January 19, 2023 | 5 Minute Read
2022 may be remembered as the year of new geopolitical and energy market realities. As we move into 2023, Russian natural gas exports to Europe remain severely curtailed—a situation that continues to upend the balance between supply and demand and cause swings in prices. However, energy prices have fallen since the second half of December, in part as mild temperatures in Europe have driven down demand. The fall in gas prices, coupled with regulatory measures introduced through last year, potentially suggest a more modest increase in bills for European households in the coming months. But while energy security threats in Europe may be much more subdued in the near-term, come summer, Europe will have to refill storage all over again, this time likely in the absence of Russian flows from the outset.
As energy policy focus has shifted toward ensuring long-term affordable, clean and secure energy, there has been a step-up in regulatory momentum for several technologies, including clean hydrogen, carbon capture utilization and storage (CCUS), energy storage and energy efficiency. Both REPowerEU in Europe and the US Inflation Reduction Act (IRA) have provided substantial improvement in the regulatory framework for clean tech and the need to accelerate the build-out of renewables. However, the process of scaling up investments in renewables will not happen overnight. While incentives for change are there, the time it takes to make those changes is slowing the transformation. We believe the clarity, significance, and duration of support for key technologies such as renewable generation, energy storage, and carbon capture along with robust and growing demand may speed up the process in the years to come.
Companies that have already achieved significant energy efficiency in their own operations and supply chains suggest that the efficient use of capital can be a powerful lever to protect margins and enhance resilience. We believe that should heighten efforts to find solutions and capital to drive development of sustainable practices. Over time, we believe policy and energy spending can alter the trajectory of climate change, and we think investors have a key role to play in this area.
Source: Bloomberg, Goldman Sachs Global Investment Research. Real Asset Investing Outlook. As of December 14, 2022. For illustrative purposes only.
We see compelling opportunities to invest in innovative companies providing solutions in areas such as clean energy, resource efficiency and water sustainability. Some clean energy companies have eliminated or are reducing emissions outright by providing cleaner alternatives to traditional energy sources (such as solar, wind, bioenergy or hydrogen). Alternatives to fossil-based power sources have meaningfully come down the cost curve, in many cases reaching cost-parity, encouraging broader-based adoption. Increasing energy efficiency is another key imperative needed to address climate change. The idea of greater efficiency touches most industries and areas of life, but we believe the greatest potential for net-positive environmental impact is in transportation and logistics (most notably around greater adoption of electric vehicles), smart cities, including improving building efficiency, and manufacturing. We also see opportunities in innovative companies helping to secure a sustainable water future by solving the complex water needs of businesses in critical sectors of the economy, from agriculture to energy.
We expect public and private equity market investors to continue to play a major role in providing both the capital and the expertise required to build the critical clean energy infrastructure assets required to reach net zero. That infrastructure includes investments for the generation, transmission, and storage of green power, such as electricity produced from solar and wind as well as investments to enable the transition from domestic and commercial combustion engines to electric vehicles. Looking more closely at energy storage, for example, two recent developments further solidifying demand are: (1) the recent passage of the Inflation Reduction Act in the US and (2) continued global focus on energy security, primarily because of the European energy crisis. We believe success in energy storage requires deep knowledge of energy markets, expertise in battery technology, understanding of the regulatory framework and experience developing and optimizing renewables assets.
In our view, the continued focus of bond issuers on climate mitigation and adaptation creates strong growth potential for green bonds, and this growth may expand the opportunities for public market investors committed to advancing environmental progress through their fixed income allocations in the years to come. Replacing a portion of a conventional fixed income portfolio with green bonds can potentially bring benefits beyond helping investors achieve their climate ambitions. For example, green bonds can help reduce climate change-related risks in portfolios resulting from policy changes such as carbon taxation that could lead to stranded assets. Extraordinary market volatility and rising interest rates slowed the supply of new green bonds in 2022 by hindering some issuers from tapping capital markets, just as we saw in the broader bond market. In addition, as companies from more sectors and sovereigns in more regions issue green bonds, we believe investors will have more opportunities, which may further stimulate demand. Looking ahead, we estimate there will be about €600 billion of green bond issuance in 2023, potentially taking the market to more than €2 trillion as sovereigns and corporates continue to focus on environmental considerations.1
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1 Source: Goldman Sachs Asset Management and Bloomberg. This forecast assumes lower market volatility in 2023 and incorporates our estimate of postponed issuance from 2022.
Energy security is the uninterrupted availability of energy sources at an affordable price.
Inflation is the rate at which prices for goods and services rise.
Risk assets those with a high degree of risk and volatility, such as such as equities, high-yield credit, commodities, and currencies.
Alpha measures the difference between a portfolio’s actual return and its expected return given its risk level as measured by its beta.
Beta measures the historical market risk of a portfolio or the volatility of a portfolio relative to an underlying index over a defined historical period of time.
Growth-oriented refers to areas of the market more likely to realize high earnings growth in the future and likely trade at a higher price relative to their earnings than the broader market.
Value-oriented refers to areas of the market less likely to realize earnings high growth in the future and likely trade at a lower price relative to their earnings than the broader market.
The “right side of disruption” refers to companies that in our view are aligned with key secular growth trends and/or are creating new innovative solutions.
