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How the oil price is affecting sustainable investors, impact of falling Yen on equities, pre-election rate rise on the cards, what’s driving China sentiment
Investors are understandably asking if there’s a long-term cost to sustainable investing when oil is trading above $US100 a barrel.
But sustainable portfolios will deliver better outcomes in the long term, argues Pendal’s Head of Multi-Asset Michael Blayney.
“The short answer is we don’t expect to get worse returns from sustainability over the long term.
“Indeed, we expect to get better long-run outcomes from sustainable portfolios. But you will see greater variation relative to a benchmark in certain types of environments.”
In environments like these, portfolio construction takes on even greater importance, says Michael.
“If your sustainability strategy gives you a slight growth bias then you might want to look for investments that also give you a value bias, for example in your alternatives.
“You might also actively seek out a bit of energy price exposure and inflation hedging via commodity futures or certain types of renewable energy infrastructure.”
Most global equities investors are familiar with the impact of currency movement on portfolios. But does the rapid decline of the Japanese Yen demand action?
“At this stage we wouldn’t be keen to step in and say, well, actually this has gone too far, we need to get involved on the other side,” says Nudgem Richyal, who co-manages Pendal Global Select Fund.
“From a portfolio perspective our views are much more medium-to-long-term and it wouldn’t make too much difference.
“We have a couple of Japanese exporters and we’re not suddenly going to sell them because we think ‘well, this yen move means that so much more can be priced in’.
“Trends go on longer than most people expect. I’m not going to call a top, because it’s too dangerous to stand in front of a steam roller.”
However Nudgem advises investors to keep an eye on yields for US 10-year bonds, which have been attracting flows from Japanese investors.
“The one macro variable that may put pause to this is if the 10-year yield in the US stops going up.”
Some 650 million adults are obese (1.9 billion are classed as overweight) and about 4 million die of obesity each year.
But anti-obesity medication is almost non-existent. “It’s a new category,” says Maxime Le Floch, an analyst with Regnan’s impact investment team.
Now investors in Regnan’s Global Equity Impact Solutions fund can say they are helping develop a solution. Regnan is an investor in Danish diabetes pioneer Novo Nordisk, which is “the poster child for finding a really strong solution that’s miles ahead of competitors in a fast-growing market,” says Maxime.
Novo Nordisk launched its new Wegovy injectable anti-obesity drug in the US last June and expects to launch in Europe later this year. “Novo Nordisk is investing in clinical trials to prove further the benefits of its treatment, says Maxime. “It could end up in a new market where there aren’t many solutions and there is a massive opportunity.”
Australia this week sped past the RBA’s 2-to-3% inflation target and caught up with other global economies.
Beyond the headlines of yesterday’s 5.1% CPI result, the contribution of new dwelling purchase price and rents are useful bellwethers, says Anna Hong from Pendal’s Income and Fixed Interest team.
“New dwelling prices came in at 5.7% for this quarter — the highest since the turn of the century. Builders are finding it difficult to quote given the cost pressures they’re facing.”
Meanwhile rents turned the corner, contributing 0.6% this quarter. “Rent growth is accelerating across capital cities and there is more to come.”
This means increased pressure on the RBA to hike rates during the election campaign, says Anna.
“Markets have already priced in aggressive rate hikes in 2022 and a cash rate forecast above 3% by end of 2023. This may come as a shock to mortgage holders.
“The RBA is increasingly looking like it must join other central banks in dampening demand to rein in inflation rather than waiting for supply to fix itself.”
Concern about Chinese economic growth remains a major factor influencing equity and bond markets.
Five factors have caused a rapid deterioration in sentiment on China’s outlook, says our head of equities Crispin Murray:
It’s estimated that a quarter of China’s population — in 44 cities and accounting for 38% of GDP — are in some form of lockdown. Chinese growth could slow from 4.8% in Q1 to less than 2% in Q2, he says.
“The policy response so far is regarded as too limited.
“We think the structural story in commodities remains attractive. But there is a sense it is a very long position among investors at the moment.”
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April 21, 2022See all
April 21, 2022See all
Generational shift drives ESG opportunity, which fixed interest funds are well placed for rising yields, what’s next for China and beware the ‘brownium’
A Morgan Stanley survey found recently that 99% of young US investors are interested in sustainable investing.
That doesn’t surprise Pendal’s Andrew Parry, who leads the investing teams at our sustainable investing business Regnan.
More than 40 per cent of advisers in Australia now offer responsible investment options, according to surveys by Wealth Insights.
That’s forecast to pass 50 per cent this year and 65 per cent in the next few years, driven partly by a demographic shift to younger investors.
