2024-10-14 12:02
Key takeaways On 12 October, China’s Finance Ministry (MoF) unveiled a package of incremental fiscal stimulus but provided limited details of the comprehensive fiscal expansion plan. The lack of stimulus details fell short of lofty market expectations of a big-bang fiscal stimulus bonanza. Finance Minister Lan Fo’an revealed the plan to raise the local government debt limit by a large amount in a one-off effort. Other measures included accelerated deployment of RMB2.3trn of unused SLGBs issuance quota in 2024, RMB400bn additional local government bonds issuance quota for 2024, issuance of SCGBs for bank recapitalisation and greater support for vulnerable groups like students. We remain neutral on mainland Chinese and Hong Kong equities as we look for concrete evidence of a forceful fiscal stimulus plan. We favour internet stocks due to their steep valuation discounts to their global peers, healthy earnings outlook and reduced regulatory risk premium. We also like quality Chinese SOEs paying high dividends, and consumer brands that benefit from the new consumption related policy stimulus. In Hong Kong, we favour undervalued high dividend stocks in the insurance and telecom sectors, as well as select oversold property developers with strong balance sheets. What happened? China’s Finance Ministry (MoF) unveiled a package of incremental fiscal stimulus to supplement the monetary, property and capital market support measures announced on 24 September. However, it fell short of lofty market expectations of a big-bang fiscal stimulus bonanza and remains uncertain whether the full details will be available when the next State Council executive meeting and National People’s Congress (NPC) Standing Committee meeting take place in late October. Key takeaways from the MoF’s press conference include: 1) Significant capacity of the central government to raise debt and fiscal deficit – China’s Finance Minister Lan Fo’an emphasised the central government’s significant capacity to increase leverage and revealed the MoF’s plan to raise the local government debt limit by a relatively large amount in a one-off effort, which was described as the “most forceful” in recent years. 2) Proceeds of SLGBs can be used to buy undeveloped lands and unsold homes – For the first time, local governments will be allowed to use the proceeds raised by issuance of special local government bonds (SLGBs) to buy undeveloped lands and unsold homes for redevelopment into subsidised housing. 3) Accelerated deployment of RMB2.3trn of unused SLGBs issuance quota in 2024 – This comprises proceeds of issued bonds that are not yet used, plus bonds that haven’t been issued but are within the 2024 issuance quota. 4) RMB400bn additional local government bonds issuance quota for 2024 – This will be done through the unspent bond issuance quotas accumulated from previous years. This additional funding is offered to make up for the significant revenue shortfalls of local governments this year. 5) Issuance of SCGBs for bank recapitalisation – Special central government bonds (SCGBs) will be issued to fund capital injection for recapitalisation of the six largest state-owned commercial banks. This will strengthen their core Tier-1 capital and lending power to support the economic recovery. 6) More decisive fiscal reform – A series of fiscal reform measures will be launched in the next two years to improve the budget system, perfect the fiscal transfer payment system and establish a mature government debt management system. 7) Greater support for vulnerable groups – The MoF guided for greater fiscal spending for low-income families and students, with the aim of boosting household consumption. Further to the slight increases in minimum levels for pensions and medical subsidies, the MoF announced the increase in transfer payment to support students on the back of the rising youth unemployment rate. Missing details of key stimulus plans could be due to pending approvals of the fiscal deficit and debt quotas by the State Council and NPC Standing Committee. Markets will closely watch out for the agendas and policy announcements at these key meetings in late October. Investment implications We remain neutral on mainland Chinese and Hong Kong equities as we look for a forceful fiscal stimulus plan that would provide a comprehensive local government debt resolution and more significant central government debt financing to reverse the property market downturn. However, the support policies announced so far should help reduce downside risk in growth in coming months and deliver the full-year GDP growth of 4.9% this year. Mainland Chinese and Hong Kong stocks remain under-owned by global investors. The valuations of MSCI China (11.8x) and HSI (10.2x) continue to stay below their 5-year averages and represent a steep discount to the 12-month forward P/E of S&P 500 (21.9x) and MSCI World (19.7x). Acceleration of