Since 1945, the exchange of dollars and oil has been a bedrock of the world's financial system. Oil runs north through the Suez Canal and south via the Straits of Hormuz. Greenbacks flow in the opposite direction. Oil is the lifeblood of economies, and they can't operate without dollars. But the world is changing. 

China has achieved global leadership in manufacturing, but the renminbi (RNB) has failed to come close to the dollar by any measure. Yet, where its currency ambitions might have failed, China seems poised to take the lead in clean energy.

In 2025, leading global battery maker Contemporary Amperex Technology (CATL) launched a car battery that charges in 10 minutes. This is far faster than traditional electric vehicle (EV) batteries.

The technology that underpins this leap forward continues to spread, with energy storage systems increasingly supporting grids powered by renewable energy. In the next century, the global energy exchange could switch, with sodium and lithium ions flowing one way, and the RMB flowing the other.

Batteries powering the future

China dominates battery and energy storage systems, enabling its grid to manage a significant amount of renewable energy input, around 31% of total production. Next year, solar is forecast to overtake coal as China's leading energy source. In 2024, Asia commissioned 24.7-gigawatt (GW) capacity of BESS (battery energy storage systems), with China accounting for 95% of that storage. This compares North America's 14.2GW and Europe's 2.4GW (including the UK) [1].

Then there's China's vast fleet of EVs. China bought 11 million of the 17 million EVs sold last year, dwarfing sales in every other market. Chinese cars offer high quality at low cost, attracting consumers worldwide. Chinese EVs can be up to three times cheaper than US or European models. China has overtaken Japan and Germany as the world's leading car exporter (see Chart 1). Chinese EVs can be seen on the roads all over Asia, Latin America and increasingly in Europe. 

Chart 1: China has become the world's largest car exporter

Stock to watch - CATL

Contemporary Amperex Technology Co (CATL) is the leading light of Chinese EVs and battery technology supremacy. Holding a commanding 38% market share across all battery types, the company innovates at a startling pace. CATL spearheads industry technological advancements across various dimensions. 

Before 2016, lithium iron phosphate (LFP) batteries dominated China's passenger EV market due to their lower barriers to entry and costs compared to nickel cobalt manganese (NCM) batteries. Most top battery producers focused on LFP technology, but CATL was quick to see the potential in high energy-density batteries. It invested significantly in NCM technology, while industry peers prioritised cost reduction. This bold approach has cemented CATL's position as the global leader in the sector. 

Earlier this year, China's BYD Auto unveiled the super-fast charging 10c battery, which takes just 10 minutes to charge for a 400-kilometer (km) range. In response, CATL unveiled the Gen 2 Shenxing battery, offering the same charge but within extended 520km range.

Last year, we visited one of CATL's new Chinese factories. The engineering prowess was impressive with much of the process automated, and batteries seamlessly floating along the production line. CATL recently listed on the Hong Kong Exchange, with the shares rising by 16% on the first day and giving the group a market capitalisation of USD166bn. 

Battery manufacturing is emerging as the most attractive part of the EV value chain, with hundreds of OEMs (original equipment manufacturers) competing for market share. However, only CATL has increasingly demonstrated its pricing power.  

Despite playing a pivotal role in the global transformation in energy and transportation, CATL still offers value and an attractive yield. The stock trades at 15x price/earnings and is expected to grow by 20% this year. With strong fundamentals, we think it  can compound at 15% annually, while paying out 50% of its profits and offering a 2.8% yield. The future of EV batteries has arrived [2]. 

Globally equity markets rallied strongly in May. In the US, the S&P 500 increased +6.2%, the Nasdaq rose +9.6%, whilst in the UK, the FTSE was up +3.3%. Domestically, the AllOrdinaries Accumulation index also performed strongly, appreciating +4.2%. On the ASX, the top performing sectors were technology and energy. The worst performers were defensive sectors such as utilities and consumer staples, which lagged as investor risk appetite recovered. As was the case in April, growth stocks performed very strongly in May with numerous technology stocks posting double digit gains.

In bond markets, the US 10-year bond yield increased +28 basis points (bp) to 4.44%, whilst its Australian counterpart rose +16 bp to close at 4.27%. The Australian dollar was flat in May, closing at US$0.643.

With warming very likely to exceed 2°C, investors face a radically altered investment landscape marked by intensifying physical risks, rising litigation and liability, evolving regulation and uneven progress in transition readiness. This paper outlines how we are recalibrating our research agenda and investment process in response to these profound structural changes. Our base case outcome driving our research approach now focuses on an adaptation and mitigation response rather than achieving a net zero outcome. To be clear, we believe we must continue to pursue net zero objectives. However, as fiduciaries, we must take a pragmatic approach to managing climate risks and opportunities.

