Noble Apex eNewsletter Issue 822- ESG trend is something that investors cannot afford to ignore

2019-08-21 00:55
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19 August 2019 Issue 822

Global Market Commentary

Equity

  • United States: The US 2-year bond yield was once higher than that of 10-year period, the first time within the past 12 years, triggering investors to worry about the US recession. For the entire week, the Dow fell by 1.53 percent to 25,886.01. The S&P 500 index fell by 1.03 percent to close at 2,888.68. The Nasdaq fell by 0.79% to 7,895.99.
  • Europe: The UK government bond yield curve was inverted, the first time within the past 10 years, triggering the market worried about the global recession. Over the week, the UK’s FTSE 100 index fell by 1.88 percent, the German DAX index fell by 1.12 percent, and the French CAC 40 index fell by 0.51 percent. The STOXX 600 index fell by 0.52% to 369.63 points.
  • Asia: The Sino-US trade war was escalated last week. The United States announced that it would impose a 10% tariff on 300 billions Chinese goods. China claimed that it is a serious violation of the consensus in the first meeting, China will have to take necessary countermeasures on US. For the whole week, the Nikkei 225 index fell by 1.29 percent to 20,418.81 points. The MSCI Asia Pacific Index fell by 1.02% to 150.70 points.

Bonds

  • United States: The US Treasury yield curve is inverted. The market worried that this is a strong warning signal for the economic recession, triggering funds flow into the bond market. For the whole week, the yield of the US 10-year government bond fell by 19 basis points to 1.591%.
  • Eurozone: UK 10-year Treasury yield is lower than that of two-year period, the first time since August 2008, the market worried about the economic prospect of Eurozone. For the whole week, the yield of German 10-year bonds fell by 10 basis points to -0.687%.

Commodity

  • Oil Price: The risk of global economic recession is rising, the market expects central banks will introduce more stimulus measures to support the economy and the demand for crude oil. Over the week, New York oil futures rose by 0.68 percent to close at $54.87 a barrel.

Currency

  • United States: US retail sales in July increased by 0.7% month-on-month, which was higher than the market expectations and the ones in June, supporting the US dollar exchange rate. For the whole week, the Dollar Index rose by 0.668% to 98.142.
  • China: US President Donald Trump announced that the US will impose a 10% tariff on US$300 billion Chinese products, and the yuan fell below 7. For the whole week, the yuan rose by 0.250% against the US dollar at 7.041.

 

Economic-related News

  • United States: Trump said that the United States is still negotiating with China, but is not ready to reach a trade agreement with China yet. Trump claimed if there is a violent suppression of Hong Kong protests, it will be more difficult for the US and China to reach a trade agreement.
  • United States: The White House economic adviser Kudlow did not agree that the US economy is heading for a recession, and claimed that there has been positive progress in the recent Sino-US telephone talks.
  • United States: The US 10-year bond yield has fallen below the two-year debt yield for the first time since 2007, signaling a recession, the increasing demand on risk averse assets pushed the 30-year US bond yield to a record low.
  • Eurozone: British Prime Minister Johnson will travel to Germany and France on August 21st and 22nd, he will announced that UK will leave the EU on October 31, regardless of whether an agreement is reached.
  • Eurozone: According to data from the European Economic Research Center (ZEW), the Eurozone ZEW economic sentiment index fell from negative 20.2 in June to negative 43.6 in July, far worse than the market expectation of negative 21.7.
  • Eurozone: The EU began investigating whether stainless steel coil exporters in China, Taiwan and Indonesia are selling products at a price that lower than the cost price in Europe.
  • Japan: The Ministry of Economy, Trade and Industry announced that after seasonal adjustment, Japan’s Industrial Production Index fell by 3.3% month-on-month to 101.4 in June.
  • Japan: Japan’s August Manufacturing Sentiment Judgment Index fell for the three consecutive months, from 3 in July to minus 4 in August, which was the first negative pessimism since April 2013.
  • Singapore: Singapore’s Prime Minister Lee Hsien Loong said that if the Sino-US relationship deteriorates, Singapore will be highly affected, but Singapore will remain independent in the conflict between the two largest trading partners, China and the US.
China Market Commentary
Economic-related news
• The People’s Bank of China announced that it will reform and improve the loan prime rate (LPR) formation mechanism, with an aim to increase the marketization of LPR, and make it as a guiding role in lending interest rates as well as promote the reduction of the financing cost in the real economy.
• Huawei founder Ren Zhengfei said in an interview with Sky News that the UK will not reject Huawei on the 5G network.

ESG trend is something that investors cannot afford to ignore

Over the last few years, Environmental, Social and Governance (ESG) investing has become one of the biggest topics in the investment community globally. With surging investors interest, growth of ESG investing was tremendous at over 30% worldwide since 2012. The AUM that using ESG strategy is estimated at over $20 trillion in 2018, or around a quarter of all professionally managed assets around the world. The remarkable rise of ESG investing was not limited to Europe and America, but is also growing extensively in emerging markets such as Malaysia, China and India. Indeed, listed companies in Hong Kong are mandatory required to publish ESG report since 1 Jan 2016, while the SFC of Hong Kong is also working hard to enhance the quality of disclosure of SFC-authorised green or ESG funds in recent years.

Why ESG investing is important?   

ESG investing, used synonymously with sustainable investing and socially responsible investing (SRI), is an investment strategy that takes into account the consideration of environmental, social and governance (ESG) factors along with financial factors in the investment decision-making process. It has revolved over the years from simply screening out companies based on ethical, moral or religious grounds, to including companies to reward good behaviour or encouraging them to change business practices. Today, shifting demographics and other long-term trends are underpinning the growing importance of ESG among institutional, wealth and retail investors. For example, the world’s largest asset owner – Japan’s $1.5 trillion Government Pension Investment Fund (GPIF) is a big supporter of ESG and sustainable investing, while the millennial generation and female investors now pay more attention to factors other than pure profitability, e.g., the climate change risk, human rights and responsibility of management to shareholders, employees and other stakeholders. Investors are more than welcome to see if their investment would make the world better.

How’s the performance of ESG funds?

There’s still no consensus and guarantee that ESG or SRI investing will outperform non-ESG funds over the long-term, in particular the sample pool and data is not large enough to make a persuasive conclusion. On one side, a recent study from Morningstar show that 73% of the ESG-screened indexes (41 of 56) outperformed non-ESG equivalents since inception, while on average, sustainable funds have outperformed their conventional peers in down markets over the last four years. Besides, some studies also suggest that companies with robust ESG practices displayed a lower cost of capital, lower price and earning volatility and lower bankruptcy risk, while market is generally willing to pay a premium valuation to these high-quality companies. On the other hand, another study by Wayne Winegarden, an economist of the Pacific Research Institute, argues that only 7% of US. Equity ESG funds (10 of 148) outperformed the S&P 500 index over a 10-year horizon. However, it has to note that S&P 500 index may not be an appropriate benchmark for all these ESG funds as they may have a very different risk and investment focus.

 

In a nutshell, there is still an ample room for ESG or sustainable investing to grow over the next decade. At the same time, there are still plenty of challenges going forward such as supportive regulation, investors education, transparency as well as the quality of ESG data. Nevertheless, ESG investing has now become more mainstream than ever where it can greatly accelerate market transformation for the better, which is something investors (or Hong Kong) cannot afford to ignore.

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