macro kaki: COP26 wants to save your world

01 Nov 2021

By Mooris Tjioe, Analyst, Phillip Futures

Last week

IndexTickerClose Price % Change*
S&P500SPX4,6051.33%
NASDAQCCMP15,8503.23%
Dow Jones IndustrialINDU35,8200.40%
China CSI 300 IndexSHSZ3004,909 🔻 -1.03%
Euro STOXX 50SX5E4,2511.48%
Straits Times IndexSTI3,198 🔻 -0.22%

☕️ World leaders meet this week at COP26. Here is what they’ll be discussing.
☕️ Signs of weakness in the Chinese economy are showing through.
☕️ Markets are bracing for possible Fed taper announcement from 3rd Nov FOMC.
☕️ The USA is set to European remove steel and aluminium tariffs.
☕️ Brace yourself for high shipping costs over Christmas.


THE MACRO VIEW (1/2)

COP26 wants to save your world

… only if you don’t mind the lack of a deadline

Remember her? She first spoke at COP24 in 2018. (Time Magazine cover)

SUMMARY

🏭 The 26th UN Climate Change Conference (COP26) happens this week.
🏭 Chinese President Xi Jinping will not attend in person, nor change China’s climate targets.
🏭 The world’s recent pivot to dirtier coal energy provides an awkward backdrop to COP26.

Depending on who you ask, the United Nations Climate Change Conference is the apex climate change summit, meant to effectively tackle the most pressing climate concerns of our day. Over 25’000 attendees from 200 countries will descend upon Glasgow to hopefully wrestle climate change and rising temperatures back into the proverbial bottle.

The roundup: Participation from China is an important signal

What is more significant than President Xi Jinping’s somewhat disappointing online-only participation in COP26, may be the fact that China will not be adjusting their climate goals set last year. Developments in the climate-science sphere over the past year have somewhat necessitated fresh urgency from the world’s number one producer of carbon dioxide (that’s China), who currently emits twice as much greenhouse gases than the next larger polluter (that’s the USA).


China’s current plans include peaking greenhouse gas emission before 2030, before steadily reducing those levels over the coming decades. While this has always been their stated plan, many are disappointed nonetheless by China’s “lack of ambition” this year, given how they have been global champions for renewable energy and sustainable economy spending over the past few years.

Global carbon emissions are nearly back to pre-pandemic levels

Chart 1: International Energy Agency (IEA) estimates of global CO2 emissions (here)

However, most of us – the Chinese included, did not count on Q3’s electricity shortage. Power shortages and even blackouts across most of China for instance saw them turn to coal-fired power generators instead, and they are now on track to emit more carbon dioxide than in 2019 (as are India and Argentina as well).

Coal has made a strong reappearance – but is unlikely to last

While coal has made a comeback, many however do not expect it to last for long – particularly given the urgency over the climate. China and other coal-reliant countries still have incentives to pursue clean energy over the long-run given how they are expected to be among the hardest hit countries by climate change (such as by floods and droughts) and have expressed willingness in the past to be amongst the most committed countries in the world to greener power generation methods.

Renewable energy looks ready for its own comeback

In any case, ahead of COP26, clean energy-related stocks have been gaining renewed attention, particularly amongst renewable energy producers as well as energy storage specialists.

Chart 2: Bloomberg data on the S&P Global Clean Energy Index against the S&P500 Airlines Sub-Index

The S&P500 Global Clean Energy Index (tracks a basket of up to 100 (currently 75) companies around the world focusing on clean energy-related business such as Enphase Energy, Plug Power, and SolarEdge Technologies, while the S&P500 Airlines Index tracks airlines listed in the S&P500 benchmark index such as Delta Airlines and American Airlines Group.

From Chart 2, we can make an immediate observation – Airline stocks appear to be falling, exactly as clean energy stocks are rallying. Looking ahead, analysts on the street are predicting that sectors with high carbon emissions such as airlines, coal, and shipping are increasingly likely to lose out as calls for emissions control grow louder.

On the other side of the court, clean energy stocks – fresh from a massive plunge in January over valuation concerns, look ready for a comeback. In fact, clean energy stocks have just broken above a 6-month long trading range, amongst predictions that renewable energy and fuel cell/battery producers will gain even more relevance after COP26 this week.

TL;DR: Famously climate-unfriendly industries such as airlines and shipping are falling ahead of COP26, while clean energy stocks are gaining.

THE MACRO VIEW (2/2)

Cool Metaverse. Does it make money?

Nonetheless, one of the more exciting corporate endeavours in recent times

Let me begin by conceding this – I’m sure the brilliant folks at Facebook/Meta and elsewhere have clearly thought through how to monetise Mark Zuckerberg’s latest obsession with virtual reality. Furthermore, Meta’s latest press release also gave the caveat that the company is only in the beginning stages of their “metaverse” and is “not an investment that is going to be profitable for us anytime in the near future”. However, allow me to approach these ideas from the perspective of a potential end-user.

