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Our Hopes for People, Planet and Profit

Please see the below article from Jupiter Asset Management received late yesterday afternoon:

Abbie Llewellyn-Waters, Freddie Woolfe, and Jenna Zegleman of Jupiter’s Global Sustainable Equity strategy, set out the progress they would like to see in 2022 and in years ahead on climate change, inequality and biodiversity.

This decade is key if we are to achieve the necessary progress in tackling the multi-decade challenges facing the planet we live on and the people we coexist with. In 2021, financial markets were largely driven by short-term considerations, but for long term economic prosperity we need to look beyond the near term to address vital issues. For this reason, we focus on companies leading the transition to a more sustainable world. This requires a long-term outlook, in line with solving vital issues facing climate change, inequality and biodiversity. The imperative for sustainable investing has never been greater.

Action on climate change

COP26, the intergovernmental climate change conference that took place in Glasgow in November 2021, was a milestone in the acceleration of policy change to address emissions reduction and biodiversity decline. While the outcome of the conference could have gone further, the direction of travel is clear. We have held the view for some time that there needs to be global collaboration around carbon pricing and there was positive momentum from COP26 around these policy measures. Governments pledged to revisit and strengthen their 2030 targets to align with the Paris Agreement goal of limiting global warming to 1.5 degrees Celsius above pre-industrial levels. We are hopeful that the ambition gap will be addressed. We expect to see greater collaboration, led by the reiteration of joint commitment from the US and China, and that there will be a rapid but just transition to a low carbon future.

As investors, we need to see clear actionability and irreversibility from companies as they move to decarbonise their processes. Companies able to tangibly reduce carbon emissions, rather than offset, will be better positioned to deliver sustainable returns as increasingly we see externalised costs becoming an internalised cost of doing business.

In 2022, we except to see further policy acceleration to address the current mispricing of the use of nature. It is vital that companies move to live within planetary bounds and mitigate their environmental impact, both from a resilience perspective but also from a financial one.

This also applies to our own company, of course. Jupiter is a signatory to the Net Zero Asset Managers Initiative and has committed itself to align its operations and its investments with net zero emissions by 2050 or sooner.

It is important that the transition to a low carbon future is a just transition, uniting climate change with social justice. At COP26, for the first time the Just Transition was core to the agreement, acknowledging the importance of fairness in how the burden of addressing climate change is borne. Compensating vulnerable nations for loss and damage caused by climate change has also started to enter the dialogue and sets a trajectory for commitments on financing by richer nations to lower-income countries. The developed world has enjoyed more than a century of unprecedented economic growth at significant environmental cost. It is imperative for the global climate action success that developing nations avoid a similar environmental crisis.

Action on inequality

In addition to investing in companies leading the transition to a more sustainable world, we also seek companies which are driving a transition to a more inclusive world. Covid has exacerbated and revealed social inequalities. The economic shock caused by Covid-related closures has fallen disproportionately on vulnerable groups. In the US, the unemployment rate skyrocketed at the start of Covid, across the board, but the impact was significantly greater for those individuals with less than a high school diploma. Similarly, during the pandemic when children were unable to attend school, access to technology became imperative for the continuance of education, again disproportionately impacting those with more limited resources.

Covid has led to the increased vulnerability of many women, particularly in terms of financial independence, and to many exiting the job market altogether. Worldwide, women’s labour force participation has rapidly declined. This has a wider reaching social impact, as there is a correlation between female underemployment and children living in poverty. We look for improved wage transparency, and higher participation of women in the work force as an indicator of high-quality businesses.

Action on biodiversity

Addressing the loss of biodiversity is increasingly becoming a key topic for policy makers. Half of the world’s GDP depends on biodiversity, yet we continue to use natural resources at an alarming rate. COP15, the intergovernmental conference on biological diversity, started in Kunming, China, in October 2021, and will continue there in April 2022. Our hope is that lessons learned from climate change will be usefully applied to the urgent need to reverse loss of biodiversity. Companies’ impact on nature will increasingly be re-evaluated as a cost – just as has happened with carbon.

Just as with carbon, the internalising of externalities around biodiversity will present both opportunities and risks. While companies have been producing carbon data for a long time, the measurement of companies’ impact on nature is nascent. There are already frameworks coming into force in the next few years to improve standardisation of disclosure, notably the Taskforce on Nature-related Financial Disclosures (TNFD). This is a positive step but one that needs to be followed with clear actionability and irreversibility from companies. Addressing these challenges is of enormous importance now, both for our society, and for our long-term capital growth objective. The imperative for sustainable investing could not be greater.

Keep checking back for more ESG related content and our usual market commentary from some of the world’s leading fund management houses.

Andrew Lloyd DipPFS

07/12/2021

Team No Comments

What President Biden could do to dampen oil prices (but probably won’t)

Please find below, an article regarding the global energy market and the options for the Biden administration. Received from AJ Bell, yesterday morning – 05/11/2021.