“A vast amount of money is going to be inherited over the next 10 to 20 years,” says Andrew. “This is going to reshape demand for these products for many years to come.”
Still, most investors wrongly believe sustainable investing implies a trade-off that involves giving up returns, says Andrew.
“I think a better way to frame it is that if you’re not thinking about these issues, you can’t have the complete picture. Therefore you’re more likely to introduce more uncertainty by not having the full information when investing.”
Bond yields have been rising and fixed income investing is gaining advocates.
But not all income funds are in the right position to take advantage says Pendal’s head of income strategies Amy Xie Patrick.
“One year ago, to invest in risk-free bonds in Australia, you were getting paid virtually nothing,” says Amy in her latest podcast. “Now you’re getting paid nearly 2.5%.
“But if you don’t have the flexibility within your portfolios to take advantage of this higher-yield environment, then this is a really large prize you are being forced to forego.
“Investors need to look at what kind of income fund they’re getting into. Is it a buy-and-hold, steady as she goes, let’s-not-do-much-about-it kind of income fund?
“Or has your income fund actually been incredibly active to insulate you against the rising interest rate risks, the rising macro risks, that have occurred over the last 6-to-12 months?
“The latter is positioned with more flexibility – and more dry powder – to take advantage of the higher yields we have today.”
With high energy prices and oil and gas company revenues soaring, shouldn’t the big fossil fuel companies be outperforming in credit and equity markets?
In a pre-ESG world the answer would be ‘yes’.
But now big fossil fuel-based companies are paying a ‘brownium’ penalty to raise money in fixed interest markets — and are trading on lower earnings multiples in equity markets compared to previous years, says Pendal ESG credit analyst Murray Ackman.
“Bond people don’t tend to like taking as much risk,” says Murray. “And bond investors look at the downside risk of ESG as pretty significant.
“In the bond world, an investor could feel uncomfortable buying some energy bonds and holding them til maturity because the world in seven years or so will be very different.
“What if there’s a sudden policy change that no one saw coming?
“Pricing can be severely affected, and you don’t want to get stuck with a bond that you don’t want until maturity.”
China’s economy grew at a better-than-expected 4.8% annual rate in the first quarter, despite pandemic lockdowns and tighter regulation on property developers.
But Pendal’s James Syme says a more telling figure may be the recent Purchasing Managers Index — a monthly survey of business activity which showed activity falling to its lowest levels since the height of the pandemic.
“We can only focus on the data and the PMI is a powerful guide to how problematic things are in China,” says James, who co-manages Pendal Global Emerging Markets Opportunities Fund.
Market nerves about China’s outlook mean some of its highest-profile and fastest-growing companies are trading at lower prices than they have for years.
But “cheapness alone is not a driver”, says James. “You need signs of positive economic of political direction.”
Investors should wait to see Beijing’s policy response to the slowdown before their next move, says James.
Dramatic changes in European equity markets over the past six weeks — and energy prices over a longer time frame — provide poignant lessons for investors everywhere.
“It shows that investors, no matter where they are, always need to think about pricing power and relative resilience,” says Paul Wild, who runs a European equities fund at Pendal’s UK-based asset manager J O Hambro.
“The opportunity set for investors can change very quickly. In Europe it has shifted hugely since the beginning of the year and investors need to alter their stance,” Paul says.
“People in different parts of the earnings spectrum react differently. Household fuel bills will be more impactful on low-income households.”
Paul expects luxury demand to hold up better than other retail categories. “We’ve seen prices rising for jewellery and watches at the very high end.”
Healthcare is also less affected, demonstrated by the share prices of big drug companies. “Utilities as well because of the expansion of renewable assets, notwithstanding those more exposed to Russian gas exports.”
The recent recovery in equity markets looks to be ending as the S&P 500 fell -1.2% and the NASDAQ -3.9% last week.
Australia remains more defensive in this environment, falling just 0.3% for the week. More hawkish comments from the Fed prompted the fall.
It signalled a 50bps hike in rates for May, absent any major new shock. It also reinforced the message that quantitative tightening is on its way. While this was known, it triggered a further sell off in long-dated bonds.
US 10-year Treasury yields rose 32bps for the week. It also took the yield curve back into positive territory.
This reinforces the key message that the Fed needs overall financial conditions to tighten sufficiently to cool wage inflation.
Surging equity markets loosen overall conditions, and the Fed is likely to try and prevent this.
How quickly is the market for responsible investing growing? How can you identify the most promising investments in the impact landscape? Is there proof that making a difference makes money? Can Australian investors…
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