ESG Take-up Rises, Asia Corporates Seek Strategic Support from Banks

Economic

Energy

Summary:

Regulations are amongst key factors driving ESG take-up globally, with Asia Pacific playing a key role, according to a BNP Paribas survey.

ESG reporting is not only an imperative for disclosure and regulatory compliance, in many sectors it is also increasingly seen as critical to demonstrate sustainability leadership to customers and investors and gain an edge over competitors.

As Asian companies look to set and meet net zero targets, they increasingly rely on banking partners to help navigate the diverse ESG regulatory landscapes, define emissions accounting and goals as well as advise on ESG strategy.

In this context, BNP Paribas recently commissioned the Asset Benchmark Research team to conduct a survey of over 200 CEOs, CFOs, CSOs and other senior managers across geographies and industries in Asia Pacific.

The results highlight the complex challenges businesses face in navigating the evolving ESG landscape, from regulatory compliance and data availability to financial constraints.

Asia Pacific plays key role

Asia Pacific plays a pivotal role in the global climate transition and is witnessing a significant rise in regulations and corporate strategies addressing ESG issues. The region is responsible for nearly 51% of global greenhouse gas (GHG) emissions, primarily driven by rapidly growing economies, large populations, and interconnected supply chains with the rest of the world.

Responses to the survey confirm that over a third of Asian companies are setting net zero targets and accelerating their responses to mounting ESG regulatory pressure in Europe and within Asia. However, the results also note that corporates still face challenges with regards to uneven regulatory requirements, lack of strategy, financial barriers, and data limitations.

Regulations pose a challenge

Compliance with regulations has emerged as the key objective for most companies (58% of the respondents) in the next three years and even more so for those headquartered outside of Asia, highlighting the critical role that regulatory pressures play in driving ESG adoption and disclosure.

Alongside regulatory compliance for both Asian and non-Asian businesses, 56% of Asian businesses in the survey are working at understanding the impact of ESG themes on their business. While non-Asia corporates rank positive environmental and societal contributions as their second highest priority.

ESG Take-up Rises, Asia Corporates Seek Strategic Support from Banks_1

Lack of emissions tracking

A disparate and rapidly evolving regulatory landscape has put pressure on companies to define and implement effective ESG strategies.

However, according to the survey, most companies still do not quantify their carbon emissions, especially in the case of Asian and non-listed companies. When it comes to Scope 3 emissions, only 6% of Asian companies and 24% of Western companies are quantifying their indirect carbon footprint. This highlights the significant challenges faced by businesses in implementing effective Scope 3 accounting and verification, to comply with emerging regulations.

ESG Take-up Rises, Asia Corporates Seek Strategic Support from Banks_2

The analysis finds that 58% of the respondents indicate that their companies face more challenges from environmental issues than from social and governance issues, while 32% believe social issues to be more pressing for their organisations, and 37% selected governance issues as the most important. On balance, ESG issues are more pressing for non-Asia companies than for Asian companies.

In response to these challenges, some corporates are turning to their banking partners for support, highlighting the evolving role of CFOs and treasurers to raise sustainable debts and address ESG matters.

To accelerate the integration process, 63% of respondent companies expressed their desire for advisory services from their banking partners including guidance on material industry challenges, peer benchmarking, regulatory advice, and support on ESG reporting.

A clear strategy is needed

Establishing clear ESG strategies is a critical starting point towards sustainability. Yet, lack of a clear strategy has been cited as the second most common impediment to ESG integration in the BNP Paribas survey, with 34% of respondents indicating that their company does not have ESG targets. Defining and implementing effective sustainable strategies has become an imperative for many corporates, to manage risks, comply with regulations or build a competitive advantage.

Availability of financial resources is also cited as a challenge for companies to implement ESG strategies. According to the same survey, 40% of respondents attribute their slow adoption of ESG to limited budget allocation, while 43% see high upfront costs as the main hurdle for adoption.