It is a case of so far, so bad for US President Joe Biden’s plan to force the oil price lower by releasing 50 million barrels of oil from America’s Strategic Petroleum Reserve (SPR). Fifty million barrels a day may sound a lot. But in global terms it is half a day’s demand and America’s entire SPR would meet worldwide oil demand for barely a week.

The Biden plan’s failure to make a dent in oil prices seems less surprising in this context. By contrast, the OPEC+ cartel can move oil markets, as its 2020 production cut and then gradual subsequent increases in supply can testify. OPEC and Russia are still producing less than they were before the pandemic, even as the global economy and energy demand recover, and the latest OPEC+ meeting (2 December) will be the next test of the cartel’s influence.

“Fifty million barrels of oil may sound a lot but in global terms it is half a day’s demand and America’s entire Strategic Petroleum Reserve would meet worldwide oil demand for barely a week.”

COP26 made quite clear the political and public will to move away from hydrocarbon as our prime source of fuel. You can therefore hardly blame Saudi Arabia, Russia and other leading producers for looking to monetise their oil assets while they can still do so.

“Demand for energy could therefore outstrip supply, with the result that hydrocarbon prices could remain firm, or even keep rising – at least unless COVID-19 rears its head again and depresses economic activity and oil demand in the process.”

In addition, alternative, renewable sources are not yet ready to take up all of the slack from oil and gas. Demand for energy could therefore outstrip supply, with the result that hydrocarbon prices could remain firm, or even keep rising – at least unless COVID-19 rears its head again and depresses economic activity and oil demand in the process.

That leaves advisers and clients with a quandary about what to do with oil stocks – and whether they should put profit over principle should oil and gas prices stay stronger for longer – and what to think about the global economy. High energy prices are a tax on consumers and a source of margin pressure for many corporations. If oil and gas rocket, there remains the chance that the indebted global economy could wobble under the strain, virus or no virus, just as it did when oil reached $147 a barrel in 2007.

Deep water

“The combined capital investment budgets of the seven Western oil majors – BP, Chevron, ConocoPhilips, ENI, ExxonMobil, Shell and TotalEnergies – looks set to drop to its lowest mark since 2005, as a percentage of sales.”

Unlikely as it may seem, oil and gas companies are listening to the political and public call for a shift to a greener, less carbon-intensive world. The combined capital investment budgets of the seven Western oil majors – BP, Chevron, ConocoPhilips, ENI, ExxonMobil, Shell and TotalEnergies – looks set to drop to its lowest mark since 2005, as a percentage of sales. In many cases, those budgets include renewable projects, too, so spending on oil production and exploration is by implication lower still.

Global oil majors continue to shy away from new investment in oil and gas fields

Source: Company accounts for BP, Chevron, ConocoPhillips, ENI, ExxonMobil, Shell and TotalEnergies, Marketscreener, consensus analysts’ forecasts

This can also be seen in the global rig count data provided by Baker Hughes (BHI:NYSE). On the previous occasions when oil traded above $80 a barrel, over 3,000 rigs were active. The current figure is barely half that.

Global oil rig activity is subdued relative to prior periods of $80-plus oil

Source: Baker Hughes, Refinitiv data

In the absence of a COVID-inspired setback, that again points to a possible supply/demand squeeze, especially as banks, insurers and many pension funds and managers continue to publicly declare their unwillingness to finance new oil and gas exploration projects.

Action points

“This is not to say President Biden has no options at all, as he seeks to manage the energy transition in the world’s largest economy and keep hard-pressed consumers on board as he and the Democratic Party prepare for the mid-term elections in 2022.”

This is not to say President Biden has no options at all, as he seeks to manage the energy transition in the world’s largest economy and keep hard-pressed consumers on board as he and the Democratic Party prepare for the mid-term elections in 2022.

  • The President could encourage oil and gas exploration with tax breaks or at least grant permission to pipelines that his administration has previously blocked, such as the $8 billion Keystone XL project. This does not seem likely, given his and his party’s commitment to the Paris Agreement and COP26.
  • President Biden could look to thaw relations with Venezuela and Iran, both of whom are currently locked out of global markets by US sanctions. Granted, it is hard to get a handle on potential Venezuelan output given the chaos that prevails there, but Caracas has produced two to three million barrels a day in the past. It is thought that Iran could double output fairly quickly from two to four million barrels a day if given the chance. Hey presto – an extra four to five million barrels a day in total. But geopolitics may rule out this option, as those sanctions are in place for a reason and the President will not want to look dovish on foreign policy ahead of those mid-term polls either.

If the President wants to curry favour, as he may well, who is to say he does not offer consumers some sort of subsidy or hand-out, so they can meet their fuel and heating bills? In a world where money printing and negative interest rates are accepted as normal, and austerity is political poison, anything is possible. But it might not be wise to expect oil consumption, or prices, to fall if such a vote-buying scheme is cooked up.

Please continue to check back for a range of blog content from us and from some of the world’s leading fund management houses.

Alex Kitteringham

6th December 2021.

