Sub Heading

Category: Rss-feed-market

Making an impact or ticking a box

Date: Nov 19th, 2018

“How well aligned are ESG managers and ESG investors?”

The ongoing growth in environmental, social and governance (ESG) investing has been driven by investors who may share certain common characteristics, but who have different concerns and commitment levels towards ethical investing.

This growth has unsurprisingly been accompanied by a proliferation of ESG product offerings from an increasing number of fund managers. However, they may take significantly different approaches in balancing the need for market performance alongside delivering positive and sustainable social and environmental outcomes.

Investors should recognise that not all ESG managers are created equal. Investors who genuinely wish their savings to be invested within a values-driven framework should identify a manager whose values align with their own, rather than one who merely acknowledges ESG risk management as a hygiene factor.

Sensitivity to performance

ESG investor behaviour is characterised by a sliding scale of commitment amongst investors and consequently the level of priority that they accord it differs.
At one end of the scale are investors who are sometimes described as philanthropic investors and are highly committed to allocating funds within a clearly defined ethical framework. They prioritise making a positive impact ahead of making portfolio returns, especially in the shorter-term.

Further along the scale, many institutions remain focussed on delivering long-term performance to their underlying investors but genuinely take ESG oversight seriously. They may well engage with the fund manager every quarter and pay close attention to the ESG credentials of all stocks within the portfolio.

At the other end of the ESG commitment scale are investors for whom ESG is perceived as a hygiene factor while their primary focus is firmly on maximising returns. The expectation is that controls are in place to manage the most significant ESG risks and ensure that the governance requirements of the mandate are being met.


Source: Responsible Investment Association Australasia – https://responsibleinvestment.org/wp-content/uploads/2018/08/RIAA_RI_Renchmark_Report_AUS_2018v8.pdf

It is perhaps unsurprising that investment managers adopt differing approaches to managing ESG risks in their portfolios. Some see this as a hygiene factor reflected in a page on their website that sets out a policy reflecting a broad approach to regulatory compliance and managing the risk of ESG impacts. However, others view it as an opportunity to build their entire investment process around an ethical framework. Instead of a mere marketing tool, they see a way to achieve environmental or social outcomes while delivering long-term value to investors.

This variety of approaches was reflected in the recent Global Impact Investor Network survey that showed 66% of impact investment managers principally target risk-adjusted market rate returns. This implies that they are unwilling to accept a below-market return while pursuing ESG focussed investments. However, investment opportunities are available that deliver positive environmental and social outcomes alongside return expectations; hence impact investors can be values driven whilst also seeking positive investment outcomes.

Making a positive impact

The traditional approach to ESG investing has been based upon excluding from the investable universe those companies that fail a screening process. In practice such companies are those whose activities are likely to cause harm to society or the environment, calling into question the long-term sustainability of their business model and earnings stream.

Such businesses might rely on the sale of tobacco or weaponry, pollute the environment, make an unacceptable contribution to climate change or carelessly manage their supply chain at the cost of vulnerable workers.

Such an approach represents progress upon traditional standard investing techniques, but investor thinking in this area has since progressed further. Some investors now increasingly expect their investments to make a positive impact on the wider world.

Impact investing might include equity investment in a developer of green energy technology, private equity investment in educational services, green bonds that finance wind farms or real estate investments that are both low energy and serve a social purpose such as aged care or social housing.

Real estate managers can go further and make a positive impact by investing in solar power. Shopping centres that use most of their energy during the day – when it is typically sunny – represent a solar power opportunity. However industrial premises, such as warehouses, tend to have more modest energy requirements and currently have limited solar generation potential. This is because exporting excess solar power into the grid is not remunerated at the same rate as drawing it down from the grid. Hence solar systems are generally sized to meet the energy demand of the building, rather than the maximum generation potential.

Managing ethical issues

A particular challenge of ESG investing is the divergence in thinking across institutions when considering the societal and environmental impacts of their investment activities. It is uncommon for two different investment policies to contain identical exclusions or even philosophies towards investing.

In particular, ESG investors may focus on a narrow or broad range of issues. Viewing the investment universe through a narrow lens is less common, however investors with a broader range of concerns are likely to hold different levels of concern and different priorities.

