Which emerging markets will be the winners and losers from energy transition?

The race to decarbonise the global economy has the potential to turn the commodities market upside down. And this will have wide-ranging implications for emerging markets (EM).

  • Our full analysis is available as a PDF here and at the bottom of this page.

Most of the world’s largest economies are targeting “net zero” emissions of carbon dioxide by the middle of the century. Demand for fossil fuels will fade over time and instead re-orientate towards base metals, which are key inputs to equipment used to generate renewable energy, along with new technologies such as electric vehicles and batteries.

This “energy transition” could have a seismic impact on EM, many of which are either significant producers or consumers of natural resources.

Producers of fossil fuels face the harrowing prospect of long-term declines in export and fiscal revenues, and will have to write-off trapped assets. Net importers of energy should eventually benefit from a structural improvement in their balance of payments, and some may even begin to export renewable energy.

However, the big winners from this new paradigm are likely to be those EM that export the base metals that will be in high demand in the decarbonised global economy. Or those that manufacture equipment used to generate, store and consume renewables.

What are the implications for investors?

The bottom line is that investors need to position themselves for the long run impact of energy transition on the performance of financial markets.

Those EM that face a substantial loss of fossil fuel export revenues will have to adapt their economies and public finances to the new, low carbon economy, or face economic and market stress. This will be a major issue for EM that have little in the way of savings from past exports.

A permanent improvement in the balance of payments of EM that are net importers of fossil fuels should be supportive of currencies and structurally lower interest rates in the long term.

But the biggest opportunities for investors will probably be found in those EM that export much sought-after commodities in the new world, which should boost returns across the board.