government bonds issuance will do the heavy lifting in providing extra fiscal stimulus Source: Bloomberg, HSBC Global Private Banking and Wealth as at 13 October 2024. Past performance is not an indicator of future performance. We prefer internet companies with 1) more robust earnings outlook; 2) bigger valuation discounts to their historical valuations during the reopening rally in 2023; and 3) solid financial positions with the ability to lift total shareholder returns through share buybacks and higher dividends. We continue to favour quality Chinese SOEs paying high dividends. Those with their H-shares trading at an attractive discount to their A-shares could see better Southbound flows support. We also prefer consumer brands that are better positioned to benefit from the new consumption related policy stimulus. We prefer to stay selective in mainland Chinese property companies and banks. In Hong Kong, we favour undervalued high dividend stocks in the insurance and telecom sectors, as well as select oversold property developers with strong balance sheets. The equity market should benefit from the expected Fed rate cuts in the coming months, which should help lower funding costs in the Hong Kong economy and the domestic property market. Within the A-share market, we prefer a balance of defensive high-quality SOEs with attractive dividend yields in light of the low yield environment onshore, and high-end manufacturers with global competitiveness. We also position selectively in resilient consumer stocks, including services, and consumer goods that can potentially benefit from enlarged fiscal support for household consumption. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/2024-10-14-mof/
2024-10-14 12:02
Key takeaways With the US elections less than a month away, the markets’ focus on polls will further intensify. The latest readings show that the race between former President Donald Trump and current Vice President Kamala Harris remains tight. Hence, it is dangerous to bet on the outcome. All potential outcomes have pros and cons for markets. A Republican victory could lead to lower taxes and deregulation, but higher trade tariffs could raise inflationary fears and slow down rate cuts, creating an offsetting headwind. A Democratic victory would likely result in less uncertainty regarding global policies and less fiscal stimulus. History shows that volatility tends to increase before the elections but eases when the result is known. Equity markets tend to rise in the 6 months after the elections, regardless of the outcome. We base our investment strategy on earnings, interest rates and growth fundamentals, which remain constructive, supporting our bullish view on US equities. We continue to lock in yields of quality bonds at current attractive levels. Bond performance should be supported by continued Fed rate cuts. What happened? 2024 is the year that half of the world’s population will have gone to the polls, and the US elections on 5 November are probably the event with the most significant implications for the global economy and markets. Polls continue to evolve, and betting agencies’ odds reflect the ups and downs in people’s views of what will happen. But actual election victory chances are determined by who gets most of the Electoral College votes, not who has the largest share of the national votes. Much will depend on those states where there is no clear majority – the so-called ‘swing states’, where just a small number of votes could determine which candidate gets the electoral votes. Those states are Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania and Wisconsin. We do not think it is possible or wise to invest on the basis of a likely outcome. We point to the 2016 elections, where Democrats won the popular vote, but Donald Trump moved into the white house because of a narrow victory in a few key swing states. There are also 34 Senate seats and all 435 seats in the House of Representatives up for election. The current prediction illustrates the broad range of potential outcomes and uncertainty. There are four potential US election outcomes, with no clear favourite at this stage Source: Polymarket, HSBC Global Private Banking and Wealth as at 10 October 2024 Investment implications For the overall market direction, the election result may matter less than is sometimes assumed. Across election cycles, we tend to see higher volatility leading up to the election, but the volatility will ease when the result is known. In the event of a close election result, a recount or dispute could extend market volatility, but only temporarily. The US equity market returns tend to be positive in the 6 months after the elections, regardless of the result. Our graph shows the historical annual average returns for the four possible scenarios, highlighting that equities can rally both in case of a Democratic or a Republican president. Under a Trump