The New Climate Reality

The world has already surpassed 1.5°C of warming[1] (refer Figure 1), and current policy pathways suggest temperatures will surpass 2.4°C this century. Many physical climate events-heatwaves, wildfires, droughts and floods-are accelerating in frequency and severity[2]. The investible universe in Australia and globally is materially exposed to both direct and indirect consequences of this warming trajectory.

Figure 1. Global surface temperatures over time relative to pre-industrial baseline

Source: Carbon Brief, Jan 2025.

The Intergovernmental Panel on Climate Change (IPCC) 2023 AR6[3] report projects that our current policies and technological trend is pointing to well over 3°C warming by the end of the century, noting that we have already exceeded two-thirds of the global carbon budget to stay below 2°C. Indeed, the current Nationally Determined Contributions (NDCs) under the Paris Agreement[4] are insufficient to limit the world's warming to below 2°C and are now projected to lead to warming above 2.4°C. And in Australia, the growing recognition of this climate reality has led to the appointment of a new position, Special Envoy for Climate Change Adaption and Resilience following the May 2025 federal election,[5] and the recent release of the Australian Adaptation Database[6].

Investment Risks are on the Rise

Physical risks are already driving financial losses. For example, Californian utility company Pacific Gas and Electric (PG&E) was forced to file for Chapter 11 bankruptcy in 2019, flagging over US$30 billion in liabilities after being held responsible for equipment failures and downed power lines that started the 2017/18 Californian wildfires, including one blaze which caused 84 fatalities. PG&E's share price is yet to recover and trades today some 3-4 times below its pre-wildfire levels (refer Figure 2).

Figure 2. PG&E's share price fell 91% between Sept 2017 and Jan 2019

Source: YCM, Bloomberg, May 2025.

Beyond being impacted by physical events, companies are also increasingly likely to be held liable for their contributions to physical events. Climate litigation is expanding. A recent model[7] attributes over US$8.5 trillion in damages globally to top fossil fuel producers. This research extended to Australia's five largest fossil fuel producers over this same period, with an estimated US$682 billion in economic damages directly attributable to these companies.

Shareholders, clearly, will be impacted by rising corporate accountability for climate change. Attribution of cost implications of physical events to specific companies will be important to watch. In Table 1 (refer Appendix), we summarise the impacts on companies from physical disruptions as well as the potential liabilities associated with causing physical events. A detailed list of sector-specific considerations is also included in Table 2 (refer Appendix). We are actively analysing these risks to every company that we research, and it now forms a key pillar in our engagement agenda.

Portfolio Implications for a Warming World

As investors, understanding (i) the portfolio implications of a likely delayed transition; and (ii) the higher physical impacts resulting from climate change are critical.

Our process is also evolving. Whereas like many investors we have historically worked to understand the path to targets and the associated risks, our focus has shifted to focus acutely on mitigation and adaptation.

We are moving beyond 'net zero pathways' to model how climate outcomes - not just targets - affect value and risk. Our analysis now focuses on physical exposure mapping, litigation trends and adaptive capacity across sectors.

Key opportunities include companies enabling climate adaptation, resilient infrastructure, diversified and adaptive supply chains, and carbon removal technologies. We expect to observe:

1. Climate Adaptation

• • Higher end market pricing: companies will adapt and manage input cost pressures and use pricing power in response to climate disruptions.
  • Rising building, construction and consumer staples demand: some companies will benefit from a world where increased property damage and emergency stockpiling is more common.
  • More product diversification: there is ample evidence globally of investment in product diversification as a climate-risk management strategy. one of the world's largest meat producers - the US-based Tyson Foods - is investing in insect and plant-based protein production, in part driven by their identification of climate-related risks. Australian companies can be expected to adopt similar strategies.

2. More Resilient Infrastructure

• • Increased infrastructure investment: we expect an increase in companies investing in resilient infrastructure, benefitting suppliers of these materials. We expect tailwinds for engineering firms and REITs and suppliers focused on flood prevention, drainage, water efficiency, infrastructure hardening and wildfire prevention.

3. Increasingly Diversified and Adaptive Supply Chains

• • Greater supply chain investment: understanding critical materials supply chain bottlenecks and contingencies for supply chain disruptions will present opportunities for diversification and innovation, notably in logistics as well as product innovation.