Green economy refers to investments leading the climate transition.
Equity risk premia refer to the excess return earned by an investor when they invest in the stock market over a risk-free rate.
TINA stands for There Is No Alternative.
TARA stand for There Are Reasonable Alternatives.
Speculative-grade fixed income refers to high yield fixed income.
Duration measures the sensitivity of the price of a fixed income investment to a change in interest rates.
Short duration refers to a bond with a small amount of time to maturity.
Treasuries refers to US Treasury debt obligations.
Inflation-adjusted yields refer to the measure of return that takes into account the time period's inflation rate.
Innovation-oriented equities refer to companies that offer innovative solutions and are in line with long-term secular growth trends, such as technological innovation, environmental sustainability, future health care, and the new-age consumer.
Liquid alternatives are alternative mutual funds that often have characteristics similar to hedge funds but are public vehicles that can be traded easily.
Green bonds are fixed income investments with proceeds used to finance projects with dedicated environmental impact
GDP stands for gross domestic product and refers to the value of finished goods and services produced within a country's borders over one year.
Median return is the middle return in a sorted list of each individual security's return.
Risk premia refer to the amount by which the return of a risky asset is expected to outperform the known return on a risk-free asset.
Leverage ratio is a financial measurement that assesses the ability of a company to meet its financial obligations.
Interest coverage ratio is a measurement used to determine how easily a company can pay interest on its outstanding debt.
Drawdown is a peak-to-trough decline during a specific period for an investment, trading account, or fund.
Low quality companies would rank low based on low return on equity (LOE), high leverage or debt to equity, and unstable earnings.
German 10Y is a bond that reflects the yield received on government bonds issued by the German government maturing in 10 years.
Spain 10Y is a bond that reflects the yield received on government bonds issued by the Spanish government maturing in 10 years.
US 10Y Treasury is a bond that reflects the yield received on government bonds issued by the United States government maturing in 10 years.
United Kingdom 10Y is a bond that reflects the yield received on government bonds issued by the UK government maturing in 10 years.
Italy 10Y reflects the yield received on government bonds issued by the Italian government maturing in 10 years.
US 2Y Treasury is a bond that reflects the yield received on government bonds issued by the United States government maturing in 10 years.
ICE BofA US High Yield Index value, which tracks the performance of US dollar denominated below investment grade rated corporate debt publicly issued in the US domestic market.
ICE BofA Euro Corporate Index value, which tracks the performance of Euro dollar denominated investment grade rated corporate debt.
ICE BofA High Yield Master II OAS uses an index of bonds that are below investment grade (those rated BB or below).
EMBI (Emerging Market Bond Index) is JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries. The Global Diversified limits the weights of countries with larger debt stocks by only including a specified portion of these countries' eligible current face amounts of debt outstanding.
ICE BofA US Corporate Index, which tracks the performance of US dollar denominated investment grade rated corporate debt publicly issued in the US domestic market.
All investing is subject to risk, including the possible loss of the money you invest.
Equity securities are more volatile than bonds and subject to greater risks. Dividends are not guaranteed and a company’s future ability to pay dividends may be limited.
Bonds are subject to interest rate, price and credit risks. Prices tend to be inversely affected by changes in interest rates. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds.
Investments in fixed income securities are subject to the risks associated with debt securities including credit and interest rate risk.
Investments in foreign securities entail special risks such as currency, political, economic, and market risks. These risks are heightened in emerging markets.
Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
High-yield, lower-rated securities involve greater price volatility and present greater credit risks than higher-rated fixed income securities.
Private equity investments are speculative, highly illiquid, involve a high degree of risk, have high fees and expenses that could reduce returns, and subject to the possibility of partial or total loss of fund capital; they are, therefore, intended for experienced and sophisticated long-term investors who can accept such risks.
Alternative Investments often engage in leverage and other investment practices that are extremely speculative and involve a high degree of risk. Such practices may increase the volatility of performance and the risk of investment loss, including the loss of the entire amount that is invested. There may be conflicts of interest relating to the Alternative Investment and its service providers, including Goldman Sachs and its affiliates. Similarly, interests in an Alternative Investment are highly illiquid and generally are not transferable without the consent of the sponsor, and applicable securities and tax laws will limit transfers.
An investment in real estate securities is subject to greater price volatility and the special risks associated with direct ownership of real estate.
Hedge funds and other private investment funds (collectively, “Alternative Investments”) are subject to less regulation than other types of pooled investment vehicles such as mutual funds. Alternative Investments may impose significant fees, including incentive fees that are based upon a percentage of the realized and unrealized gains and an individual’s net returns may differ significantly from actual returns. Such fees may offset all or a significant portion of such Alternative Investment’s trading profits. Alternative Investments are not required to provide periodic pricing or valuation information. Investors may have limited rights with respect to their investments, including limited voting rights and participation in the management of such Alternative Investments.
The above are not an exhaustive list of potential risks. There may be additional risks that should be considered before any investment decision.
The views expressed herein are as January 17, 2023 and subject to change in the future. Individual portfolio management teams for Goldman Sachs Asset Management may have views and opinions and/or make investment decisions that, in certain instances, may not always be consistent with the views and opinions expressed herein.
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Date of First Use: January 19, 2023 303206-OTU-1729696