presidency, we would expect fiscal easing for both companies and households as a result of the extension of existing tax cuts. This tends to be positive for equity markets, but the tailwind may be offset by higher import tariffs, which would not only hurt Chinese and European exporters but also potentially raise costs for US companies and households, boosting inflation. In turn, this could lead to slower Fed rate cuts. Historical annual returns of US stocks under four scenarios Source: Bloomberg, Factset, HSBC Global Research and Wealth as at 18 September 2024. Past performance is not a reliable indicator of future performance. From a sector perspective, we have recently seen that cyclical sectors and those potentially benefitting from deregulation (including technology, consumer discretionary, and financials) have performed well when Donald Trump’s polling numbers have improved. However, a reduction in immigration could weigh on sectors like construction and hospitality, as they rely on access to foreign workers, while higher tariffs could increase the cost of inputs for the industrials and consumer discretionary sectors. If Kamala Harris wins, there are offsetting factors, too. Continuity with the Biden administration may reduce uncertainty and could be a positive for markets. However, fewer tax cuts compared to a Trump presidency could be viewed as a negative. Climate change-related investments would see policy support, while the effort to re-onshore manufacturing are expected to continue. Whoever wins the presidency, if there is no clean sweep, policies would be less ambitious, reducing the market impact. The current market action suggests that investors have been reducing concentrated positions in their portfolios to avoid being wrong-footed on election day. For example, popular overweight positions in technology have been reduced, while investors have been adding to traditionally less favoured utilities and real estate stocks. As previously noted, we have been broadening our sector exposure beyond technology to include US financials, industrials, communications, and healthcare. Given the unpredictability of the elections and our view that the volatility is only temporary, we continue to base our investment strategy on other factors, namely Fed rate cuts, solid earnings, and resilient economic growth. These supportive fundamentals continue to warrant a bullish US equity stance. As for bonds, we continue to lock in yields of quality credit. Stronger-than-expected economic data have driven up yields in the past weeks, providing an opportunity to lock them in as cash rates continue to decline. US election scenario grid Source: HSBC Global Research, HSBC Global Private Banking and Wealth as at 10 October 2024. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/2024-10-14/
2024-10-14 07:04
Key takeaways The USD typically strengthens in the run-up to US elections. Among the four possible outcomes, clean sweep outcomes are likely to offer greater scope for USD strength to persist. But it would be a mistake to extrapolate the initial reaction into 2025, as others factors, like Fed policy, may be more dominant. The FX market likes to distil issues, such as the 5 November US elections, into a simple binary outcome, but this would be a mistake. The complexity is not only a function of the result being too close to call, but also the result of there being numerous implications, impacting fiscal, trade, and monetary policy, among other aspects. In addition, the impact may vary over time. Historically, the USD has fared well in the run-up to US elections, likely reflecting the “safe haven” allure amid heightened political uncertainty. That is likely to be true over the coming weeks. Once the result is known, we will see the next response in the FX market (we run through four possible outcomes below), perhaps persisting for days, weeks, or months. But it would be a mistake to assume that he post-result reaction will continue to set the tone into 2025. There are plenty of ways in which the FX market could stall or reverse that initial move, for example, if actual policy outcomes fail to match expectations, or if other factors supersede political forces as the key FX drivers. A Republican clean sweep: The USD is likely to rally sharply if there are signs of future fiscal stimulus that would temper market expectations for the Federal Reserve (Fed) easing in 2025. The likelihood of higher trade tariffs would also support the USD, particularly if they feed inflation expectations and further temper pricing for Fed rate cuts. Potential corporate tax cuts and deregulation expectations might draw investment flows into USD assets. Nevertheless, the USD could face headwinds, including concerns that the Republican Party would talk down the USD or call for lower US interest rates. Rising risk appetite might also temper the “safe haven” USD. But we would expect bullish USD forces to