The Strategist

Fancy it a little warmer?

2024 continues the alarming trend of record-breaking global temperatures, surpassing previous highs set just last year. With July 22 marking the hottest day ever recorded, the persistent rise in temperatures underscores the urgent need for climate action. As extreme weather events become more frequent and severe, the impact of these changes is felt worldwide, from heatwaves in Europe to economic disruptions globally.

Date: 20 August 2024
Author: Cedric Baur, Equity Analyst, LGT Private Banking
Reading time: 10 minutes

After a mild winter between 2023 and 2024, summer in Switzerland and other Central European countries at similar latitudes did not really want to get off to a good start. Although there were warm, or even hot days as early as the beginning of April, the earliest since records began, they were again a rare commodity until June. The first half of the year in particular was characterised by very changeable weather. In addition, there were once again extreme weather events such as flooding caused by heavy rainfall, which dominated the headlines due to the extent of the destruction.

A completely different picture emerged at the beginning of the year in Catalonia, for example. It has been raining far too little there for around three years, which is why the local government had to declare another drought emergency at the beginning of 2024 in order to save water. Towards the middle of the year, it became steadily warmer and a veritable heatwave began to spread northwards from southern Europe. After the risk of fire had already increased significantly in Greece and tourist attractions had to be closed during the day due to the extreme heat, temperatures in Switzerland and Germany also rose towards 30 °C and above. This was accompanied by the first tropical nights, during which temperatures did not fall below 20 °C at night. In addition to Europe, the USA, Canada, Mexico, Brazil, the Middle East and North Africa were also affected by heatwaves. The uneven distribution and frequency of weather phenomena and the intensity of corresponding extreme weather events are expected to increase further due to the warming climate. The main driver continues to be the steady rise in greenhouse gas concentrations in the Earth's atmosphere.

2024 on the way to the next record year

The high air temperatures will continue in 2024 after the record year of 2023. According to the EU's Copernicus Earth Observation Programme, 22 July 2024 was the hottest day since records began in 1940. The mild winter at the turn of the year was certainly a consequence of this temperature trend. The El Niño weather phenomenon is also likely to have contributed to this, as it causes higher water temperatures in parts of the Pacific at certain intervals and thus also higher air temperatures. The global average temperature of around 17.2 °C measured on 22 July exceeded the previous record of 6 July 2023 (17.1 °C). The long-term average for the month of July of 16.2 °C (1990-2020) was also significantly exceeded. The warming trend continues unabated and the values measured so far are likely to be just an interim step towards further record values.

This is also shown by the average daily temperatures over the last 50 years. The ten highest values were all reached in the last ten years. The years 2023 and 2024 were once again significantly higher than the previous year's values. In addition, the global earth temperature has already been at least +1.5 °C above the pre-industrial temperature average of 1850-1900 in each of the last 12 months. Despite cooler weather and lots of precipitation, it hasn't really got any cooler. However, this does not mean that the Paris Climate Agreement has failed, as the aim is to limit the average temperature rise over longer periods to below +2.0 °C, and, if possible, +1.5 °C . There is not yet a formally agreed definition among the member states as to when the +1.5 °C target has been exceeded. However, experts assume that the target will be difficult to achieve and will be exceeded within the next few years. A survey of scientists from the Intergovernmental Panel on Climate Change (IPCC) recently showed that they expect a temperature rise of 2.5-3.0 °C by the end of 2100.

Every tenth of a degree counts

This would be a catastrophic development, as significant weather extremes, such as longer and more intense heatwaves, can already be observed today. Increasing heat not only has an impact on our own health, but also on the economy. In its heat study for 2024, the International Labour Organization (ILO) estimates that lost working hours, increased sick days and productivity losses due to heat stress in the workplace could cost the global economy around USD 2.4 trillion by 2030. Last year, the US Senate Economic Committee also stated that heat-related productivity losses due to climate change are likely to lead to significant economic costs. There are also other heat-related costs for companies that could amount to several hundred billion US dollars per year. In addition to crop failures, examples include forest fires that affect company buildings or production facilities, power outages or an interruption in the cold chain.

