Natural Capital?

According to the World Economic Forum, $44 trillion in GDP, which is greater than half the world’s GDP, is at risk due to our reliance (reflecting high or moderate exposure) on nature and ecosystem services.8 Ecosystem services provide everything needed for life, yet the private and public sectors typically do little to incorporate their intrinsic value into their decision making; however, market-based and non-market-based methods used to approximate the monetary value of such services do exist. A market-based approach would include a way to assess direct market prices. For example, the value of food dependent on honeybees and other pollinators is estimated to be as much as $577 billion annually,9 which could be considered a direct market price. Other market-based valuation methods include “Net Factor Income” and “Production Function Methods”; for these measures, the ecosystem is a key input in determining the production parameters of certain marketed goods, such as a habitat that sustains a fishery.

The Taskforce on Nature Financial Disclosure (TNFD), the Taskforce on Climate Financial Disclosure (TCFD), and Science Based Targets for Nature (SBTN) are just a few of the initiatives that were created to provide guidance and frameworks to help investors better understand the risks and opportunities of nature-related issues, with the overarching goal of directing capital to more nature-positive outcomes, or at least away from nature-negative outcomes. While the initiatives align in fostering advantageous natural outcomes, they focus on different issues:

  • The TCFD has developed recommended financial disclosures to better inform investors, shareholders, and society about a company’s climate- related financial risks.
  • The TNFD was modeled after the TCFD, using the same structure and language but with a focus on nature-related risk management and disclosures. Its framework considers businesses’ impact on environmental assets and ecosystem services to better inform companies of relevant issues and opportunities.
  • The SBTN helps businesses set transparent science-based targets to ensure they are doing enough to minimize their impact and dependencies on nature, with the end goal of transforming their business models to become more sustainable and competitive.

Other methodologies and initiatives also exist and their numbers are growing; while all have their benefits and deficiencies, the primary objective of each is to support policymakers and companies to provide better tools, resources, and governance in managing crucial nature-based systems able to support all life on Earth.

The Path Forward?

No one solution can fix all of humanity’s detrimental natural impact. Green growth, degrowth, technological innovation, natural restoration, a circular economy, and a different consumption mindset (once again, queue up Tyler Durden) are all forms of decarbonization that can be utilized to restore the natural balance and reverse some of the damage inflicted on Earth’s planetary boundaries.

Green growth or a transition to renewables is needed to reduce and eventually eliminate our reliance on fossil fuels; however, this comes with significantly greater mineral extraction, which has its own adverse environmental effects. Additionally, a significant amount of raw materials are needed to support weaning us from our fossil-fuel addiction given the current state of solar, wind, and battery technologies. This is not to say that we shouldn’t continue to develop and deploy such technologies, but such efforts should be integrated alongside nuclear and geothermal options, and importantly, all of this should be done alongside the continued restoration of natural ecosystems. Furthermore, technology in this area is changing at a rapid pace, such that nuclear fusion, more efficient solar, green hydrogen technologies, and vastly improved batteries are within reach to help transform the energy sector.

Notwithstanding, a key question remains: Can humans, especially in the developed world, continue to live like we do now? As mentioned earlier, GDP is a flawed indicator; it does not consider the negative externalities of our current methods of production. Our natural resources are not infinite; therefore, neither is GDP growth. While the idea of “degrowth” (i.e., living within the boundaries provided by our sole Earth) may seem unpalatable and at odds with the prevalent “more is more” mindset (i.e., more money, more profits, bigger this, supersize that, more stuff), it may be fundamentally necessary to remain sustainably within our planetary boundaries to maintain civilization in large part as we know it. Degrowth’s impact as a policy on markets and asset prices is a major unknown. However, considering the very real possibility that a continued disregard of natural limits would lead to a more hostile and less habitable planet with a far higher probability of severe societal and market breakdowns, perhaps it is time to explore the benefits of degrowth. One possible criticism is that a de-growth model may weaken a nation’s global competitiveness, as other countries that continue to pursue traditional growth models may outpace them economically. A new approach would necessarily require a fostering of admittedly hitherto unprecedented international cooperation, emphasizing the importance of redistributing wealth more equitably within and between nations to promote a more balanced global economy. The inherent benefits of sustainability, such as reduced environmental degradation and enhanced social well-being, would need to be understood as fundamentally of greater importance than existing conventional measures of economic competitiveness. How this would look in practice is unknown, but much of this unknowability relates to a lack of exploration of its possibility.

Climate science is a difficult-to-navigate field and better education needs to be provided to investors on the topic. While carbon dioxide is the climate crisis’s main culprit, methane10 (measured as 25x more potent than CO2 over a 20-year period11) and other gases/pollutants can also cause serious harm in shorter amounts of time. Ultimately, understanding the facts and scientific processes underlying them while increasing disclosure, engagement, and adherence to common goals are the key ingredients for positive change.

To begin this journey, we must know where to start, what to look for, and set goals that are measurable to facilitate actionable accountability. The TNFD initiative, for example, provides such a framework. The list below is not complete but highlights some of the cornerstones.12

  • Deepen our collective understanding of the fundamentals of nature: The various components of nature (e.g., ecosystem services, biomes, and environmental assets), biodiversity, and the conceptual basis of nature-related dependencies and their related risks and opportunities are critical to understand so that better choices can be made.

  • Make the business case for nature: The long-term viability of any business model should be grounded in its relationship with nature. Therefore, determining the economic and financial value of nature—the risks and opportunities—is crucial to motivate relevant parties.

  • Encourage collective progress through engagement: Value chains are interconnected such that the engagement of relative stakeholders would increase pressure throughout the broader chain to encourage nature-positive outcomes and more transparent disclosure of nature-related issues.

