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What 2024 has in store for us

By Craig Swanger
6 minute read

The two themes that will drive investment returns over 2024 are actually themes that will impact investment markets for the next decade too.

These have been on the radar for investment markets for some time, but are now large enough to meaningfully impact markets, particularly volatility.

Both themes, that is both “sustainability” and “artificial intelligence”, fall into the same category in that they are both “disruptive themes”. This is because they are both so large an influence on valuations that they will drive investment returns, but they are also both new, so investment researchers cannot easily look backwards to predict markets’ response.

What we do know, however, is that they will cause volatility this year, which is a great euphemism for both opportunity and risk.


Sustainable investments

The biggest opportunity here is not that sustainable investments are trending or not, but the impact that this theme is having on the flow of capital.

Put plainly, this means two separate but related opportunities exist, being:

  1. The so-called “dirty assets” offer higher returns as media-sensitive lenders (i.e. banks and other publicly listed lenders) are forced to exit these markets.
  2. The sustainable sector itself, particularly those borrowers looking to refinance balance sheets and lock in lower rates currently available due to the excess cash chasing these deals, creates opportunities for those that can participate in primary markets (debt capital markets).

AI and the digital economic revolution

There is little question that the digital economic revolution has been impacting capital markets for some time. What is less well understood is the impact that they will have on capital markets over the next few years.

The real question is what will drive those impacts and because we are in the middle, not the end, of that economic revolution, what are the opportunities and risks to look for as an investor.

AI represents the first time that the economy will be fundamentally and widely changed by this economic revolution. It will not be plain sailing, as there will be capital market bubbles, but there will be changes to the global economy.

The green new deal

There are two sides of this theme: the impact on sustainable (e.g. clean) investments and the flipside to this, i.e. the impact on so-called dirty asset valuations. Because these impacts are particularly relevant in commodity and property markets, they are very relevant for Australian investors.

Consider two debt issues: both come from the same sector, have similar asset backing, and are rated with just one notch difference, but one of them is “sustainable” due to the use of clean energy and the other is not. The sustainable deal has a lower credit rating, but it is currently paying less than the other deal in secondary trading.

This lower return-risk payoff is sometimes called the “greenium”.

Now consider two debt deals with the same balance sheet and cashflow risks, but one is to the coal sector and the other to cleaner energy, e.g. solar power generation. So their fundamental risks are similar in terms of underlying pricing and market risk (power generation). And while the risks differ in other ways (government support, weather impacts, etc), there is no fundamental reason that returns should differ strongly for two issues of the same credit rating.

Yet we are already seeing a “greenium” of around 150–200 bp, because the coal assets are struggling to find major funders and the clean energy provider spoilt for choices.

These are two examples of real deals in the market today and therefore great examples of the opportunities that understanding this market represents. The presence of these higher returns highlights the importance of understanding the investment markets’ impact of “sustainability”, even if you haven’t specifically dedicated part of your portfolio to sustainable assets.

In the first example, the sheer weight of capital has created a lower expected return for what is actually a higher risk investment. In the second case, the lack of finance, caused by the same theme, is driving up returns for those still in that market.

Part of this topic is the understanding that sustainable investments will likely offer lower returns due to the excess capital chasing sustainable assets. This is a market condition that will not change over the next few years at least.

Similarly, non-sustainable assets, particularly in the energy sector (e.g. coal) will have to pay more for capital as brand/PR-sensitive funders (e.g. major banks and growing ESG pension funds) exit these markets.

Impact on emerging economies

It is worth watching how sustainable energy production will impact commodity prices and the rapidly expanding emerging economies, and particularly the capacity constraints that will impact these markets as the OECD economies ramp-up sustainable energy capacity.

India is the largest of these, already the world’s fifth largest economy, and will soon likely pass Japan and Germany to become third, only smaller than China and the US. This rapid growth is emulating China’s in many ways. But this growth cannot be fuelled by renewable energy; India simply cannot afford this, and nor can the world provide such capacity in renewable energy while providing the capacity needed for the developed world to switch over to renewable sources of energy.

This creates an opportunity for investors: coal production and export infrastructure that is seen as reliable supply. Leaving sustainable investment insights to the side, both put Australian energy producers, i.e. as both reliable producers of renewable energy and coal, in strong positions.

Supporting India’s growth is a high growth opportunity, much like supporting China’s growth over the past 30 years. But it is not consistent with sustainable investing goals. Hence the risk: investors need to be very clear about what their strategies are.


Sustainable investing has been discussed from the philosophical viewpoint: what makes a sustainable asset? But for investors, this leaves out the question of how such philosophical issues impact capital markets.

This is no longer a niche issue; it is now mainstream. That means that the greater opportunities will go to those who understand how sustainability principles work to impact capital markets. This is not about how much one allocates to sustainability, but actually about stepping back to understand where future value will lay given that these sustainability investing principles will continue to impact markets for years to come.

Craig Swanger, chief investment officer, Income Asset Management