Taking charge: How battery technology advances could fuel a new boom in electric transport

As the electric and autonomous vehicles markets evolve, significant advances are being made in battery technology and the race is now on to build battery packs that can compete on cost with the internal combustion engine.

There is a lot of debate about how much battery packs of the future will cost with a target of US$100 per kilowatt-hour often held up as the figure which will make them competitive with conventional petrol and diesel fuelled engines. Given recent technological advances, that could be achievable by 2022-23.

Battery costs have already been dropping at about 15% per year over the past decade. Scale manufacturing and adjustments in the way chemicals and technology are applied in battery construction are also helping to improve battery energy density and the range they allow electric vehicles to travel.

Major tyre manufacturers are also addressing the challenges set by the weight of EVs by developing better tyres specifically designed for them. Because of the sheer weight and the higher torque of electric battery driven vehicles, their wheels do need stronger tyres with lower rolling resistance. Tyres will need to improve over time to support this market.

Frank Goguen and Barry Mills, senior research analysts. The Boston Company, a brand of BNY Mellon Asset Management North America Corporation

As the electric and autonomous vehicles markets evolve, significant advances are being made in battery technology and the race is now on to build battery packs that can compete on cost with the internal combustion engine. There is a lot of debate about how much battery packs of the future will cost with a target of US$100 per kilowatt-hour often … read more

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The BBB conundrum: an accident waiting to happen?

The composition of the US corporate investment grade (IG) market has undergone a dramatic transformation over the last decade. A boom in debt-fuelled M&A and share repurchase activity has contributed to an increase in leverage and an explosion in BBB-rated US IG corporate debt. There are signs that while downgrades have happened, credit rating agencies have been arguably too lenient in some cases, placing too much faith in the ability/desire of companies to de-lever within a target timeframe.

However, the general trend of increased leverage is consistent with a strengthening economic backdrop. The US economy remains in the midst of a protracted economic expansion that began almost a decade ago and, should it continue into summer 2019, will become the longest expansion in its history. Along with the recent tax reforms, this presents a very favourable environment for corporate America. The tax reforms should lead to an improvement in corporates’ free cash flow, which would enable them to manage higher leverage burdens; and the now higher after-tax cost of debt makes it less attractive from an issuer’s perspective. This should pour some cold water on opportunistic debt issuance. Along with still-easy monetary policy, an economy at full employment and the Federal Reserve’s preferred measure of inflation hitting 2% for the first time in six years, and the increase in corporate leverage makes more sense.

We would also note that valuations of BBB-rated debt still appear attractive in the context of historical loss rates. That said, if the credit cycle turns and companies do not sufficiently delever, rating agencies may be forced to downgrade some of these large-cap companies to high yield. We therefore believe security selection has become ever-more important.

Peter Bentley – head of UK and global credit. Insight Investment, a BNY Mellon company

The composition of the US corporate investment grade (IG) market has undergone a dramatic transformation over the last decade. A boom in debt-fuelled M&A and share repurchase activity has contributed to an increase in leverage and an explosion in BBB-rated US IG corporate debt. There are signs that while downgrades have happened, credit rating agencies have been arguably too lenient … read more

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Emerging market sell-off: an untimely exit?

There is no doubt emerging markets have had a rough run since the start of the year, and it is easy to understand why investors are skittish. Events, such as Italian politics and Trump’s future behaviour on trade, could create negative shocks and are tough to measure or anticipate. However, we think the move away from EM may be premature; our global macro outlook actually supports the asset class.

We expect the main external drivers lead to a reversal of recent trends and bolster EM assets such as local currency debt. While US rates will likely continue moving a bit higher, the bulk of expected Federal Reserve hikes are already priced in forward curves. A relative healthy global growth outlook continues to support commodity prices, an obvious boon to many commodity exporters. Finally, we believe some fundamental drivers for US dollar depreciation remain intact. We also think the dollar is expensive, particularly when considering mounting twin external and fiscal deficits. As the dollar begins to slide, which we expect, it will create a tailwind for the asset class. While we may have to be more patient, we think the asset class will recover and likely post notable returns.

Federico Garcia Zamora – portfolio manager. Standish, BNY Mellon Asset Management North America

There is no doubt emerging markets have had a rough run since the start of the year, and it is easy to understand why investors are skittish. Events, such as Italian politics and Trump’s future behaviour on trade, could create negative shocks and are tough to measure or anticipate. However, we think the move away from EM may be premature; … read more

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Green thinking: A future growth market for bonds?

Green bonds offer investors looking for exposure to sustainable investments a chance to invest in the ‘E’ (environmental element) of their environmental, social and governance (ESG) remit. They allow investors to help aid the transition to a low-carbon world by lending money that will be used for specific green projects.

Historically, exposure to these types of projects was through higher-risk and less-liquid project-finance debt. Standard ‘use-of-proceeds’ green bonds benefit from being backed by the underlying credit rating of the issuer, thereby lowering the specific project risk and thus overall credit risk. The cash flows funding the coupons and principal can originate from non-green operations, and the bond can still be considered ‘green’.

Evidence suggests that green bonds price at a similar spread to non-green bonds, thereby encouraging investors who do not have specific green mandates to consider investing in them, but the market remains relatively niche.

The real boost that the asset class needs will come when companies from a wider range of industries and geographies are encouraged to enter the market, which will increase liquidity. Countries issuing green bonds may help lead by example.

The fact that green bonds are becoming higher profile leads us to expect that the market structure will continue to improve over time. However, if the market is to continue to grow strongly, it will need greater diversification across credit rating, sector and geography in order to improve liquidity, and a globally agreed means of assessing and evaluating individual bonds.

Scott Freedman – analyst and portfolio manager fixed income team. Newton Investment, a BNY Mellon company.

Green bonds offer investors looking for exposure to sustainable investments a chance to invest in the ‘E’ (environmental element) of their environmental, social and governance (ESG) remit. They allow investors to help aid the transition to a low-carbon world by lending money that will be used for specific green projects. Historically, exposure to these types of projects was through higher-risk … read more

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Measure for measure: Putting the emerging market debt sell-off in context

Emerging market debt (EMD) has had challenging year-to-date performance, and investors are questioning whether this is merely a performance correction after a strong two-year spell, or the start of something bigger. There are some similarities between the current sell-off and 2013’s ‘taper tantrum’, with both influenced to an extent by Federal Reserve (Fed) policy normalisation. If this serves as a useful point of reference, much of the sell-off has already likely materialised. Chief among investor concerns are two key global macro risks with uncertain outcomes – policy normalisation and trade protectionism. This backdrop of global macro uncertainty has intensified the focus on emerging market (EM) vulnerabilities. However, technicals rather than fundamentals have exacerbated this sell-off, with a big unwind of cross-over investor positioning. Relative to 2013, we believe EMs are in a fundamentally stronger position in aggregate. The dislocation created as a result of the indiscriminate selling may also create new investment opportunities for investors able to adopt a flexible approach.

Colm McDonagh – head of Emerging Market Fixed Income. Insight Investment, a BNY Mellon company

Emerging market debt (EMD) has had challenging year-to-date performance, and investors are questioning whether this is merely a performance correction after a strong two-year spell, or the start of something bigger. There are some similarities between the current sell-off and 2013’s ‘taper tantrum’, with both influenced to an extent by Federal Reserve (Fed) policy normalisation. If this serves as a … read more

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