4. Greater Investment in Carbon Removal Technologies

• • Heightened investment in carbon sinks: we expect rising land use approaches as well as greater investment in carbon technology, capture and storage.

Mitigation and adaptation strategies also include specific initiatives to slow down or reverse the effects of global warming (refer Figure 3).

Figure 3. Adaptation and mitigation opportunities

Source: Tailwind Climate Adaptation Finance Primer.

What We're Doing Differently

With the world on a trajectory beyond 2°C, understanding and navigating the risks associated with this emerging reality is crucial. In particular, we are:

1. Reassessing Portfolio Risks and Implications
Our mapping of adaptation and mitigation risks and opportunities and understanding of preliminary implications has informed our stewardship agenda for the period ahead. In some cases we are seeking clarification of specific risks. e.g. safeguarding or insuring assets in locations with higher risk of damage or disruption.

2. Refining our Stewardship and Engagement Priorities
We are constructively engaging with companies around opportunities to improve their adaptation and mitigation strategy, including managing climate-related impacts.

3. Positioning for Opportunities
We are integrating these insights to position our portfolios in response to these material risks and opportunities. This includes assessment of both headwinds (e.g. rising cost inflation) and tailwinds (e.g. rising demand for niche products or services).

The climate investment narrative has shifted from 'if' to 'how much' and 'how fast'. Portfolio resilience now requires a forward-looking understanding of both climate impacts and adaptation dynamics. We are sharpening our research to reflect this new reality and to ensure we continue to deliver value in an era of accelerating environmental change.

+++

[1] Source: https://wmo.int/news/media-centre/wmo-confirms-2024-warmest-year-record-about-155degc-above-pre-industrial-level.

[2] Source: https://soe.dcceew.gov.au/overview/pressures/climate-change-and-extreme-events; We note that some physical events may have uneven impacts across regions, including some regions, such as Queensland, projected to experience potentially decreasing frequency and increasing severity of cyclones; whereas other risks, in particular, chronic risks are projected to increase in both frequency and severity.

[3] Source: https://www.ipcc.ch/assessment-report/ar6/.

[4] Source: https://unfccc.int/. The Paris Agreement is a legally binding international treaty that aims to limit global warming to well below 2°C with efforts to limit it to 1.5°C through national commitments to reduce greenhouse gas emissions, enhance climate resilience and provide support for developing countries. In 2015, 195 countries signed this agreement; and as of March 2025, there are currently 196 countries and the European Union who are signatories, representing an estimated 85-90% of global greenhouse gas emissions (following the withdrawal of the United States - which accounts for an estimated 15% of global emissions - by executive order in January 2025). In 2018, the Intergovernmental Panel on Climate Change (IPCC) published a special report noting that limiting the global temperature increase to 1.5°C above pre-industrial levels would significantly reduce the risks and impacts associated with climate change compared to an average increase of 2°C. This included lower levels of biodiversity loss, sea-level rise and extreme weather events such as heatwaves and more frequent and severe storms.

[5] Source: https://www.pm.gov.au/media/press-conference-canberra-12may25.

[6] Source: https://australianadaptationdatabase.unimelb.edu.au/.

[7] Source: https://www.nature.com/articles/s41586-025-08751-3.

With quarterly results now in for most of the companies we follow, we've compiled the latest Canopy Highlights-insights from our global research.

Just as investors have faced heightened volatility, business leaders are navigating a similarly complex environment. According to The New York Times and FactSet, 87% of corporate earnings calls this season referenced the word "uncertainty," up from 38% in the previous three months-a theme echoed by many of the companies we look at.

Tariffs front and centre

While many businesses had already begun diversifying manufacturing and sourcing in response to US tariffs introduced during the previous Trump administration, renewed uncertainty is accelerating those efforts. Take Floor & Décor, a US hard surface flooring retailer: in 2018, ~50% of its products were sourced from China. By the end of FY25, that figure is expected to fall to the low- to mid-single-digits, though most of its sourcing will remain outside the US. Another example is Yeti, which sells drinkware and coolers. While ~80% of its drinkware was produced in China as at the end of FY24, it is targeting a reduction to ~10% by the end of FY25, with most of that capacity being relocated elsewhere in Asia.

However, for many, shifting production remains impractical, with most companies indicating plans to pass on tariffs through price increases.

Bigger ripple effects?

The larger impacts may be indirect: falling consumer confidence, delayed capital decisions, and a general pause in big-ticket spending were cited across sectors-from global luxury to US industrial spending to housing. Much of this stems from a lack of US policy certainty and high interest rates. As Assa Abloy, a global supplier of locks and doors put it: "The challenge with the tariffs is a little bit that it changes every day...So, the answer I can give you is only the answer as it is today, as the tariffs stand...this morning, because perhaps they change this afternoon".

