Ben Mandel, J.P. Morgan Asset Management Multi-Asset Global Strategist joins Yahoo Finance to discuss the companies latest report that looks at climate change and policy.
ADAM SHAPIRO: Welcome back to "On the Move." There's a new report from JP Morgan Asset Management. It's entitled, "Weighing the Investment Implications of Climate Change Policy." To help us break down what this means, especially as you make decisions about your investments, we invite into the stream multi-asset global strategist Ben Mandel. Appreciate your being here.
One of the things you say in the report is, going forward, this is going to depend on what you call the carrot and the stick coming from the government. And a case in point on this is a little bit of confusion I had this morning when the team was talking about it.
The capacity for renewable energy is now greater perhaps than coal, but the majority of electric generation in this country is still fossil fuel. So it sounds like the carrot and the stick are not yet in play, at least in the real world in the United States.
BEN MANDEL: So I think that's the key starting point for this discussion, is that, and everyone's talking about climate change. It's entered the common-- you know, the average investor's vernacular. And so the question is, is it priced in? And I think you're-- to your point, it is not. It is not priced in.
One piece of evidence for that is that of all the CO2 emissions globally, 80% are not covered by any carbon pricing system. And so even though you can make arguments, and there's some evidence that investors are seeing a risk premium for carbon in markets today, it has really not even come close to entering sort of the global economic set of incentives, and hence the actual fundamentals of individual firms.
Even where there is a carbon pricing system, I think you could also argue that that price is way too low. So it's the type of thing where I'm not exactly sure what the right carbon price is. But I can recognize the wrong price. And out of the 65 global carbon pricing systems, about half of them, or over half of them, have a carbon price of less than $10 per ton.
So that seems quite low in light of the negative externalities and the fact that to remove a ton of carbon from the atmosphere, the price is about $50. And so all this might reflect the fact that people are saying, well, you know, the economic consequences are out in 2100 or the distant future.
But the truth is, it's policy that's going to telescope those distant implications into the here and now. And we see that says pricing in over the coming decade. But it's not priced in yet.
JULIE HYMAN: And Ben, it's Julie here. It's good to see you. It's also interesting because you say, even if it is going to take a decade, as an investor, this is something that you need to be factoring in now, that it's better to be early than wrong in this case.
BEN MANDEL: I think that's-- I think that's right. I don't think it's-- you know, if it's not priced in and it-- you know, an interesting angle on what you just said is that it's really actually difficult to make big directional bets on how climate change will affect growth. So it could pan out in a number of different directions.
There could be a Green New Deal scenario where all the effects are very front-loaded in terms of policy. There could be a climate Minsky moment if it's backloaded, and there's a more chaotic outcome. And so in our baseline estimates, actually, it's very difficult to say which way this is going to sway growth over the next 10 years in one direction or the other.
Where we focused in on and where I think we have more confidence in are stories about relative performance. And so we've been making the case in our long-term outlook that, you know, for example, equity markets outside the US are likely to perform better over the next 10 years in relative terms than they did over the last. So if the 2010s was the US equities decade, given the massive outperformance of US large cap, it's unlikely to repeat over the coming decade.
And so where climate comes in is to help us differentiate where outside the US you want to be investing. And we see that as balancing out the emerging markets versus developed markets allocations in the sense that climate is going to be a headwind to emerging markets. EM countries are most prone to the physical damages of climate change. So their starting point is a little bit less favorable, perhaps less able in terms of fiscal space to deal with those issues.
And so I think it ends up being a drag on emerging market economies a little bit more than developed markets. And at the end of the day, we see it as a spreading out or strategic sort of long-term 10 to 15-year equity allocations much more evenly across markets than we had over the past decade.
MELODY HAHM: Ben, you mentioned earlier that you feel as though everyone is talking about climate change. I would argue that not everyone is speaking about it in a real way. even if you look at the White House of the United States, there have been some remarks of denial in the past. Not everyone is on the same page. President Donald Trump certainly doesn't prioritize subsidies or environmental investments.
How do you anticipate a movement from the political front, whether that's even nationally or globally, with things like the Paris Climate Accord? Do you feel that you can actually move the needle? Can they really push this movement further? Or do you feel like all of this is coming from the private sector?
BEN MANDEL: So I think it's going to be a confluence of those stakeholders over the coming years. And it's less a question of whether it happens, because I think this is a pressing issue, and more of an issue of who's leading the charge.
And so I guess you've seen on the carbon pricing and on the green infrastructure type of spending and on the government policy choices that they have to make-- is it the carrot or the stick-- a lot of that's happening outside the US at the moment. And you look at Europe as being kind of leading the charge.
Now whether that converges over the next couple of years or in the longer term is an open question. But it's less a question of whether it happens than who's leading the way.
ADAM SHAPIRO: Ben Mandel is JP Morgan Asset Management multi-asset global strategist. We appreciate your helping us to understand this report that you all have published. And we appreciate your being here "On the Move." The report, by the way, is called "Weighing the Investment Implications of Climate Change Policy." More "On the Move" after this.