Carbon emission minimization for example, is typically a key feature of ESG investing, however policies vary significantly from those institutions that screen out only the most egregious emitters of CO2 to those that demand zero carbon emissions from all companies in which they invest.

Issues that tend to enjoy a high level of investor consensus include tobacco and prohibited weapons, such as chemical, biological, cluster munitions and land mines. There is widespread agreement amongst ESG investors that such products do unacceptable harm and that they should not invest in businesses whose primary purpose centres on their production.

However, there is greater ambiguity when businesses engage in excluded activities, but only as an incidental part of their overall business operations. An example might be a diversified mining company that provides essential raw products that are widely used, such as iron ore, aluminium and copper, but also engages in coal mining. It is now widely accepted that coal mining and its subsequent burning in power generation contributes to harmful climate change. Whereas a committed ethical investor would screen out such companies, an ESG risk focussed investor might consider them further if they had overall strong ESG characteristics. These might include mining efficiently and remediating mine sites upon the completion of operations.

Other areas where investors are likely to adopt differing positions are in the fields of animal rights or human rights. Investor attitudes towards such issues depend on values, which are likely to vary materially from one investor to another. Whereas ESG investing is based on scientific evidence correlating environmental or social harm with a business activity, an ethical approach rests upon a values framework which might be driven by a desire to avoid all harm to animals.

Managing supply chains in a responsible way has been a key ESG priority since the 2013 Rana Plaza disaster when 1,134 garment workers were killed in a building collapse in Bangladesh. The expectation that companies source supplies ethically is widely held. Most well governed companies understand the risks to their business in the form of operational disruption and reputational damage, which may occur if something goes wrong in the supply chain. However, investors do expect fund managers to engage with companies and to endeavor to hold them accountable for their supply chain practices.

Governance is another area of ESG investing where investor expectations and manager priorities vary. Diversity, executive pay, shareholder rights and board independence are all key areas which require engagement by investment managers. However, the relative importance that investors attach to different aspects of the governance process will depend on perceptions of long-term value that can be created through such a focus.

 

1 The Global Impact Investment Network (GIIN): Global Impact Investor Survey 2017, (2018), p3 https://thegiin.org/research/publication/annualsurvey2017

Source: AMP Capital 25 October 2018

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

Four global investment opportunities amid market uncertainty

Date: Nov 19th, 2018

In a time of market uncertainty with concerns around rising US interest rates and overvalued equities it can be difficult to find investment opportunities and it’s of little surprise that investors are asking where they should allocate their funds.

But the good news is that recent developments have highlighted and reinforced a number of investment opportunities around the world that we believe investors should be exploring. Four of our picks are detailed below.

1. Latin American and emerging markets

The first is Latin American and emerging markets.

Based on forward price to earnings ratios, the relative valuation of emerging markets equities versus US equities is reaching lows not seen since 2008. The US market is also showing signs of running out of breath, so we are selectively adding to our emerging markets allocations through Latin American equities, emerging market bonds, and certain currencies, including the Mexican Peso and the Chilean Peso.

Many Latin American currencies and markets have been under pressure thanks to uncertainty around the North American Free Trade Agreement (NAFTA), which creates a trade bloc between the US, Canada and Mexico. Latin American markets should have been benefiting from rising commodity prices but concerns that US President Donald Trump would dump the trade pact outweighed this.

The recently revised North American trade deal, now known as the United States Mexico Canada Agreement (USMCA), has removed that uncertainty. It comes shortly after the US revised its free trade agreement with South Korea (known as KORUS) and bodes well for upcoming US-Japan bilateral trade talks.

These recent agreements suggest that Washington seems happy to accept some minor modifications to existing free trade deals, declare victory and get ready for the midterm elections. This seems to be a win for free-trade ‘globalists’ and a loss for protectionists who want to restrict free trade and as a result, emerging markets, which are heavily exposed to trade and have borne the brunt of concerns around rising US protectionism, should benefit.

2. Chinese consumer stocks

The second opportunity is in Chinese consumer stocks.