Systemic overhauls are always difficult to achieve, but in this case they are necessary to ensure a planet that continues to be habitable and investable. The transition to a more sustainable and nature-positive economy will present investors with a vast range of risks and opportunities. The meeting of inertia (the tendency to do nothing or to remain unchanged) and the second law of thermodynamics (entropy or increased disorder in the system) captures the current impasse between humanity and nature, respectively. However, our future will depend on resisting these powerful forces to bring about much needed change and restoration. The climate crisis and natural capital are inextricably linked—restoring natural capital improves the climate’s and humanity’s future potential, while destroying such capital (i.e., continuing business as usual) will only worsen and narrow the future’s possibilities.

There’s no resetting the clock on too late. At Crewcial, we’re committed to helping our clients navigate these difficult currents while creating a future that subsequent generations will want to inherit. For the many non-profits organizations with a mandate to operate in perpetuity that rely on scaling local resources and community solidarity, the concerns above are not abstract.

Core to our investment process is an assessment of risk related to sustainability based on relevant sector-specific factors to account for the longer-term financial feasibility and operational viability of investment options from an environmental perspective, regardless of a manager’s underlying ESG objectives. This allows all clients to transparently calibrate in which ways such concerns affect their shareholders, missions, and overall portfolio orientation, and to mitigate or reverse the negative impact of environmental degradation on affected communities based on subsequent investment decisions.

Our efforts also extend to generally leveraging our assets under management to encourage managers to think beyond financial risk and reward—to also consider how portfolio companies contribute to positive and negative externalities. In public markets, we want to understand how managers are encouraging portfolio companies to be more sustainable and aligning their objectives with meaningful environmental goals. In private markets, we are examining how disruptive innovations can either limit or remove carbon dioxide from the atmosphere and restore ecosystems. We will also continue to provide education to clients who require or request it as we scale our own knowledge and expertise. In an ever-evolving space, continual learning at the vanguard is key.

This is a challenging subject, and we acknowledge that many perspectives compete on the specifics. However, at the end of the day, a healthier world is a world better able to support biodiversity, and therefore broader human interests indefinitely. Being a good steward of capital means being a responsible steward of capital. In line with our dedication to advancing human dignity and inclusion, championing a sustainable environment for all provides a foundational element underpinning our philosophy: We all live here; let’s build a brighter way forward together.

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test-4-gms
GDP

During Q3 2023, real GDP rose at an annual rate of 4.9% followed by a 2.1% increase in Q2 2023.  The increase was driven by consumer spending and inventory investment; imports also increased. Overall, 14 of 22 industry groups contributed to real GDP growth in the third quarter; the value added from private goods-producing industries was particularly strong at 10.2%.

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Retail Sales

Total retail and food sales increased 0.3% and 4.1% month-to-date and year-to-date ending November 2023, respectively.  Total sales from September through November 2023 were up 3.4% compared to the same period one year ago; the percentage change over the same period was up 0.4%.  Significant contributors include non-store retailers and food services and drinking places. 

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Unemployment

A total of 494,000 jobs were created in the fourth quarter of 2023, which did not outpace the previous quarter’s gains of 710,000.  The US economy added 216,000 jobs in November, which is below the twelve-month average monthly gain of 225,000.  December’s notable job gains occurred within the following industries: government (+52,000), health care (+38,000), social assistance (+21,000), and construction (+17,000).

The unemployment rate remains unchanged from the previous quarter’s average at 3.7%.  The number of unemployed persons (6.3 million) experienced minimal net movement as well.  The labor force participation rate decreased by 0.3% in December (62.5%).

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VIX

During Q2 2023, real GDP rose at an annual rate of 2.1%, following a 2.2% increase in Q1. The increase was driven by state and local government spending, non-residential fixed investment, and consumer spending, partially offset by a decrease in exports; imports also decreased. Relative to Q1, the second quarter experienced a slowdown in consumer and federal government spending alongside the decline in exports, which drove the Q2 deceleration of real GDP.

 
MID CAP VALUE VS. GROWTH
ROLLING 1-YEAR PERFORMANCE VS. RUSSELL 2000
12/31/2013 TO 12/31/2023

LARGE CAP VALUE VS. GROWTH
 
ROLLING 1-YEAR PERFORMANCE VS. RUSSELL 2000
 
12/31/2013 TO 12/31/2023
 
 
Charts
Notes & REFERENCES
  1. Scottish Wildlife Trust, “50 for the Future—Natural Capital.” 50 for the Future - Natural Capital | Scottish Wildlife Trust
  2. National Park Service, Web of Life - Web of Life (Teacher’s Guide/Ecology) - Teachers (U.S. National Park Service) (nps.gov)
  3. The limits to the impact of human activities on the Earth before irreparable damage to environmental self- regulation.
  4. HM Treasury, Final Report - The Economics of Biodiversity: The Dasgupta Review - GOV.UK (www.gov.uk)
  5. Getting Straight on Decoupling – Both Brains Required
  6. Getting Straight on Decoupling – Both Brains Required
  7. Climate Change: Atmospheric Carbon Dioxide | NOAA Climate.gov
  8. WEF_New_Nature_Economy_Report_2020.pdf (weforum.org)
  9. Pollinators: first global risk index for species declines and effects on humanity (cam.ac.uk)
  10. https://climate.mit.edu/ask-mit/what-makes-methane-more-potent-greenhouse-gas-carbon-dioxide
  11. Yale researchers investigate methane emissions by rivers, streams - Yale Daily News
  12. Getting_started_TNFD_v1.pdf
 

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