Greening supply chains

One of the most significant gaps identified in the survey is that of a company’s ability to measure GHG emissions. Specifically, the survey finds that nearly 70% of the surveyed companies aren’t fully tracking their GHG emission data. Of those who can perform GHG accounting, less than 10% are measuring Scope 3 emissions along their value chains.

Corporates are increasingly partnering with their banks on multiple fronts to further drive their ESG strategy and address the Scope 3 gap. Sustainable supply chain finance solutions present a powerful opportunity for corporations to drive change across their value chains. By embracing ESG considerations in supply chains, corporates can enhance their competitiveness, build climate resilience and achieve greater operational efficiencies over time.

Tran shares how BNP Paribas is helping corporates to factor in sustainable finance into their operations. “For the past several years, we have been forming partnerships with leading innovative ESG solution providers to support the collection of ESG data across the value chain of our clients, helping them to set up KPIs and targets in line with their ESG material issues,” he highlights. “Through financial incentives, corporates can encourage their suppliers to adopt more sustainable practices, fostering a ripple effect of positive change.”

Innovation and shared commitment as the path forward

Other innovative approaches, such as blended finance, which combines public and private funding, and strategic partnerships with multilateral development banks, NGOs and international agencies, can further accelerate the deployment of sustainable solutions, particularly in emerging and developing markets where the need for sustainable development is most pressing.

Looking ahead, as the global transition towards a low-carbon economy accelerates, corporations should also integrate sustainability considerations into their core operations and decision-making processes. By investing in renewable energy, adopting circular economy principles, and implementing robust systems for measuring and managing their environmental and social impacts, corporations can future-proof their operations, mitigate risks and capitalise on emerging opportunities in the rapidly evolving sustainability landscape.

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Warren Takunda

Commodity

Markets are closely watching the OPEC+ online meeting which began at 12 noon GMT for signs of production intentions following Iran's missile attack on Israel.

The group is not expected to make any changes to its current plan for an output cut of 5.86 million barrels per day, although sources suggest it may unwind the cuts from December, according to the Financial Times.

The organisation had previously agreed to increase its joint output by 180,000 barrels per day from December as part of its plan to raise supply in 2025.

Amid surging US production and falling oil prices, OPEC+ is under pressure from declining market share and profitability.

Voluntary production cuts still awaited

Meanwhile, the voluntary production cuts have not been fully adhered to by member countries, with nations such as Iran and Kazakhstan failing to meet their commitments.

These two countries oversupplied and have pledged to compensate with cuts of 123,000 barrels per day in September and October. Until these compensatory cuts are fulfilled, OPEC+ is unlikely to raise output.

However, the situation also underscores the crucial role Iran plays in influencing oil market trends.

Any further escalation in geopolitical tensions could push oil prices higher once again, complicating the global inflation outlook.

Crude oil prices spiked after Iran launched approximately 200 ballistic missiles at Israel on Tuesday, marking a significant escalation in the Middle East conflict. The attack was in retaliation for the killing of a Hezbollah leader and an Iranian commander, followed by Israel’s deployment of ground forces into southern Lebanon.

Brent futures on the ICE rose 2.9% to $73.56 per barrel, while WTI futures on the Nymex surged 3.5% to $70.92 per barrel on Tuesday.

Both benchmark oil prices continued to climb by over 1% during the Asian session on Wednesday, reaching $74.56 and $70.94 per barrel, respectively, as of 4:45 am CEST.

For the time being, the impact on the oil market appears limited, as most missiles were intercepted by Israeli defences, with only one reported fatality – a Palestinian civilian in the West Bank.

Oil prices may face further upside pressure

The primary concern for oil markets is the potential for retaliatory strikes on Iranian oil facilities by Israel, which could push crude prices significantly higher.

Iran is among the top 10 oil producers globally, with production reaching over 3.3 million barrels per day in August – the highest in five years, according to the Organisation of the Petroleum Exporting Countries (OPEC).