The recent positive developments around US trade may point to the possibility of a deal being achieved with China, but I’m not so hopeful. It seems the US-China trade tension is a symptom of a much bigger problem: the Trump administration’s unease with the rising power of China.

I don’t expect to see a US-China trade deal soon but to offset weakening US exports, the Chinese will likely stimulate domestic demand through co-ordinated fiscal and monetary support which will benefit listed Chinese companies that are exposed to domestic consumer demand.

As a result, we are increasing our exposure to shares in mainland China-based companies that are traded in Renminbi on its domestic stock exchanges (China A shares) which are undervalued and should benefit from any monetary policy easing.

3. Energy

The third opportunity is in US and global energy, with oil likely to push higher towards $US80 a barrel before a brief pause.

On the supply side, Donald Trump has called on Saudi Arabia to lift production, but the reality is the Saudis have very little spare production. Supply from Iran is also likely to leave the market as the US wants all oil imports from Iran to end by November. In support of this, India (the second largest buyer of Iran’s oil after China) is reducing its intake of Iranian oil, cutting its purchases to zero in November. Meanwhile in the US, shale oil productivity has been declining and capital expenditure has collapsed after the 2015/16 energy crisis.

On the demand side, global growth is running at a solid pace despite the recent non-US softness. Chinese growth should see a rebound as the impact of recent policy easing comes through.

4. Japanese equities and banks

The final opportunity is in Japanese equities, and in particular Japanese banks.

The Japanese Government Pension Investment Fund (GPIF), which is the world’s largest retirement savings pool, recently announced it wouldn’t automatically reinvest redemptions into Japanese Government Bonds (JGBs).

We believe this is important because it indicates a cautious stance towards holding JGBs. The bond bubble is slowly deflating and the GPIF is rightly looking for flexibility rather than blindly adding bonds to its portfolio. Basically, demand for bonds is waning which suggests bond yields are likely to rise (when bond prices fall, yields rise).

At the same time, the Bank of Japan’s (BoJ) balance sheet will soon be as large as Japan’s GDP. The BoJ – Japan’s central bank – will have to taper or reduce purchases of JGBs to avoid further serious market distortions.

We believe Japanese banks are likely to be significant winners from this situation, with a flow-on effect to global banks.

A world of opportunity

In summary, for investors willing to explore global opportunities and consider different asset classes, there are a significant number of possibilities to diversify their portfolios, protect against the mature US bull market, and enhance returns so they can reach their investment objectives and goals.

 

Author: Nader Naeimi, Head of Dynamic Markets and Portfolio Manager of Dynamic Markets Fund

Source: AMP Capital 01 November, 2018

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

Three reasons why we’re not in a bear market

Date: Nov 19th, 2018

https://vimeo.com/299367257

October was certainly a volatile month for investors. Share markets globally fell between 6% and 7% in total return terms. Australia had the worst monthly outcome since August 2015.

But if you measure the falls from highs this year to recent lows the retreat has been even bigger. The average decline for global shares has been around 10%.

From its peak in late August, the S&PASX200 fell almost 11%. Emerging markets were hard hit, down around 20%, with China’s stock market slumping 30%.

Thankfully a bit of good news at the end of the month meant share markets have bounced around 3%.

The question now is, have we seen the bottom in markets?

We think it’s too early to say given various risks and so another bout of volatility remains possible. However, there are several reasons to believe that there is a good chance that markets will be higher in two months, six months or 12 months. In other words, I think the recent rout is likely a correction or a minor bear market within an ongoing bull market.

1. A bull market correction

The first reason is that for a major bear market to develop, where markets fall 20%, and the following year are down another 20% – as happened in the global financial crisis – you really need to see the US economy going into recession and dragging the rest of the world down with it. At the moment there is no sign of that happening.

2. Rates remain low

The second reason is that we’re in a world of relatively low interest rates. Yes, the US Federal Reserve is raising interest rates, but they have a long way to go before you could say interest rates are painful. And other countries are still a long, long way from raising interest rates. If anything, countries like Australia may still engage in monetary stimulus.

