Investment Institute
Annual Outlook

Beware the merchants of doom


Key points:

  • Transition to zero emissions is happening much faster than many predict - mainstream forecasters consistently underestimate its pace
  • They get the future wrong consistently because a ‘gloom bias’ is built into their models
  • Governments and industry alike are embracing the goal of trebling renewable energy capacity by 2030

Headline writers live by a simple mantra – ‘if it bleeds it leads’. And there is certainly plenty of bad news to catch the eye at this time of conflict, inflation and geopolitical uncertainty. The context for investment in the race to zero emissions seems, on the surface, to be much worse than during the heady, collaborative, cheap-money era of COP26 in Glasgow back in 2021.

Most reports and headlines tell us that we are failing – they catalogue the increasingly frequent and damaging sequence of extreme weather events, point to worsening scientific projections of when we might pass the 1.5 degrees threshold and remind us that we are simply not going fast enough. And they are not wrong.

But as F. Scott Fitzgerald famously said:

“The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.”

And there is a second, opposing view of our progress towards zero emissions which is also true.  This view is based on the extensive evidence from the history of technological transitions – that happen very slowly at first and then very quickly – and the growing evidence that in several sectors of the economy we can now confidently predict this pattern of exponential change. And this pattern shows a transition happening much faster than mainstream forecasts predict.

Why does this matter for investors? Mainstream forecasters consistently underestimate the pace of the transition and correct their respective electric vehicle (EV) market share estimates upwards, every year. So, they have a systemic gloom bias, and if investors take these forecasts as normative, then value is left on the table, and value destruction stays in portfolios.

Take the EV transition, now with a market share growing at well over the rate needed to see a doubling every two years. In the first quarter Tesla accounted for 28% of sales in the US luxury segment, that means incumbents have lost that market share and will likely never get it back.1  Similarly in Europe, Chinese manufacturers already boast 8% of the EV market2 , which will be the whole market in 10 years, so incumbents have likewise lost share.

  • VVM6IFRlc2xhIEFjY291bnRzIEZvciAyOCUgT2YgTHV4dXJ5L1ByZW1pdW0gQ2FyIFNhbGVzIEluIFExIDIwMjMgKGluc2lkZWV2cy5jb20p
  • SG93IHdpbGwgdGhlIEVV4oCZcyBpbnZlc3RpZ2F0aW9uIGludG8gQ2hpbmVzZSBlbGVjdHJpYyB2ZWhpY2xlIHN1YnNpZGllcyB3b3JrPyDigJMgRVVSQUNUSVYuY29t

Mainstream forecasters get the future wrong consistently because their gloom bias is built into their models – either the systemic blindness of trying to look at everything that is happening in say EV investment and then modelling this up to market scale or by using integrated assessment models that are incapable of modelling those two key market drivers of policy and entrepreneurship. Recent academic work shows that extrapolating exponential growth is a more reliable forecast methodology than these two and this has been applied to renewable energy (RE) and EV projections by the Rocky Mountain Institute in its X-Change research series.3

And the good news is that governments are finally waking up to two truths that all believers in the power of markets have long held to be so. Firstly, the inevitable transition to net zero is a massive competitive race – the Chinese have benefited from taking a strategic approach to solar, wind, batteries, and EVs and have built globally leading positions in these and other sectors of the future.

The US Inflation Reduction Act can be seen as a straightforward response in terms of industrial strategy to the fact that the US has lost ground in these key growth sectors. Secondly, markets are amazing innovation and execution machines – which is why we now see not only RE and EV markets enter their exponential growth phase but early signs of the same pattern in zero carbon shipping, green steel, sustainable aviation fuel and green hydrogen.

Shipping provides a simple illustration – three years ago there was not one zero-carbon ship even being built anywhere in the world then, two years ago Maersk, the world’s biggest container shipping company, ordered the first one.4  One year ago, there were 20 such ships on order. This year, Maersk’s first zero-carbon ship is at sea and there are over 120 zero carbon ships on the order books i.e. 0, 1, 20, 120 - that’s the nature of technology transitions.5

Perhaps the strongest sign of this new-found confidence is the way national governments and industry alike are embracing the goal of trebling renewable energy capacity by 2030 – a goal baked into the G20 and G7 communiqués and one at the heart of the Global Renewables Alliance campaign launched in New York in September.

Expect this and more public-private sectoral campaigns with clear short-term deployment goals to be a strong feature at COP28. But don’t expect the press to pay them much attention – good news is always tucked away at the bottom of the inside pages!

So, while the machinery of gloom kicks into overdrive, it’s worth remembering the second half of that Fitzgerald quote: “One should, for example, be able to see that things are hopeless and yet be determined to make them otherwise.”

The views and opinions expressed in this article are those of the author and do not necessarily reflect the those of AXA Investment Managers.

  • WC1jaGFuZ2U6IENhcnMgKHJtaS5vcmcp
  • V29ybGTigJlzIGZpcnN0IGNhcmJvbiBuZXV0cmFsIGxpbmVyIHZlc3NlbCBieSAyMDIzIHwgTWFlcnNr
  • aHR0cHM6Ly93d3cubWFlcnNrLmNvbS8=

    Disclaimer

    The information on this website is intended for investors domiciled in Switzerland.

    AXA Investment Managers Switzerland Ltd (AXA IM) is not liable for unauthorised use of the website.

    This website is for advertising and informational purpose only. The published information and expression of opinions are provided for personal use only. The information, data, figures, opinions, statements, analyses, forecasts, simulations, concepts and other data provided by AXA IM in this document are based on our knowledge and experience at the time of preparation and are subject to change without notice.

    AXA IM excludes any warranty (explicit or implicit) for the accuracy, completeness and up-to-dateness of the published information and expressions of opinion. In particular, AXA IM is not obliged to remove information that is no longer up to date or to expressly mark it a such. To the extent that the data contained in this document originates from third parties, AXA IM is not responsible for the accuracy, completeness, up-to-dateness and appropriateness of such data, even if only such data is used that is deemed to be reliable.

    The information on the website of AXA IM does not constitute a decision aid for economic, legal, tax or other advisory questions, nor may investment or other decisions be made solely on the basis of this information. Before any investment decision is made, detailed advice should be obtained that is geared to the client's situation.

    Past performance or returns are neither a guarantee nor an indicator of the future performance or investment returns. The value and return on an investment is not guaranteed. It can rise and fall and investors may even incur a total loss.

    AXA Investment Managers Switzerland Ltd.