Iran exports half of its production, representing approximately 2% of global supply.

Additionally, the escalating military conflict between Iran and Israel could lead to the reinstatement of US sanctions on Iranian oil exports, further driving up oil prices.

Josh Gilbert, Market Analyst at eToro, said: "This undoubtedly provides short-term support for oil, especially if we see these geopolitical tensions escalate further."

Oil prices had been in a downtrend over the past three months due to a weakened demand outlook, driven by softer global economic data, particularly from the US and China.

Meanwhile, record-high oil output in the US and the global shift towards green energy have contributed to the price slump. Despite these macroeconomic headwinds, intensifying geopolitical tensions often act as a bullish factor for the oil market.

China's recent policy measures may also improve the demand outlook for the world's largest oil importer.

Last week, the People's Bank of China (PBOC) announced a 0.5% cut to the Reserve Requirement Ratio (RRR), accompanied by key leading rate cuts. China has also implemented several easing policies to support its housing sector and stock markets.

Gilbert added: "China's stimulus package is also a significant factor. If there's a view that the world's second-largest economy is set to ramp up demand at a time when supply might be constrained, it provides a tailwind for crude prices."

Source: Euronews

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PIIE

Economic

Political

Former president Donald Trump has promised to carry out the “largest deportation program in American history,” a step targeting unauthorized immigrants endorsed by the Republican Party’s 2024 platform. This policy is intended to increase employment of native-born workers, boosting economic growth. But new research by scholars at the Peterson Institute for International Economics (PIIE) finds that mass deportations would lower US GDP and reduce employment through 2040, compared with what would happen if the policy were not implemented.

In a new PIIE Working Paper, Warwick McKibbin, Megan Hogan, and Marcus Noland use econometric modeling to generate a baseline forecast for different variables like GDP, employment, and inflation in 24 countries and regions. They use the model to project the effects of three of Trump’s policy proposals—mass deportations, tariffs, and weakening Federal Reserve independence—measured as deviations from each baseline. This blog focuses on the economic impact of mass deportations—separate from the worrying humanitarian and moral costs such actions would have.

Trump and his advisors envision using local law enforcement, the National Guard, and the United States Armed Forces to implement the deportation plan. They claim authority to do so by citing the Insurrection Act of 1807 and other, often esoteric, statutes and interpretations of presidential prerogatives. Read more about this plan and Trump’s other immigration policy proposals here.

McKibbin, Hogan, and Noland examine two scenarios: a low-end estimate based on President Dwight D. Eisenhower’s deportation of 1.3 million persons in 1956 under what was officially called “Operation Wetback” and a high-end count based on a Pew Research Center study that estimated approximately 8.3 million workers in the US were unauthorized in 2022.

Both scenarios cause lower US GDP and employment through 2040 than the baseline projection—in other words, compared with what would have happened without the deportations. The scenarios differ only by the degree of damage inflicted on people, households, firms, and the overall economy.

In the “low” scenario, if 1.3 million unauthorized workers are deported, by 2028, US GDP is 1.2 percent below the baseline. In the “high” scenario, GDP is 7.4 percent lower than baseline by 2028 (figure 1). On the assumption that the baseline GDP growth is approximately 1.9 percent per year, this projection implies that the level of US GDP in 2028 will be almost unchanged from that in 2024—meaning no economic growth over the second Trump administration from this policy alone.

Mass Deportations Would Harm the US Economy_1

The model finds that by 2028 in both scenarios, employment measured in hours worked is below the baseline—1.1 percent under the low scenario and nearly 7 percent in the extreme case (figure 2).These findings are consistent with PIIE Senior Fellow Michael Clemens’ explanation of why deportation of unauthorized workers reduces employment for workers in the US.