3. Normal volatility

The final reason is purely technical. We often see weakness around October. It is known as a volatile month. The good news is we typically rally into the end of the year and that strength continues into the early New Year. So, what we have seen in October is typical of seasonal volatility we get around this time of the year. It usually starts around August and September, but this year it started a little bit later in October.

Not the start of a major bear market

A number of worries triggered the recent sell-off, including US inflation, rising US rates, the China/US trade war, and concerns about emerging markets and Europe.

A lot of those worries still exist and markets could still have another leg down, retesting the lows we saw a few weeks ago. But I don’t think the recent sell-off represents the start of a major bear market. For that to develop we’d need to get a bit more negativity on the US economy and at this stage the US economy still remains pretty strong.

 

Source: AMP Capital 08 November, 2018

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

Monetary Policy Decision – Statement by Philip Lowe, RBA Governor, November 2018

Date: Nov 08th, 2018

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The global economic expansion is continuing. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. Growth in China has slowed a little, with the authorities easing policy while continuing to pay close attention to the risks in the financial sector. Globally, inflation remains low, although it has increased due to both higher oil prices and some lift in wages growth. A further pick-up in inflation is expected given the tight labour markets and, in the United States, the sizeable fiscal stimulus. One ongoing uncertainty regarding the global outlook stems from the direction of international trade policy in the United States.

Financial conditions in the advanced economies remain expansionary but have tightened somewhat recently. Equity prices have declined and yields on government bonds in some economies have increased, although they remain low. There has also been a broad-based appreciation of the US dollar this year. In Australia, money-market interest rates have declined recently, after increasing earlier in the year. Standard variable mortgage rates are a little higher than a few months ago and the rates charged to new borrowers for housing are generally lower than for outstanding loans.

The Australian economy is performing well. Over the past year, GDP increased by 3.4 per cent and the unemployment rate declined to 5 per cent, the lowest in six years. The forecasts for economic growth in 2018 and 2019 have been revised up a little. The central scenario is for GDP growth to average around 3½ per cent over these two years, before slowing in 2020 due to slower growth in exports of resources. Business conditions are positive and non-mining business investment is expected to increase. Higher levels of public infrastructure investment are also supporting the economy, as is growth in resource exports. One continuing source of uncertainty is the outlook for household consumption. Growth in household income remains low, debt levels are high and some asset prices have declined. The drought has led to difficult conditions in parts of the farm sector.

Australia’s terms of trade have increased over the past couple of years and have been stronger than earlier expected. This has helped boost national income. While the terms of trade are expected to decline over time, they are likely to stay at a relatively high level. The Australian dollar remains within the range that it has been in over the past two years on a trade-weighted basis, although it is currently in the lower part of that range.

The outlook for the labour market remains positive. With the economy growing above trend, a further reduction in the unemployment rate is expected to around 4¾ per cent in 2020. The vacancy rate is high and there are reports of skills shortages in some areas. Wages growth remains low, although it has picked up a little. The improvement in the economy should see some further lift in wages growth over time, although this is still expected to be a gradual process.

Inflation remains low and stable. Over the past year, CPI inflation was 1.9 per cent and, in underlying terms, inflation was 1¾ per cent. These outcomes were in line with the Bank’s expectations and were influenced by declines in some administered prices due to changes in government policies. Inflation is expected to pick up over the next couple of years, with the pick-up likely to be gradual. The central scenario is for inflation to be 2¼ per cent in 2019 and a bit higher in the following year.

Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low. Growth in credit extended to owner-occupiers has eased but remains robust, while demand by investors has slowed noticeably as the dynamics of the housing market have changed. Credit conditions are tighter than they have been for some time, although mortgage rates remain low and there is strong competition for borrowers of high credit quality.

The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Source: Reserve Bank of Australia, November 2nd, 2018

Enquiries

Media and Communications
Secretary’s Department
Reserve Bank of Australia
SYDNEY

Phone: +61 2 9551 9720
Fax: +61 2 9551 8033

Email: rbainfo@rba.gov.au

Provision Insights

Subscribe to our Quarterly e-newsletter and receive information, news and tips to help you secure your harvest.

Newsletter Powered By : XYZScripts.com