win out initially. Nonetheless, a USD rally would have its limits entering 2025, as it would not be guaranteed that actual delivery of policy would fully match those expected by markets. A Republican presidency, divided government: The initial USD reaction is still likely to be bullish, with markets likely to anticipate higher trade tariffs (and perhaps inflation), and a more business-friendly regulatory backdrop. But the USD would not benefit from the fiscal easing expectations that a clean sweep would have brought. A divided Congress could foster a more fractious debate regarding tax cuts expiring in 2025, which could create a “fiscal cliff” mood in markets. Most likely, however, Fed policy would return as the dominant USD driver in 2025, amid fiscal gridlocks. We believe a modest initial post-election USD rally could extend into 2025. A Democrat clean sweep: This outcome could point to a sling-shot path for the USD. The initial post-election reaction is likely to be USD negative, as markets price out the potentially USD-positive aspects that a Republican presidency might have fostered. But that reflex would be unlikely to set the tone for the USD into 2025. A clean sweep could still belatedly foster market expectations for USD-positive fiscal stimulus, albeit with different elements to a Republican clean sweep. This could temper market expectations for the pace of Fed easing in 2025, with attendant USD upside. Any initial USD-negative reaction in November could reverse in 2025. A Democrat presidency, divided government: On paper, the ultimate status-quo outcome, but one which could see some initial USD weakness, amid adjusting to price out fiscal stimulus expectations. This scenario should not carry lasting implications for the USD, but other drivers, such as Fed policy and the pace of easing elsewhere, would likely be more dominant. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/2024-10-14/
2024-10-14 07:04
Key takeaways Q3 results season kicks off this week with 8% of the S&P 500 (by market cap) reporting, and 60% expected by Halloween. Annual consensus profits growth is 10% for this year, and 15% for 2025. Many Frontier and smaller emerging market countries were relatively quick to respond to the post-Covid inflation surge, hiking rates faster than the US. Growing expectations of a soft economic landing bode well for US investment grade (IG) debt. Chart of the week – US economic data holding up September’s strong US employment report, with non-farm payrolls up 254k (versus 150k expected) and the unemployment rate unexpectedly edging lower to 4.1%, was good news for those hoping for a soft landing for the world’s largest economy. The recent run of better-than-expected economic data (see chart) also coincides with an underlying trend of disinflation – despite September’s stronger-than-expected CPI print. Leading indicators point to a further moderation in price pressures, including the shelter component which is contributing to high services inflation. August’s market wobble – partly triggered by a weak July payrolls number – now seems like a distant memory. US stock markets are notching up fresh all-time highs and the US 10-year Treasury yield is back above 4%. A soft landing is good news for global risk assets. But markets are likely to remain volatile as investors grapple with uncertainty over the economic outlook. Rates remain restrictive and the US election has the potential to usher in policy shifts. And despite better US macro news, some labour market data suggests cooling ahead. The October payrolls report could be weak again. Earnings could also disappoint – doubly bad news given stretched valuations. Market Spotlight Chinese markets take a pause for breath It was a bumpy week for Chinese stocks as investors digested the recent surge in prices and the National Development and Reform Commission’s (NDRC) announcement that it would accelerate bond issuance to support the economy. A pause for breath last week isn’t surprising given the extremity of recent market moves – the MSCI China had gained around 26% in the 10 trading days leading up to the Golden Week holiday. Investor expectations around the speed and scale of incoming fiscal support may have become too optimistic. Despite the lack of details on potential fiscal stimulus offered by the NDRC, it is likely that Chinese authorities will still unveil a meaningful fiscal package in the coming weeks. The Ministry of Finance held a press briefing on 12 October, while another opportunity for action comes at the National People’s Congress standing committee meeting later this month. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 11.00am UK time 11 October 2024. Lens on… Analysts spooked Q3 results season kicks off this week with 8% of the S&P 500 (by market cap) reporting, and 60% expected by Halloween. Annual consensus profits growth is 10% for this year, and 15% for 2025. But on a quarterly year-on-year basis, analysts have slashed forecasts for Q3 to just 2.9% – down from 10.2% a year ago. So, what has spooked them? Economically-sensitive sectors like materials, consumer discretionary (autos/retail), and industrials have seen some of the biggest cuts. Soft economic data over the summer are likely to blame, and lower oil prices hit energy names. But from Q4, that changes. Five quarters of growth averaging 14% (double the long-run average) suggests a rosier outlook. Technology is set to be the fastest growing sector in Q3, while analysts expect energy to be the weakest. Financial stocks, which are among the first to report, are anticipated to slow. Overall, a low growth bar could offer scope for above-average beats for Q3. But with the market already trading on a relatively high PE of 21x, a soft landing and giddy profit growth from Q4 onwards appear to be priced-in, just as momentum in tech earnings is starting to slip. Value at the frontier Many Frontier and smaller emerging market countries were relatively quick to respond to the post-Covid inflation surge, hiking rates faster than the US. With real rates now significantly positive, they have room to cut – and stimulate growth – without pressuring their currencies. We’ve seen recent cuts in countries like Iceland, Kenya, Pakistan, and Serbia. It’s a trend that should act as a tailwind for Frontier valuations. It comes as valuation discounts between Frontier and both DM and EM regions remain well above their 5-year averages. Frontier markets are currently trading at a price-earnings ratio of 9.7x – a 51% discount to DMs (at 19.9x) and a 24% discount to EMs (at 12.8x). Yet, Frontier offers superior earnings growth and higher dividend yields, plus the diversification benefit of low correlation with other asset classes. This is largely being driven by structural trends like the relocation of manufacturing hubs, re-routing of supply chains, social and economic reforms (especially across Gulf Cooperation Council countries), and digitisation. ‘All in’ appeal of US IG Growing expectations of a soft economic landing bode well for US investment grade (IG) debt. With Fed policy easing expected to continue at a cautious pace, and recent jobs data mitigating recession worries, 10yr Treasury yields have risen, which has improved the attractive all-in yields that IG debt offers. IG debt has a high correlation with government bonds. So, if risk appetite falters, IG should be a defensive play as the widening in credit spreads is likely to be, at least partially, offset by the fall in government bond yields. The fundamental backdrop for IG has also been positive. Corporate profits have been resilient, and the net issuance outlook is expected to remain favourable. Above all, investor demand remains upbeat. There have been strong flows for much of this year into US IG exchange traded funds and the unwinding of popular carry trades during the summer did little to dent investor enthusiasm. The experience suggests that the marginal spread-widening required to attract buyers is smaller than it was in the past. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Source: HSBC Asset Management. Macrobond, Bloomberg, Datastream. Data as at 11.00am UK time 11 October 2024. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 11.00am UK time 11 October 2024. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Market review Risk markets were firm ahead of Q3 earnings season in the US. Core government bonds fell on an upward surprise in September’s employment report. US CPI data also came in stronger than expected. Bunds continued to fare better than US Treasuries as investors priced in a 0.25%, rate cut at October’s ECB Council meeting. In stocks, the US S&P 500 touched a new all-time high, the Euro Stoxx 50 index traded sideways, and Japan’s Nikkei 225 inched higher. Emerging market equities weakened as investors awaited further details on potential fiscal stimulus for the Chinese economy. The Hang Seng fell sharply, with China’s Shanghai Composite also weakening after the Golden Week holiday. The Korean Kospi rebounded, with India’s Sensex little changed. In commodities, geopolitical tensions are supporting energy prices. Copper weakened, while gold was on course to finish the week flat. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/2024-10-14/
2024-10-14 07:04