It is important to minimise the rise in temperatures as much as possible, because every tenth of a degree of additional warming increases the likelihood of irreversible changes to the global climate system. Active emission reductions are therefore essential. In order to achieve this, international cooperation on global climate protection must be significantly strengthened. The Climate Change Conference (COP 29) in Azerbaijan in mid-November offers the next opportunity for this. In addition, existing government programmes such as the EU Green Deal or the Inflation Reduction Act (IRA) in the USA must be extended or replaced by new, improved programmes. The expansion of renewable energies remains an important lever - above all to replace fossil fuels, which still account for a large proportion of global greenhouse gas emissions. The next few years will be decisive and determine the direction in which the global community moves, and whether it could still get (a little) warmer.

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We apply a “hybrid approach” (internal fundamental analysis combined with “theScreener”, an external, purely quantitative analysis tool). TheScreener is based on purely quantitative, i.e. computable variables such as (but not exclusively restricted to) profit adjustments of the past few weeks, stock valuation in relation to historical performance and comparison groups, the technical trend, performance in relation to the market etc. The assessment of the equity analysts, which is largely based on a qualitative analysis, does not need to match with the one of theScreener. For the overall judgement the assessment of the equity analysts overrides the one of theScreener. LGT Bank (Switzerland) Ltd. categorizes its analysis recommendations into five ratings: for a “Buy” recommendation we expect a relative outperformance compared with the sector. Only equities subjected to an internal fundamental analysis can be rated “Buy”. The recommendation “Attractive” is used for equities exclusively ranked by theScreener without any internal fundamental analysis as “slightly positive” or “positive”. A moderate relative outperformance versus the index is expected. For equities that we rate as “Hold” we expect a performance largely in line with the one of the sector. This can comprise both equities for which a fundamental analysis has been carried out as well as equities that theScreener ranks as “neutral” versus the index. The recommendation “Unattractive” is used for equities exclusively ranked by theScreener without any internal fundamental analysis as “slightly negative”. A moderate relative underperformance versus the index is expected. By contrast, “Sell” recommendations are based on the expectation of a relative underperformance compared with the sector. This can comprise both equities for which we are recommending “Sell” for fundamental reasons as well as equities that theScreener ranks as “negative” versus the index. Therefore the ratings always reflect a relative consideration versus the sector and/or specified index. The risk assessment is based on the individual judgement of the analyst (e.g. we assume a “high” risk for illiquid shares, highly indebted companies or shares from developing countries).

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We employ both qualitative and quantitative methods to derive our recommendations, which are to be seen as relative to sector/quality peers among comparable maturities. “Buy” and “Sell” recommendations demand a qualitative in-house analyst opinion, in which we incorporate both historical and projected financial results and credit metrics as well as past and anticipated company and sector-specific observations and trends. We recommend “Buy” for a security for which we expect a strong relative outperformance compared to sector/quality peers among comparable maturities. We recommend “Sell” if we expect strong relative underperformance compared to sector/quality peers among comparable maturities. The ratings “Attractive”, “Hold” and “Unattractive” can be based purely on a quantitative approach, which includes the market price of credit risk, valuation of equities and associated instruments, corporate leverage, liability structure, size, and agency rating. We recommend “Attractive” for a security for which we expect a relative outperformance compared to sector/quality peers among comparable maturities. We recommend “Hold” if we expect an average performance compared to sector/quality peers among comparable maturities. We recommend “Unattractive” if we expect a relative underperformance compared to sector/quality peers among comparable maturities.

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Definition of rating categories of S&P and Moody’s which are relevant for us:

AAA/Aaa: Borrower with highest credit quality. Default risk also virtually negligible over the longer term
AA/Aa: Safe investment, default risk virtually negligible but more difficult to assess in the longer term
A: Safe investment as long as no unforeseen events impair the overall economy or sector
BBB/Baa: Average investment. However, problems must be expected if the overall economy deteriorates
BB/Ba: Speculative investment. Defaults must be expected if the economic situation deteriorates
B: Highly speculative investment. Defaults are likely if the economic situation deteriorates

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