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The Spillover Effect: A Global Challenge in the 2030 Agenda

The Spillover Effect: A Global Challenge in the 2030 Agenda

July 23, 2024

The topic of the week:

Trying to meet the Sustainable Development Goals (SDGs), countries face a significant challenge known as the ‘Spillover Effect’. This phenomenon refers to the negative impact that measures undertaken by one country in its effort to meet the SDGs can have on other countries with which it has a direct or indirect relationship.

It is crucial that the strategies designed to achieve the SDGs do not generate adverse effects in other countries. Thus, both the degree to which each country achieves the SDGs and the potential collateral damage that may occur are factors of paramount importance. In this context, international collaboration and consideration of cross-border effects are essential to ensure sustainable and equitable progress at the global level.

SDGs 12 (Responsible Consumption and Production) and 13 (Climate Action) are particularly vulnerable to the Spillover Effect. Actions taken in these areas, while necessary, can have negative consequences for other countries, especially developing countries. These countries are often the ones most affected by the negative externalities of policies implemented in more developed nations.

At this point in the reading, it is surely obvious that the economic blocs that cause the greatest spillover effect are the major powers, and it is the most vulnerable countries that suffer the consequences. Let us look at some concrete examples:

– US trade and environmental policies have a significant impact on Latin America. For example, the outsourcing of polluting industries to countries with laxer regulations in the region increases the environmental burden on these nations.

– China’s economic and environmental decisions have global repercussions as one of the world’s largest producers and exporters (if not the largest). The relocation of highly polluting industries to Southeast Asian countries, such as Vietnam and Cambodia, is a clear example of negative spillover.

– Strict environmental regulation in the EU may lead to the export of hazardous waste to African countries with less capacity to manage it properly, exacerbating health and environmental problems in those regions.

There are four main risks related to international spillovers that need to be carefully managed:

– Trade-Related Environmental Impacts: Strict environmental policies in one country can lead to the outsourcing of polluting industries to countries with laxer regulations, increasing the environmental burden in these regions.

– Direct Transboundary Flows: Movements of people and goods can generate significant impacts, such as the transfer of hazardous waste to less developed countries.

– Economic and Financial Flows: Economic and financial decisions in one country can have global repercussions, affecting the economic stability and sustainable development of other nations.

– Transboundary Security and Peacekeeping: National policies can influence the stability and security of neighbouring regions, exacerbating conflicts and peacekeeping challenges.

Impact investing plays a key role in mitigating the Spillover Effect by directing capital towards projects and companies that seek to generate a positive social and environmental impact along with a financial return. Impact investing can help by supporting sustainable enterprises in developing countries, helping to mitigate the negative impacts generated by the policies of more developed countries, directing investments towards green infrastructure projects such as renewable energy and waste management, supporting initiatives that seek innovative solutions, and through investments that facilitate collaboration between countries to address common challenges can reduce negative impacts by sharing resources and knowledge, among others.

To meet the SDGs effectively and equitably, it is essential that national policies consider and minimise negative cross-border effects. International cooperation, together with the active role of financial markets and sustainable investment, is essential to ensure that progress for some does not translate into setbacks for others. By addressing the Spillover Effect, we can move towards a more sustainable and just future for all.

The beacon of the markets:

The equity markets saw how the sell-offs were driven by bans on exports to China of cutting-edge technology for the development of Artificial Intelligence. Thus, stocks such as Nvidia and ASML accumulated losses close to double digits that ended up dragging down the main stock market indices: the S&P 500 lost 2% in the last 5 days compared to -4% for the Nasdaq and -4.3% for the Euro Stoxx 50, while the Ibex 35 lost only 1.45% as the benchmark with the lowest weight in technology.

In fixed income, it could be seen that overcoming the first barrier presented by the 10-year US Treasury (4.20%) is not going to be an easy task and therefore the high probability that the market is discounting that the FED will lower rates in September could be the trigger that allows interest rates to continue to fall. The good US economic data at the end of the week caused the main global benchmarks to move a few basis points away from their weekly lows, although they are still very close to them.

In commodities, gold fell by 1%, following, as usual, the opposite movement to that of interest rates. Brent futures maintained the falls of the last few days, and the reason for this is the low economic activity in China, where the additional measures adopted at the third annual meeting of the country’s main economic leaders last week were also somewhat disappointing. China’s GDP figure for the second quarter came in at +4.7% against an estimate of +5.1%, but without affecting the unemployment rate which remained at 5%.

In Europe there were not many surprises: CPI met expectations (2.5% overall and 2.9% core) and the ECB left interest rates unchanged. In the US, retail sales exceeded experts’ forecasts, as did home sales and new building permits, and the Philadelphia Fed’s manufacturing activity index came in well above the +2.7 estimate at +13.9.

For the current week, the most relevant in Europe will be the PMI data for which slight improvements are expected in June for both the manufacturing and services sectors. In the US, PMIs will also be released, but in this case the services sector is expected to decline somewhat from last week’s benchmark of 55.3. Preliminary GDP for the second quarter (+1.9%) and consumer prices (PCE) will have the biggest impact on the markets. On the other hand, the release of corporate results will give visibility to the market as to whether or not they are in line with analysts’ forecasts.

In addition, we will see how the markets behave after this week’s announcement by the current US president, Joe Biden, to drop out of the race for the White House. For the moment, the main indices are showing a certain positive tone, although it is true that in recent weeks the Republican candidate, Donald Trump, had already been given a certain advantage.

The Quote:

And we sign off with the following quote from Walter Babeo, the 19th century English journalist, political scientist and economist: ‘The greatest pleasure in life is to do what people say you can’t do’.

Summary of the performance of major financial assets (7/22/2024)

This report does not provide personalized financial advice. It has been prepared irrespective of the particular circumstances and financial objectives of the persons receiving it.

This document has been prepared by Portocolom Agencia de Valores S.A. for the purpose of providing general information at the date of issue of the report and is subject to change without notice.  Portocolom Agencia de Valores S.A. assumes no obligation to communicate such changes or to update the contents of this document. Neither this document nor its contents constitute an offer, invitation or solicitation to purchase or subscribe for securities or other instruments or to make or cancel investments, nor may they form the basis of any contract, commitment or decision of any kind.

The information contained herein has been obtained from public sources believed to be reliable, and while reasonable care has been taken to ensure that the information contained herein is neither uncertain nor unequivocal at the time of publication, we do not represent that it is accurate and complete and it should not be relied upon as if it were.  Portocolom Agencia de Valores S.A. assumes no responsibility for any loss, direct or indirect, that may result from the use of the information provided in this report. Past performance of variables may not be a good indicator of future performance.