Key takeaways As expected, the RBI changed its stance from “withdrawal of accommodation” to “neutral”, in order to buy itself more flexibility, while keeping rates unchanged. While the RBI will be carefully analysing the “inflation hump” expected in the September print, it expects one year-ahead-inflation at target levels of c4%. The sequencing is important; the stance was changed today, and we believe rate cuts will begin in the next meeting; we expect 50bp in rate cuts over December and February, taking the repo rate to 6%. In line with our expectation, the RBI kept the policy repo rate unchanged at 6.5%, but changed its stance from ‘withdrawal of accommodation’ to ‘neutral’. It further explained its intent to “remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth”. It also said that a neutral stance will give “greater flexibility and optionality” in monetary policy making. Five of the six MPC members voted for a pause in rates. The new MPC member, Dr. Nagesh Kumar, voted for a cut. All six members voted for the change in stance. As per Bloomberg consensus, a clear majority (40 out of 44 respondents) called for no change in rates. But it was rather divided house between those expecting a stance change, and those not. We believe that a bunch of softer growth indicators of late and our expectation that inflation will get to the 4% target by March 2025, made a case for a softer stance. But with key global uncertainties in the horizon such as US elections and oil prices, it would have been too soon for a rate cut. Careful sequencing We believe the RBI aptly put the horse before the cart. One, being an inflation targeter, it spoke more of upside inflation risks than downside growth risks. The animal analogy was not lost on us. The inflation elephant alluded to in past meetings had been sluggish, taking time to rein in. Meanwhile the inflation horse, mentioned in today’s meeting, had understandably been taken to the stables, but could bolt again if the stable doors were to be opened. We don’t particularly see this as hawkish. We see it aptly aligned with the RBI’s desire to remain close to the 4% inflation target. Two, the RBI seems to be sequencing its moves carefully, starting off with a softening of stance today. We believe the next move will be a 25bp rate cut in the December meeting. RBI style growth-inflation balance While the RBI mentioned that the balance between growth and inflation remains well-poised, we believe it fully acknowledged upside risks to inflation (namely adverse weather events, geopolitical conflicts, commodity price spikes), while not acknowledging the downside risks to its growth forecast. On inflation, Deputy Governor Patra spoke about the short term “inflation hump”, and RBI’s desire to see it pass. Indeed, September inflation is expected to come in at 5.2% y-o-y (versus 3.7% last month), led by base effects and select sticky food prices. On growth, the RBI continues to forecast GDP growth at 7.2% in FY25, which is higher than our forecast of 7%. In the Monetary Policy Report (MPR) which was released along with the policy statement, the FY26 growth forecast has also been kept at an elevated 7.1% (HSBC: 6.6%). But we are going to read between the lines. Even as the RBI highlighted upside inflation risks, the MPR unveiled a 4.1% inflation projection for FY26 (i.e. one year ahead inflation). Given the RBI is driven by future inflation expectations, this is another reason why we think a rate cut is coming up in December. Confident but not complacent The RBI sounded confident on many aspects of the macro economy: Liquidity has eased (after a tight second half of September), the term premium has been stable and transmission to credit markets has progressed satisfactorily (see exhibit 1). On the external front, the current account deficit is likely to remain at sustainable levels, portfolio flows have risen, and FX reserves are at record highs (of over USD700bn). Fiscal consolidation is also underway (though we believe that the centre’s consolidation may be partly offset by wider deficit at the states). But despite the confidence, the RBI was not complacent. In particular, it highlighted two areas of financial stability that need to be monitored. One, stress build-up in a few unsecured loan segments (like loans for consumption purposes, micro finance loans and credit card payments outstanding). And two, some NBFCs pursuing growth too aggressively with an “imprudent growth at any cost approach”. What next? We believe the recent softness in select fast moving growth indicators (PMI Manufacturing, motor sales, cement production, bank credit, corporate tax collections, GST revenue growth and goods exports) is more representative of sector rotation (from urban to rural) rather than a marked slowdown. Therefore, we think this will be a shallow rate cutting cycle, with an aggregate 50bp in easing. We expect a 25bp rate cut in December, followed by another one in February, taking the policy rate to 6%. This aligns with our real rate calculation of neutral rates at 1.75% (the average of the band the RBI communicated in the monthly bulletin), and our medium-term inflation forecast of 4.25%. https://www.hsbc.com.my/wealth/insights/market-outlook/india-economics/2024-10/
2024-10-09 12:02