Mass Deportations Would Harm the US Economy_2

The Trump campaign assumes that employers would simply replace the deported workers with native workers, but the historical record shows that employer behavior is far more complicated than that. Past experience with deportations demonstrates that employers do not find it easy to replace such workers. Instead, they respond by investing in less labor-intensive technologies to sustain their businesses, or they simply decide not to expand their operations. The net result is fewer people employed in key business sectors like services, agriculture, and manufacturing.

In addition, those unauthorized immigrants aren’t just workers—they’re consumers too. Deporting them means less demand for groceries, housing, services, and other household needs. This lower spending in turn reduces demand for workers in those sectors. That reduced demand for workers in all types of jobs outweighs the reduction of supply of unauthorized workers. Contrary to the Trump campaign’s assumption that deporting workers increases domestic employment, removing immigrants reduces jobs for other US workers.

Deportations would also drive inflation higher than the baseline through 2028 in both scenarios, but inflation would return to baseline by 2030. The distribution of price changes across US sectors varies, partly because the sectors are initially subject to different shocks to potential labor supply and partly because production linkages across the US and global economies differ in their exposure to international trade. Agriculture is projected to suffer the hardest, which is not surprising as up to 16 percent of that sector’s workforce could be removed, resulting in higher prices.

In addition to the moral issue of rounding up millions of people, and disrupting their families, workplaces, and livelihoods, Trump’s “America first” proposal for mass deportations would raise prices, cost jobs, and harm the US economy. Other policy proposals, like high tariffs and eroding Federal Reserve independence, are projected to deal an economic blow as well. Those scenarios, separately and combined with deportations, can be found in the Working Paper.

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ING

Economic

Commodity

Energy

European SAF demand needs to fly soon as regulation bites

European air passenger traffic accounts for 27% of global aviation, making it the second-largest aviation market after Asia-Pacific. In 2023, this translated to a jet fuel consumption of approximately 1.38 million barrels per day (65 million tonnes), a figure expected to rise as traffic volumes recover this year.

Europe is often viewed as a pioneer in climate policy and energy transition. The overarching ‘Green Deal’ and the ‘Fit for 55’ package are driving the aviation sector and its fuel suppliers towards greater sustainability. Here are the key policies within this framework:

The Renewable Energy Directive (RED III) establishes a comprehensive framework for the energy supply sector, mandating that 42.5% of energy must come from renewable sources by 2030. For the transport sector, it sets a renewable energy target of 14%. Additionally, RED III outlines the eligible Sustainable Aviation Fuel (SAF) resources under the Refuel Aviation directive, specifically excluding food and feed crops as feedstocks.

The ReFuel Aviation Directive mandates that all airlines use a 6% Sustainable Aviation Fuel (SAF) blend for flights departing from EU airports by 2030. Additionally, it requires aircraft to refuel at least 90% of the necessary volume to prevent tankering, which involves sourcing fuel from other locations for return flights. The UK has set an even more ambitious target, aiming for a 10% SAF blend by 2030

Europe's ETS for aviation strengthens SAF business case

Intra-European flight traffic falls under the Emission Trading Scheme (ETS). As part of the ‘Fit for 55’ climate policy package, the free allowances for the aviation sector under the ETS are being gradually phased out. The system will be fully implemented by 2026, with a 75% reduction in free allowances in 2024 and a 50% reduction in 2025. Consequently, airlines will be fully accountable for their CO2 emissions, which will increase fuel costs. The use of Sustainable Aviation Fuels (SAFs) reduces the number of credits airlines need to obtain under the ETS, thereby benefiting the SAF business case.

European blend rates exceed average, but 2% target still tough

According to data from BNEF and IATA, the blend rate in Europe is expected to reach just over 0.6% in 2024, falling short of the 2% target set by the ReFuel aviation directive for 2025. BNEF predicts that airlines may only achieve an average blend rate of around 1.25%. This shortfall could result in fines unless airlines purchase blend certificates. Additionally, airlines face challenges with governance clarity, particularly regarding bunkering outside of Europe and the use of SAF certificates to meet targets and avoid potential sanctions.