Some tailwinds too

Not all companies are struggling. Discount retailer Dollar General is benefitting from trade-down by lower-income consumers. Fixed income trading platform MarketAxess is seeing gains from increased market volatility, with average daily credit trading volumes up >30% in April-an improvement from flat growth in the two quarters to March. And some international companies we've spoken with have cited rising anti-American sentiment as a potential commercial tailwind.
 

National home values rose for the third month in a row, with CoreLogic's Home Value Index up 0.3% in April, adding roughly $2,720 to the median Australian dwelling. Growth was recorded across all capital cities, though the pace slowed slightly from March.

While mid-sized capitals and regional markets led the charge, Sydney and Melbourne remain below previous highs. Annual growth eased to 3.2%, reflecting last year's broader slowdown despite a recent rebound since February's rate cut.

Key Highlights:

• Market sentiment dipped in April amid global uncertainty and the federal election

• Every capital city posted gains, led by Darwin (+1.1%)

• House values are outpacing units in most cities

• Regional markets rose faster than capitals, especially in SA and WA

• Auction activity and new listings hit their lowest April levels since 2019

Property Values
as at 30th of April 2025

Median Dwelling Values
as at 30th of April 2025

Source: CoreLogic, Report, Article

April Edition

Tariffs bring global uncertainty

Donald Trump's second term in office has now passed the symbolic 100-day mark, and his most significant action this far was his announcement of global tariffs on 2 April. Trump's "Liberation Day" triggered a market sell-off in anticipation of a global supply shock, but after he subsequently announced a 90-day pause, global equity indices recovered, ending the month broadly where they began.

The pause should give the US administration time to negotiate with its closest allies, but if no meaningful progress is made, particularly with countries like South Korea and Japan, by the end of May, it could signal a prolonged impasse. That would reinforce concerns that this is not simply a short-term negotiating tactic, but the beginning of a more entrenched trade rift. Therefore, while investors who avoided panic selling in April may have found themselves emerging relatively unscathed, the tariff shock continues to justify a higher risk premium across global equities.

US economic concerns at the fore

This not the first time the world has faced a severe supply chain disruption. But unlike the pandemic, for example, the current shock is self-inflicted, driven by Trump's idiosyncratic approach to trade policy rather than external forces. We're already starting to see the effects ripple through the US economy. Logistics data shows a sharp drop in goods moving from China to the US. Container bookings are significantly lower than a year ago. The Port of Los Angeles, the main entry point for Chinese goods, expects arrivals in early May to be down by a third. Airfreight bookings are also falling. According to Vizion, container bookings for standard 20-foot boxes from China to the US were 45% lower year-on-year by mid-April. As John Denton of the International Chamber of Commerce noted, many businesses are delaying decisions while they wait to see whether the US and China can reach a deal.

China-US relations remain key

As discussed last year, Trump's approach to tariffs has been to target China most aggressively. But political headwinds may force him to take a more conciliatory approach than he would like. With mid-term elections in November 2026, the Republican Party needs a quick win with allies, ideally leading markets towards new highs before then. China's President Xi Jinping, of course, faces no such political pressure. The tariff strategy appears designed to create what economists might call a "separating equilibrium", pushing allies to side with the US in isolating China, while also testing China's response. Trump's approach leaves little room for Xi to save face, effectively forcing Beijing into tit-for-tat measures. That lack of an off-ramp increases the risk of a drawn-out standoff, with economic data releases ratcheting up the pressure.

Looking ahead, we expect more anecdotal evidence of supply disruption to emerge by the end of May, followed by harder economic data shortly after. The potential inflationary effect is notable. Based on trade volumes of around USD 425 billion and tariff rates that could eventually settle around 50%, we estimate the direct impact on US inflation could be around 1 percentage point, assuming no offsetting effects. Depending on how much of the cost is absorbed by importers and exporters, the range could be anywhere from 30 to 70 basis points. In short, the trade war's economic effects are already becoming visible. The longer it persists, the greater the risk that it drags on US growth and complicates the Federal Reserve (Fed)'s task of managing inflation expectations.

Threats to Federal Reserve impartiality: are Powell's days numbered?

Early in his second term, Trump appeared to be testing the legal ground for removing the Fed Chair Jerome Powell before the end of his term, with suggestions he could do so without needing to show cause. Trump has recently softened his public stance on Powell, but questions remain over future Fed independence.