A sustainable future for beer Climate change affects the taste of beer, and firms in the industry need to ensure taste quality is maintained as demand rises. Brewers are also under pressure to be more sustainable in terms of water use, raw materials and packaging emissions. We think investor scrutiny of retailer commitments could help ensure beer is more sustainably enjoyable. In this issue of #WhyESGMatters, we discuss the climate and environmental issues associated with beer production and what brewers and investors can do to alleviate this impact. Did you know? Beer holds a volume share of 75% in the global alcoholic beverage market. An additional 55% primary energy is needed for one litre of beer packaged in glass vs. in aluminum cans. 90% of Europe’s aromatic hop field area is located in Slovenia, Germany and Czech Republic. Europe supplies 50-63% of hops globally. The average alpha acid content in hops decreased by 34.8% in Celje (Slovenia) between 1971 and 2018. Beer production accounts for 5% of the UK's total water demand. Did you know? Alpha acids are chemical compounds found in the hop plant, which are the source of bitterness, aroma and flavour in beer. Bitter hops have a higher alpha acid content and are generally used to extract bitterness. Aroma or finishing hops have a lower alpha acid percentage, but they contribute to the overall flavour profile. Changes in alpha acids affect the quality of aroma hops, which has an impact on beer’s flavour. Source: M Mozny et al., Climate-induced decline in the quality and quantity of European hops calls for immediate adaptation measures, Nature Communication, 10 October 2023; European Commission, Crop productions and plant-based products: hops and Hop report for the harvest year 2022; D Amienyo, A Azapagic, Life cycle environmental impacts and costs of beer production and consumption in the UK, The International Journal of Life Cycle Assessment, 2016, World Spirit Alliance, Spirits: Global Economic Impact study 2024. Climate change and beer Beer is one of the most popular drinks globally, accounting for 75% of total beverage alcohol volumes, compared to 10.4% for wine, and 9.9% for spirits. The beer industry sits just below spirits in terms of consumer spend, representing 40% of the alcoholic beverage market value. China, the US, and Brazil lead beer market share, accounting for 21.9%, 10.6%, and 7.8% of sales, respectively as of 2022, but Czechs consume the most beer per capita, over 6x China and 3x US, at 189 litres per year. Will climate change take the taste and aroma away? Hops: The growing consumer preference for beer flavours, which depends on high-quality hops, has led to increased focus on the impact of climate change on beer brewing. A recent study by the Czech Academy of Sciences and Cambridge University compared European aroma hops during two periods, 1971–1994 and 1995-2018, and found that rising temperatures associated with climate change delayed the start of the hop-growing season by 13 days from 1970 to 2018. This pushed back the critical ripening period towards the warmer part of the season, lowering the alpha acid content in hops and impacting the aroma and flavour of beer. Climate change is likely to continue to impact European and other top hop-growing regions globally, such as the US (Idaho, Oregon, and Washington), China (Xinjiang and Gansu) and Australia (Tasmania and Victoria). For example a decline of 20-31% in alpha acid content is anticipated in Europe by 2050, while overall yields are expected to shrink by 4-18%. Given that all G20 countries have seen rising temperatures, we expect hop cultivation in these other markets to face similar challenges. Beer production process Note: some techniques may vary, e.g., hops may be added at various stages of the process, such as mash hopping and dry hoping. Source: HSBC, Britannica. Malted barley: Climate change is also likely to affect malted barley crops, with big implications for the beer industry, given malt provides sugars responsible for alcohol concentration and proteins required for beer’s foaming properties. Indeed, one study shows that most of today’s barley harvesting areas will get warmer and dryer, resulting in sharp declines in yields, by 3-17%, depending on the environment. Research also suggests that increased temperatures and heat intensity can lead to significant rises in grain protein concentration, which reduces the starch concentration and enzymes necessary for high-quality malt and good beer production. What does this mean for the sector? We think investors should consider how hop and barley farmers, as well as firms in the sector, implement adaptation measures to ensure availability of high-quality crops. For example, some hop farmers are relocating their gardens to higher elevations and valley locations with higher water tables. They’re also building irrigation systems or protective shading structures and breeding more drought resistant varieties. Some commentators suggest that, ultimately, hop growing is likely to move to cooler locations, even such as Finland or Norway, due to cost considerations; this adaptation measure is