Ryanair is expected to be the largest SAF consumer in 2025 by volume

Top 10 European Airlines by expected SAF demand at European airports in 2025 (under the ReFuel aviation directive), in mn. tonnes

Source: BNEF

Offtake agreements help to get European SAF-supply going

European production of Sustainable Aviation Fuel (SAF) is expected to accelerate in the coming years, driven by offtake agreements secured by European airlines. Several agreements are in place to deliver SAF, including significant contracts between Air France-KLM and Neste (until 2030) and Total Energies (until 2035). DHL and Lufthansa have also disclosed offtake agreements.

To enhance future sourcing, substantial volumes have been agreed upon under Memorandums of Understanding (MOUs). Other suppliers in Europe include OMV and Shell. Additionally, IAG has secured the largest offtake agreement for synthetic SAF to date, covering the period from 2024 to 2039. However, the secured supply alone is insufficient to meet the 2025 requirements, necessitating reliance on the spot market and/or SAF certificates to fulfil the remaining demand.

Capacity set to meet demand despite delays and import reliance

If all planned capacity is realised as expected, there will be enough to meet the required demand and fulfil the 2030 mandate, according to SKY-NRG. However, past delays suggest that new capacity is rarely completed on schedule, meaning the scaling-up process may take longer than anticipated.

Earlier this year, we saw setbacks in capacity realisation. The construction of one of the largest Biodiesel/SAF facilities in Rotterdam was temporarily halted. Similarly, BP announced it would scale back its SAF production plans in Rotterdam, citing challenging market conditions with lower prices. This could impact offtake agreements and spot market supply. Short-term oversupply might be a factor, as more production capacity in the US and Asia comes online and flows to Europe. A sluggish phase leading up to the 2% obligation in 2025 could also contribute to this.

Despite these setbacks, new announcements continue to emerge, such as Neste’s plans in Rotterdam. Complicating matters, refinery margins could shift due to competition with renewable diesel (HVO-100), as facilities can often switch output without significant cost. Given the global nature of the market, Europe will not be able to fully meet its own SAF demand and will need to rely on imports from North America or Asia, with this deficit expected to grow over time.

Feedstock and trade dynamics

The domestic supply of agricultural and waste feedstocks in Europe is quite limited compared to the mandated amount of SAF required by 2030. Additionally, EU criteria for qualifying feedstocks are generally stricter than those in North America or Asia, further reducing the potential supply pool. For animal fats and used cooking oil (UCO), collection and distribution networks in Europe are well-established, ensuring available resources are converted into biofuels.

However, there may be a shift from using these feedstocks in road transport to aviation. Unlocking additional feedstocks, such as cover and intermediate crops, holds some potential but requires developing and scaling up the necessary supply chains.

To meet its blending mandates, Europe will continue to rely on importing various feedstocks and SAFs. Historically, the EU has sourced feedstocks from the East, but some companies have also started establishing supply chains based on agricultural inputs from Africa. Trade flows have been turbulent over the past three years. For instance, UCO imports into the EU dropped by 30% in 2023 due to concerns about the authenticity of imports, particularly from China. However, data from the first half of 2024 show that UCO imports have been picking up again, indicating a strong business case for UCO.

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Justin

Economic

Thailand's underperforming US$77 billion (RM318.1 billion) social security fund will invest US$11.6 billion in a new foray into global private assets, an executive told Reuters, part of a strategic overhaul to address its poor returns amid rising demand from an ageing population.

Thailand's biggest state fund, which supports healthcare, unemployment benefits and pensions for 25 million workers, has seen an average return of under 3% over the past 10 years, far below its potential, and seeks to rectify that from next year by diversifying away from its domestic-focused strategy, investment board member Petch Vergara said in an interview.