The replacement for Microsoft Teams and Zoom meetings. Perhaps decide for yourself how well it works.
Source: Horizon Workroom from Meta’s website

Nobody likes having too many meetings. There’s a whole long list of positives to be said about conducting meetings, but many should agree with the sentiment that most of us dislike having back-to-back meetings stretching on for the whole day, forcing many of us to do our “real” work after office hours.

However, COVID-19 has forced many of us to attend more meetings and work even longer hours. Through these two years, we’ve often only had one reprieve – we can look away from the screen every now and then, stand up and take a big stretch, play with our cats, grab a snack from the kitchen – all without people realising that you’re no longer at your seat.

Try escaping from this.

How does it make money though?

Thankfully, Meta is still a business anchored by realistic P&L concerns, and thus appears to be quite some way from making its way into our workplace. Besides how the recent metaverse reveal promises near-limitless potential for imagination, fun, and… work? Meta has yet to answer the question of how to monetise their future offering.

In the movie “Ready Player One”, the CEO of villainous organisation IOI had plans to monetise his company’s takeover of the virtual reality world by selling “up to 80% of an individual’s visual field, before inducing seizures”. What’s Zuckerberg’s plan to monetise the metaverse?

Will you start receiving advertisements in the virtual world?

To take a swing at the topic, Meta many change their name as many times as they like, but they primarily make their money from advertising. To get some sense of scale, as of Q3 2021, 97% of their total revenue was generated from advertising. The remaining 3% came from sale of hardware and developer fees, as well as other miscellaneous sources.

What’s perhaps worse, is that advertising appears to no longer be as smooth sailing a revenue stream as some may believe, given the recent turmoil from Apple’s iOS data privacy restrictions, as well as a list of data privacy scandals that looks likely to take years to clear.

Monetising games is nothing new – and can be wildly successful

MapleStory now brings in over $1 billion a year
Source: MapleStory Wallpaper

Ever heard of MapleStory? After being release by Korean gaming company Nexon as a free-to-play role-playing adventure game in 2003, the company released a free-to-play mobile-only version (MapleStory M) in mid-2018.

Far from being a tired franchise, people have thrown themselves into MapleStory M, showing their willingness to pay even for a free-to-play game – largely on cosmetics and gameplay improvements. This success has been nothing short of breath taking, driving Nexon’s total revenue in 2020 to $2.8 billion.

Customisation, personalisation, and the desire to stand out online are all nothing new to video games and players have forked out mountains of cash in pursuit of augmenting their online avatars – MapleStory being a prime example. This remains one of the more immediate and highly lucrative ways Meta can monetise their future products and may be a more possible – if unfamiliar route to monetisation for the company.

TL;DR: Meta has massive potential to monetise the world they are envisioning – but as of now, details are still murky on how the company can make money from this venture. If anything, it is clear that the company has much capability-growing to do and many partnerships to forge before they may start to see success.


CHART OF THE WEEK

Some inflation measures growing at fastest rate in decades

Chart 3: Bloomberg chart of Cleveland Fed’s 16% Trimmed Mean CPI and Dallas Fed PCE Trimmed Mean across a 20-year period

Following last week’s inflation-based theme, measures of inflation have continued their transit – off the charts. These two plots are trimmed-mean CPI measures, which exclude the most volatile items from the top and bottom of their respective price-change distributions.

For instance, the Cleveland Fed’s 16% Trimmed Mean CPI takes away the top and bottom 8% of CPI items (hence 16%), and thus intends to allow observers to get a better sense of the underlying inflation trend, un-skewed by more volatile price changes in some items that may be more temporary and extreme in nature.


EARNINGS THIS WEEK

MondayIDEXX Laboratories IncPre-market
1st NovIncyte CorporationPre-market
On SemiconductorPre-market
🔥PfizerPre-market
NXP Semiconductors NVPost-market
Simon Property Group IncPost-market
Realty Income CorporationPost-market
Amgen IncPost-market
Match Group IncPost-market
🔥AMC EntertainmentPost-market
TuesdayActivision BlizzardPost-market
2nd NovMatch Group IncPost-market
T-Mobile US IncPost-market
Mondelez InternationalPost-market
WednesdayMarriott InternationalPre-market
3rd NovEtsy IncPost-market
🔥QualcommPost-market
Hubspot IncPost-market
Fox CorporationPost-market
Lumen Technologies IncPost-market
ThursdayAtara BiotherapeuticsPre-market
4th NovCryoLife IncPost-market
Viavi Solutions IncPost-market
Monster Beverage CorporationPost-market
Motorola Solutions IncPost-market
Skyworks Solutions IncPost-market
Dropbox IncPost-market
Cloudflare IncPost-market
🔥Square IncPost-market
🔥Pinterest IncPost-market
Airbnb IncPost-market
🔥Peloton InteractivePost-market
Fortinet IncPost-market
🔥MercadoLibre IncPost-market
🔥Moderna IncPost-market
🔥Uber Technologies IncPost-market
FridayKimco Realty CorporationPre-market
5th NovDraftKings IncPre-market
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