Clean Transition Investing: From Managing Risk to Unprecedented Opportunity

The world requires substantial investment in the transition to cleaner sources of energy. We view investment in the clean transition as an overarching theme rather than a specific asset class. Solutions will require investments across the capital stack and with all forms of capital—including equity, debt, and various real-asset structures—from both public and private sources.

DOWNLOAD THE WHITE PAPER

Key Takeaways

  • For investors considering exposure to the clean transition, we see significant opportunities to generate attractive, diversified returns in a number of sustainability-related sectors, while driving real, positive change in the world.
  • To address the global energy transition, the world requires substantial, immediate, and ongoing investment in both businesses and technologies which support decarbonization, the transition to cleaner sources of energy, and a more sustainable level of consumption.
  • This will require unprecedented levels of investment. No matter how it’s calculated, the capital required to facilitate the energy transition by 2050 is enormous: Per the International Energy Agency (IEA), $150 trillion. Per McKinsey, $275 trillion. Per PWC, approximately $1,000 per year for every person on the planet.
  • Because climate risk can affect every business, in every sector, globally, Apollo views investment in efforts to decarbonize as an overarching theme rather than a specific asset class. Solutions will require investments across the capital stack and with all forms of capital—including equity, debt, and various real-asset structures—from both public and private sources.
  • Last year, Apollo announced the launch of a comprehensive sustainable investing platform focused on financing and investing in energy transition, decarbonization, and sustainability. We believe we can effectively deploy $50 billion in clean energy and climate-related opportunities through 2027 and see an opportunity to deploy as much as $100 billion by 2030.
DOWNLOAD THE WHITE PAPER

The information herein is provided for educational purposes only and should not be construed as financial or investment advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the end of this document for important disclosure information.


Important Disclosure Information

This presentation is for educational purposes only and should not be treated as research. This presentation may not be distributed, transmitted or otherwise communicated to others, in whole or in part, without the express written consent of Apollo Global Management, Inc. (together with its subsidiaries, “Apollo”).

The views and opinions expressed in this presentation are the views and opinions of the author(s) of the White Paper. They do not necessarily reflect the views and opinions of Apollo and are subject to change at any time without notice. Further, Apollo and its affiliates may have positions (long or short) or engage in securities transactions that are not consistent with the information and views expressed in this presentation. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. Target allocations contained herein are subject to change. There is no assurance that the target allocations will be achieved, and actual allocations may be significantly different than that shown here. This presentation does not constitute an offer of any service or product of Apollo. It is not an invitation by or on behalf of Apollo to any person to buy or sell any security or to adopt any investment strategy, and shall not form the basis of, nor may it accompany nor form part of, any right or contract to buy or sell any security or to adopt any investment strategy. Nothing herein should be taken as investment advice or a recommendation to enter into any transaction.

Hyperlinks to third-party websites in this presentation are provided for reader convenience only. There can be no assurance that any trends discussed herein will continue. Unless otherwise noted, information included herein is presented as of the dates indicated. This presentation is not complete and the information contained herein may change at any time without notice. Apollo does not have any responsibility to update the presentation to account for such changes. Apollo has not made any representation or warranty, expressed or implied, with respect to fairness, correctness, accuracy, reasonableness, or completeness of any of the information contained herein, and expressly disclaims any responsibility or liability therefore. The information contained herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice or investment recommendations. Investors should make an independent investigation of the information contained herein, including consulting their tax, legal, accounting or other advisors about such information. Apollo does not act for you and is not responsible for providing you with the protections afforded to its clients.

Certain information contained herein may be “forward-looking” in nature. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking information. As such, undue reliance should not be placed on such information. Forward-looking statements may be identified by the use of terminology including, but not limited to, “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology.

The Standard & Poor’s 500 (“S&P 500”) Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value.

Additional information may be available upon request.

Fed Says Inflation Is Driven by Demand

The Fed has calculated how much of inflation is driven by demand and how much inflation is driven by supply, and their latest estimates find that supply is becoming less important and demand inflation remains high and sticky, see chart below.

Specifically, the Fed, for each of the 124 product categories in the core PCE index, estimated price and quantity equations using a VAR with 12 lags. They looked at the signs of residuals to identify how big a share of categories of consumer spending experienced a combination of higher prices and higher quantities (demand shock) or higher prices and lower quantities (supply shock).

With inflation being driven by demand, more demand destruction is needed in the form of higher rates from the Fed.

Source: FRBSF, Apollo Chief Economist

Monthly Payments for New Mortgages

The monthly mortgage payment for a new average loan size has doubled to almost $3,000 since the beginning of last year, see chart below. As households continue to run down their excess savings, these higher mortgage payments will eventually begin to have a negative impact on the housing market and the consumer.

Source: Bloomberg L.P., Apollo Chief Economist. Note: Calculation of monthly payment using the 30-year average new purchase loan size and the 30-year effective rate.

Job Openings Offering Work From Home

The share of job openings offering work from home is starting to flatten out across countries, see chart below. For more see here.