Petch, a former executive director at Goldman Sachs who managed private wealth for ultra-high-net-worth individuals for almost a decade, said the fund's high concentration of domestic and low-risk investments was unsustainable.

"At this rate, the fund could go bankrupt by 2051," said Petch, who joined the Social Security Fund earlier this year.

"The current investment portfolio of the fund is overly concentrated in Thai assets," she said, adding "the low-risk investments may look safe in the short term but it damages potential long-term returns."

The shift comes as Thailand's population grows older, with one-fifth of its 66 million people aged over 60 at the end of last year, compared to 10% two decades ago, according to the Department of Older Persons at the Social Development and Human Security ministry.

The over-60 population has doubled from 6.2 million in 2004 to 13 million in December 2023, the data shows.

New faces, reformist backing

The more aggressive strategy follows a recent change in the composition of the fund's board after some members were elected to their roles for the first time ever in December. Before that, most members were appointed by the generals who seized power in a 2014 coup.

Last year, two-thirds of the 21-member board were elected. Many were nominated by labour groups and by the progressive party that won last year's general election on promises of major institutional reforms, but was blocked from forming a government by conservative lawmakers allied with the royalist military.

The new board has approved an investment framework starting in 2025 that will lower the fund's weighting of low-risk assets from 70% to 60%, and increase the concentration of higher-risk investments to 40% from the current 30% over the next 2-1/2-years, Petch said.

The aim was for a 50-50 split by mid-2027, she added.

Of the higher-risk investments, 15%, or 375 billion baht will be allocated towards investment in global private assets, such as in private equity, private credit and hedge funds, by mid-2027, said Petch.

"The idea is to make the portfolio more global to find more returns in the long term," she added.

Meagre returns

A 2023 study by the non-profit Thinking Ahead Institute on global pension assets across 22 major pension markets showed an average annual return of 7.7% over the past five years for pension funds with investment portfolios that consisted of 60% global equities and 40% global bonds.

By comparison, the portfolio of the social security fund in Thailand, Southeast Asia's second-biggest economy, has seen an average return of just 2.7% in the past five years.

Analysts have long advocated a change in tack to meet swelling demands from the population, but point to trust issues and a lack of public faith due to the fund's history of mismanagement, high operating costs and underperformance.

According to Worawan Chandoevwit, an adviser on social security at the Thailand Development Research Institute, 700,000 retired workers are currently eligible for pensions from the fund but that number is set to increase significantly.

Based on independent research, there will be more people drawing out money than contributing to the fund and there will be a clear deficit by 2045, she said.

"We will soon have more people utilising the pension and they will also live longer," Worawan said, "So the money going in and coming out is a very different amount."

"High return is key in the long term to ensure the long-term viability of the fund," she said. "Long-term good governance on the fund's investments is key."

Source: The edge markets

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AShmore

Economic

Stocks

A decade of tech-driven US stock market outperformance has contrasted with tepid returns for Emerging Market (EM) stock indices. But past returns are not an indicator of future performance, and the drivers of markets over the next decade will be quite different from the ones over the last.

A better fit: relative GDP growth

Although it makes intuitive sense, it is misleading to assert that there is a direct relationship between a country’s GDP growth and its equity market performance. Since 1989, however, there has been a clear relationship between real GDP growth differentials and equity market relative performance. EM equities outperformed Developed Market (DM) (and US) markets between 1989 and 1994 and subsequently between 2001 and 2011. Both periods coincided with a significant increase in EM vs. DM economic performance (growth premium). Then, between 2012 to 2022, the EM growth premium declined, coinciding with the poor performance of EM equities vs. DM, despite some episodes of good EM absolute performance.

Since Covid, things have changed. According to the International Monetary Fund (IMF), 2020 DM GDP contracted 3.9%, while EM GDP declined by just 1.7%. EM then quickly bounced back to pre-Covid annual growth of around 4.0% as per Fig 1, while DM GDP growth remained tepid. The resilience EM GDP showed through the pandemic and over the last two years has reestablished a healthy growth differential, which the IMF expects will remain in place over the coming years.