proving to be effective in wine industry. For barley, similar adaptation measures can be done; researchers are also working on new strains of barley that can be grown in different conditions while maintaining malt brewing quality, such as ‘winter ready’ varietals. The environment and beer Throughout the lifecycle of beer, sustainability issues exist in the cultivation of raw materials, the production of beer by breweries, and in the packaging and delivering of beers to stores or other places. We discuss three key environmental impacts of beer below. Water Water is an essential component in farming beer’s key ingredients, barley and hops. According to the Water Footprint Network, malted barley required to produce one litre of beer needs nearly 300 litres of water. Water is also key in beer’s production processes, from the mashing of grains to washing and cleaning equipment after each batch is completed. The brewing stage itself consumes, on average, between 4-7 litres of water per litre of beer in smaller craft breweries. In the UK alone, the production of beer requires 185bn litres annually, c5% of the UK’s total water demand. Raw materials Malted barley encompasses a highly energy-intensive production process, so it’s unsurprising that among the raw materials used to make beer, it makes the biggest contribution to emissions. The use of pesticides and fertilisers not only releases further emissions but also raises biodiversity risks. Globally, 64% of agricultural land is at risk of pesticide pollution, and 34% of high-risk areas are high-biodiversity regions. Hops face similar challenges on top of the energy required to dry them before the boiling process. Contribution of different materials to beer’s overall emissions from raw materials Note: Hops are included in ‘Other’ Source: The International Journal of Life Cycle Assessment (2016) Packaging Emissions from packaging contribute the largest part of the beer industry’s carbon footprint, which is largely driven by the production and transportation of glass bottles. It’s estimated that one litre of beer packaged in glass requires 55% more primary energy, compared to the same volume in aluminium cans. Recycling and reducing the weight of glass packaging is key: a 10% weight reduction is estimated to save 5% of emissions. At the same time, kegs are the most sustainable option as they can have a useful life of more than 30 years and can be reused more than 150 times before being recycled. Emissions intensity of beer by packaging and life cycle stage Source: The International Journal of Life Cycle Assessment. Addressing sustainability issues Recent years have seen the rise of carbon-neutral and net-zero breweries. Carbon neutral breweries emphasise the use of carbon offsets, conversely, net-zero breweries take a more proactive approach by addressing emissions across production and supply chains, integrating renewable energy sources and efficient technologies. Brew without the buzz With the rise of health-conscious consumers, a rising number of consumers chooses non-alcoholic beverages. According to a 2023 UK survey, 44% of individuals aged 18-24 consider themselves either occasional or regular drinkers of non-alcohol alternatives, and 33% consider themselves non-drinkers. The industry is catching the drift: popular beer brands have started producing low and non-alcohol beers. Non-alcoholic beers require less processing and resources than alcoholic beers and are therefore more sustainable. But the environmental impact of barley and hops, which are still key to their flavour, remains significant. Flavours fading for craft brewers We think beer lovers should be aware that these flavoured or hop-forward beers come with a higher environmental impact; they require more aroma hops and are often more water and space intensive than other hop varietals. For example, in the US, it takes c70% more land and water to produce one kilogram of aroma hop pellets than for alpha hop pellets. Actions towards sustainable beer production Source: HSBC; Responsible Brewing: An Introduction to Water, Energy, and Waste Management in Breweries, Medium, 08 July 2023; R Nieto-Villegas et al., Effects on beer attribute preferences of consumers’ attitudes towards sustainability: The case of craft beer and beer packaging, Journal of Agriculture and Food Research, March 2024. 4. Conclusion As climate change continues to impact the beer sector, we think investors should also continue to scrutinise companies’ sustainability commitments in the beer industry; future improvements should focus on the raw materials stage, especially malted barley, as well as packaging and water use. An increased focus on adaptation measures is also required to meet beer demand without reducing its quality. We believe that over time, investors input could help make beer more sustainably enjoyable. https://www.hsbc.com.my/wealth/insights/esg/why-esg-matters/2024-08-20/