Work-from-home job vacancies by country
Source: WFH MAP, Apollo Chief Economist. Note: This includes share of new job vacancy postings which explicitly offer new hires the right to work one or more days per week from home or other remote location. This pools together both hybrid and fully remote offers.

Forecasting the Fed Funds Rate

In March 2021 the FOMC thought that the Fed funds rate by the end of 2023 would be zero, and today they think it will be 5.6%, see chart below. With this in mind, markets should be flexible when they think about where the Fed funds rate will be by the end of 2024.

Fed funds rate projections change
Source: FRB, Apollo Chief Economist

When Will Fed Rate Hikes Slow Consumer Spending?

The charts below show how consumer spending on services and goods respond during Fed hiking cycles. 

There are two conclusions:

1) The first chart shows that spending on consumer services is not very responsive to Fed hikes, and it can take up to 18 months after the first Fed hike before consumer spending on services starts slowing down.

2) The trajectory of consumer spending on goods during this Fed cycle has been very muted. This was likely driven by the strong growth in consumer spending on goods during the pandemic.

The bottom line is that looking at previous Fed hiking cycles, it always takes a long time before Fed hikes begin to slow down consumer spending on services. 

With services making up 80% of spending, this argues for the Fed having to raise rates more than the market is currently pricing. And with more rate increases comes a higher risk of a harder landing.

Response of services spending during Fed rate hikes
Source: BEA, FRB, Apollo Chief Economist
Response of goods spending during Fed rate hikes
Source: BEA, FRB, Apollo Chief Economist

Predicting Inflation

Even though they did not raise interest rates at their meeting last week, the Federal Reserve signaled that more rate hikes are needed to get inflation under control. The latest FOMC forecast predicts that core inflation will fall below 3% within a year. This has been the forecast from every Fed meeting over the past two years, and it has been wrong. It has been a difficult period to predict what inflation will do—and the conclusion for investors is to take inflation forecasts with a grain of salt.

This presentation may not be distributed, transmitted or otherwise communicated to others in whole or in part without the express consent of Apollo Global Management, Inc. (together with its subsidiaries, “Apollo”).  

Apollo makes no representation or warranty, expressed or implied, with respect to the accuracy, reasonableness, or completeness of any of the statements made during this presentation, including, but not limited to, statements obtained from third parties. Opinions, estimates and projections constitute the current judgment of the speaker as of the date indicated. They do not necessarily reflect the views and opinions of Apollo and are subject to change at any time without notice. Apollo does not have any responsibility to update this presentation to account for such changes. There can be no assurance that any trends discussed during this presentation will continue.   

Statements made throughout this presentation are not intended to provide, and should not be relied upon for, accounting, legal or tax advice and do not constitute an investment recommendation or investment advice. Investors should make an independent investigation of the information discussed during this presentation, including consulting their tax, legal, accounting or other advisors about such information. Apollo does not act for you and is not responsible for providing you with the protections afforded to its clients. This presentation does not constitute an offer to sell, or the solicitation of an offer to buy, any security, product or service, including interest in any investment product or fund or account managed or advised by Apollo. 

Certain statements made throughout this presentation may be “forward-looking” in nature. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking information. As such, undue reliance should not be placed on such statements. Forward-looking statements may be identified by the use of terminology including, but not limited to, “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology.

S&P500 and Fed QE Highly Correlated

Since SVB collapsed, the Fed has been adding liquidity, and the S&P500 is up more than 10%. The high correlation between Fed net QE and the S&P500 seen in the chart below suggests that Fed liquidity is a crucial driver of the stock market. With the Fed turning more hawkish and continuing QT, the downside risks to equities are growing.

S&P500 performance and Fed QE
Source: Federal Reserve Board, Bloomberg, Apollo Chief Economist. (FED QE = Fed total assets – Balance of the Treasury General Account – Temporary cash added/drained through Overnight Reverse Repo).
Fed adding liquidity after SVB
Source: Federal Reserve Board, Bloomberg, Apollo Chief Economist

Fed Consistently Wrong About Inflation

The latest FOMC forecast predicts that core inflation within a year will fall below 3%. This has been the forecast for every Fed meeting over the past two years. And this forecast has been consistently wrong, see chart below.

Earlier this week, the Fed took the consequence of this systematic forecast error and turned significantly more hawkish. Markets didn’t listen, and the change in tone from the Fed ended up having little negative impact on rates, credit, or equities.

The bottom line is that inflation at 5% remains too high, and it is clear that markets are underappreciating the Fed’s commitment to get inflation back to 2%.

The Fed's forecast of falling inflation has been consistently wrong
Source: Federal Reserve Board, BEA, Bloomberg, Apollo Chief Economist

Sales of Cardboard Boxes Falling

Sales of cardboard boxes have been declining over the past year, reflecting the ongoing weakness in the goods part of the economy, see chart below.

Industry shipments of corrugated boxes, in billions of square feet
Source: Bloomberg, Apollo Chief Economist