A New Bull Market Cycle in Emerging Market Equities_1

Macro resilience

While growth is important, equity investors also care about downside risks. This renders GDP growth trivial without macro stability, and in the last five years, impressive EM GDP has been coupled with inflation falling more quickly than in DM. The IMF and the Bank of International Settlements (BIS) have put this macro stability down to sound fiscal and monetary policies, with a balanced fiscal expansion in the aftermath of the pandemic allowing for better debt dynamics in many EM countries.3 We agree, and this is reflected in the recent trend of more EM sovereign debt upgrades than downgrades by rating agencies. Upgrades are particularly notable for some of the significant equity markets, such as Brazil and India, as well as smaller ones such as Türkiye and Kazakhstan.

Earnings cycle

Solid macro lays a good foundation for equity performance. However, the most critical catalyst for a meaningful rebalancing of investor positioning towards EM equities will be a sustained increase in their earnings per share (EPS).

Over the last 25 years, the EPS of EM and DM rose by a similar pace: 6.5% for the former and 5.7% for the latter. The averages hide two distinct cycles. From 2000 to 2011, EM EPS rose by a whopping 17.2% per annum (p.a.). DM ex-US increased by 5.9% p.a, while US EPS growth was only 4.9% p.a. Then, over the last decade, this relative performance reversed, as EM EPS growth dropped to 2.3% p.a., DM ex-US was only 0.5% and US EPS increased by 6.4% p.a.

The first period of EM earnings divergence (2000-2011) was backed by a decade of important governance reforms across many sovereigns and corporations that started in the early 1990s. These reforms were a catalyst for deeper integration into global markets. Then, with China emerging as a major manufacturer for the rest of the world after the turn of the millennium, its huge demand for natural resources provided a tailwind for other EM countries. Unfortunately, the latter part of the EM bull market, from around 2009-12, became overexuberant. This led to macroeconomic imbalances via large external and fiscal deficits. The correction of this exuberance led to a sharp decline in earnings (2012-2016), which coincided with the first phase of US economic exceptionalism driven by low rates, the shale oil revolution and booming tech companies.

What we are seeing today is very much the reverse. The US is now the centre of over exuberance and macroeconomic imbalances – and probably due for a correction – while EM external and fiscal balances are largely healthy, setting a good foundation for earnings growth. After a two-year decline, 12-month EM EPS growth forecasts have been higher than the S&P 500 since October 2023 and have risen from 9% at the end of January to 25% at the end of August (vs. 10% for S&P 500).

Conclusion

The case for an outperformance of EM equities post beginning of US rate cuts is sound. Macro fundamentals across EM are solid, and many companies are well positioned to benefit substantially from long term structural drivers such as AI and energy transition. As the Fed cuts policy rates, EM central banks will be in the position to ease more aggressively. Against that backdrop, with the dollar having peaked, and EM earnings expectations improving, the structural under-allocation to EM equities is likely to change. The savvier investors will choose active strategies over passive or quasi-passive allocation, in an asset class where active management has a significant edge.

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FastBull Featured

Daily News

Economic

[Quick Facts]

1. Biden signs a bill to accelerate semiconductor chip manufacturing projects.

2. Fed's Barkin says price pressures may not fade as fast as expected.

3. OPEC+ set to go ahead with Dec oil output hike despite possible oversupply.

4. ADP data shows U.S. companies add more jobs than expected in Sept.

5. Japan's economics minister asks BOJ to help complete exit from deflation.

[News Details]

Biden signs a bill to accelerate semiconductor chip manufacturing projects

The White House announced that President Biden signed legislation that will exempt some U.S. semiconductor manufacturing facilities from federal environmental reviews that are receiving government subsidies. Without this new legislation, U.S. semiconductor chip manufacturing and research projects, worth $52.7 billion, could have been subject to federal reviews that might take years.