At the heart of this issue is Wilkins v. United States, a Supreme Court case expected to be decided in June. The case could effectively challenge the precedent set by Humphrey's Executor in 1935, which limits a president's ability to remove the heads of independent agencies without cause. Should the Supreme Court side with the Trump administration, it could strip away key legal protections that shield the Fed Chair from political interference. Even if the court offers a more limited ruling, the legal precedent could still be weakened, clearing the way for greater executive control over independent agencies. In the most extreme outcome, Trump would have the authority to dismiss Powell, or any other agency head, at will. Such a move would undermine the institutional integrity of the Fed and draw comparisons to the erosion of central bank independence seen in countries like Turkey, where politically driven monetary policy has contributed to economic instability.

Powell's current term ends in May 2026, and it is unlikely he will be reappointed, and his successor could be announced well before then. Trump will likely nominate a more dovish candidate willing to cut rates aggressively in support of his policy agenda. This puts the Fed in a difficult position. Even if political pressure builds to ease policy, the Fed must remain vigilant about the risk of re-accelerating inflation. A premature or politically motivated pivot could risk repeating the mistakes of the 1970s, when monetary policy missteps allowed inflation to spiral. For now, this uncertainty may push the Fed to maintain its current pause for longer, as it waits for greater clarity on both inflation and the political landscape.

Has the tariff risk premium already been priced in?

In fixed income markets, some degree of tariff-related risk premium has already been priced into the long end of the US rates curve. However, when comparing US long-term yields with those of other developed markets, the relative value is starting to look more compelling. Global bond market scepticism, often described as bond vigilantism, can only stretch so far.

At a certain point, investors recognise they are being adequately compensated for bearing tariff-related inflation risks. When that happens, US long bonds may start to attract stronger demand, offering not just a yield premium but also a degree of protection in a potentially slower growth environment. With the European Central Bank moving onto an easing path, the spread between US and European long-end rates is likely to widen further in the near term. That divergence supports the case for US duration, especially as the risk premium embedded in Treasury yields becomes more attractive.

Downward pressure on the dollar

While credit markets also weakened during April, the more pressing concern is the US dollar. The dollar index fell to a three-year low in the month, and the currency is currently looking technically oversold, even when assessed relative to interest rate differentials. Fundamentally, there appears to be an incentive for the US to maintain a weaker dollar in order to reduce its export deficit.

What we are seeing is the emergence of a new economic regime. Previously, foreign exchange moves were largely driven by interest rate differentials. But under Trump's policies, those drivers appear to be shifting. Trade dynamics and political strategy are taking a more central role in currency movements. In this new environment, we expect continued downward pressure on the dollar. Slowing economic data, which we anticipate will materialise soon, could reinforce this trend. We also believe that at its upcoming June meeting the Fed is more likely to ease policy, which the markets have currently priced in at only around 50%.

Thoughts on volatility

The start of April brought a spike in market volatility that unsettled many investors. In today's markets, risk premiums are priced in far more quickly than they were two decades ago, and we saw this in action with the volatility index (VIX) briefly surging above 50 following Liberation Day. Such levels are rare and typically short-lived. While similar spikes occurred during the Global Financial Crisis and the early days of pandemic, volatility above 50 historically tends not to persist. It creates an environment where selling volatility becomes attractive, quickly pulling the index back down. This pattern appears to be playing out again.

The initial equity sell-off seemed to bottom shortly after the Liberation Day announcement, in a manner not dissimilar to the bottom reached in March 2020 at the onset of the pandemic. Back then, valuations fell to around 16 times forward earnings. This time, we've only seen multiples contract to roughly 19 times, and credit markets have experienced far less severe dislocation. While macro risks remain, current conditions do not yet point to a systemic crisis.

From a market positioning perspective, the worst may now be behind us. What happens next largely depends on the pace and direction of trade negotiations, both with Washington's allies and, further down the line, China. Ultimately, we expect US-China tariffs to settle in the mid-double-digit range, depending on how far both sides are willing to compromise. Crucially, Trump will need to make at least a symbolic concession to allow Xi Jinping to save face. Without that, a sustainable off-ramp becomes much harder to achieve. For now, based on historical patterns and current valuations, we think it's likely the market has found a near-term bottom, unless trade tensions escalate significantly from here.

In our view, now is an opportune time to consider an active global fixed income approach to navigate what is likely to be a prolonged period of uncertainty and for those seeking diversification. With bond yields and geopolitical risks remaining elevated, this environment presents unique opportunities in fixed income, particularly as markets adjust to lower inflation expectations.

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