The bill has caused division within the Democratic Party, highlighting the challenges Biden faces in advancing his economic agenda while balancing ambitious climate goals. Critics argue that the bill allows companies to bypass critical steps designed to reduce potential harm to the environment and workers.

The legislation would reportedly exempt eligible chip projects from the National Environmental Policy Act (NEPA), which requires federal agencies to assess the potential environmental impacts of major federal actions before they can be implemented. The House of Representatives passed the bill last week, and the Senate unanimously passed it last December.

Fed's Barkin says price pressures may not fade as fast as expected

Richmond Federal Reserve President Tom Barkin, speaking at an economic conference at the University of North Carolina Wilmington, said that the rate decision in September reflected a recalibration of policy. Headline inflation is close to its target and unemployment is approaching its natural level after the federal funds rate has stayed at a high of 5.3% for more than one year. The current incongruous figure is the federal funds rate, which no longer needs to be so restrictive given the progress we've made.

There is still a lot of work to be done on inflation. While inflation has fallen back from its highs, it remains above our 2% target. I don't expect core inflation to fall too sharply until 2025, as we are still comparing it to the low inflation data from late last year.

The U.S. labor market is performing solidly, but the trend is not encouraging. The unemployment rate has risen since last year, while monthly hiring has slowed. However, layoffs remain low, as employers seem to be more cautious about cutting jobs after the labor shortages during the pandemic.

The labor market faces the dual risk that lower interest rates could stimulate demand and increase hiring, or that the negative trend could intensify further.

OPEC+ set to go ahead with Dec oil output hike despite possible oversupply

Despite signs of an oversupply in the oil market, OPEC+ has not changed its plan to gradually hike oil production starting at the end of the year. The group confirmed its plan to increase production by 180,000 barrels per day in December, two months later than scheduled due to fragile market sentiment.

Oil prices have risen more than 5% in the past two days after OPEC member Iran launched an attack on Israel, leading to an escalation of conflict in the Middle East. While lower oil prices have come as a relief to inflation-plagued consumers and central banks that have started interest rate cuts, it has put economic pressure on OPEC and its allies. Wednesday's OPEC+ Joint Ministerial Monitoring Committee meeting focused on the failure of Iraq, Kazakhstan and Russia to fulfil their production cut commitments, according to delegates who declined to be named. While these countries 'reaffirmed their strong commitment to the agreement,' most continue to exceed their production quotas and have yet to begin additional cuts to make up for the oversupply in previous months.

ADP data shows U.S. companies add more jobs than expected in Sept

U.S. companies added more jobs than expected last month, which was at odds with other indicators showing a cooling labor market. Data showed private sector employment rose by 143,000 in September, compared with an upwardly revised 103,000 increase in August.

The increase in employment represented a rebound after five consecutive months of slower job growth, especially in light of last month's data which was at its lowest level since March 2023. Even so, the three-month average fell to 119,000, one of the lowest levels since 2020.

Japan's economics minister asks BOJ to help complete exit from deflation

Japan's new Economics Minister Ryozo Akazawa said the Bank of Japan (BOJ) should decide on rate hikes carefully to avoid the risk of excessive cooling of the economy. "I don't think we have completely overcome deflation, and I still can't deny the possibility of slipping back into deflation. As long as I feel that way, I hope the central bank agrees with us that it needs to be more cautious about raising interest rates," Ryozo Akazawa said. He said consumers remain unconvinced that prices will continue to rise, given that wages and prices have barely increased in Japan for decades.

Akazawa, however, was not totally opposed to further rate hikes by the BOJ. Akazawa said,"If conditions are met, it would not be surprising to see monetary policy normalized." Japanese Prime Minister Shigeru Ishiba, on the other hand, said in a speech that it is appropriate for further interest rate increases now.