Team No Comments

Invesco – Investors grapple with uncertainty as Omicron rattles markets

Please see below an article published on 1st December by Kristina Hooper who is the Chief Global Market Strategist at Invesco, which was received yesterday afternoon and covers Invesco’s view on how the Omicron variant has impacted on markets:

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Please keep safe and healthy.

Carl Mitchell – Dip PFS

Independent Financial Adviser

03/12/2021

Team No Comments

Flexibility will be key in 2022

Please see below article received from Jupiter yesterday afternoon, which reviews a tumultuous period for markets and looks ahead to 2022, where flexibility will be essential in a volatile investing environment.

“Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it.” – Ferris Bueller, Ferris Bueller’s Day Off (1986)

We leave it to the readers’ imagination why a film about a high school slacker resonates with the Multi-Asset team. But the post-pandemic period has been one of the most intense of our careers – it’s all too easy for investors to get caught up in the market narrative. Our job is to take a “day off” from the hyperbole and make sense of what’s happening. We predicted back in April 2020 that the sugar rush of pandemic stimulus would kickstart a warp-speed business cycle, and it did. After the fastest recession there was the fastest recovery in history, and now markets are worried things are moving too fast. The market narrative has flipped from deflation to reflation to stagflation to inflation in a matter of weeks.

Don’t rely on inflation fading next year

The Federal Reserve (Fed) has allowed monetary policy to run looser for longer, as we expected after the structural shift of its 2020 framework review1. There has been an even faster rebound in demand than the Fed expected, driven by vaccines, rising household wealth, and stimulus cheques. Demand has outstripped supply resulting in inflation levels we haven’t seen for nearly 40 years.

The Fed is banking on inflation fading next year, but it may be more persistent . We analyse current inflation across four key buckets: reopening-related sectors, housing, wages, and expectations. All are moving higher. Inflation in rents is sticky and can contribute to higher inflation expectations, which reinforce longer term inflationary dynamics. Central bank policy is running a risk of going too slowly now, and having to move at a faster pace further down the line, choking the recovery.

Heading into 2022, we think growth can be sustained and support markets. Supply bottlenecks have left inventories low, and restocking can sustain industrial production. Accumulated savings (of around 10% of GDP in the US) can continue to support consumption. As we head towards the middle of next year, restocked inventories, slowing consumer demand, tighter policy and stretched valuations will make life more difficult. Conclusion: one can continue to ride the wave in equities and hold fewer bonds for now, but the likelihood is the flexibility to cut risk and add duration later next year will be needed.

Job openings are outstripping the supply of unemployed workers, putting upward pressure on wages

Looking beyond the horizon

Looking out into the more distant future, structural shifts point to a modestly stronger growth and inflation environment. Pandemic stimulus cheques and asset price rises allowed an increase in retirements, reducing labour supply, but lifting wages. The pandemic and trade wars exposed global supply chains, leading to a structural shift from “just in time” to “just in case”. We have seen increased capital expenditure and in particular increased spending on research and development since the pandemic, which can drive productivity and growth. Last but not least, the need to fund climate transition can unlock additional fiscal spending and potentially forms of ‘green’ stimulus. There seems to be little chance of a return to the austerity of the previous decade.


These factors will take some time to play out, but the sum of their impact is likely to be a modestly higher growth and higher inflation environment over the next decade, particularly compared to the previous one. Shifting policy is also likely to lead to higher volatility, and more frequent, sharper crises. Simple balanced portfolios of higher quality equities and longer duration bonds are unlikely to work as well as they have.


This doesn’t necessarily mean investors can’t make decent returns, but it will call for different approaches. As Ferris said, “you’re not dying: you just can’t think of anything good to do”. We think this sentiment applies to investing: you can still perform, but you will need more flexibility and a wider range of return sources.

Please check in again with us soon for further relevant content and news as we continue through the festive season.

Stay safe.

Chloe

02/12/2021

Team No Comments

Brewin Dolphin – Markets in a Minute

Please see below this week’s Markets in a Minute update from Brewin Dolphin – received late yesterday afternoon – 30/11/2021

Omicron variant sparks global market selloff

Stocks ended last week sharply lower as the discovery of a new and potentially more contagious Covid-19 variant sparked a global market selloff.

In the US, the S&P 500, Dow and Nasdaq ended their holiday-shortened trading week around two percentage points lower, after scientists in South Africa said the Omicron variant seemed to be spreading more quickly than previous strains.

The pan-European STOXX 600 tumbled 4.5% as the spread of Omicron stoked fears of a fresh hit to the global economy. Travel stocks suffered the most as countries moved to suspend travel to southern Africa. The FTSE 100 and Germany’s Dax slid 2.5% and 5.6%, respectively.

The sombre mood continued in Asia, where Japan’s Nikkei 225 and Hong Kong’s Hang Seng lost 3.3% and 3.9%, respectively.

Virus fears overshadow strong economic data

Last week started on a fairly strong note, with encouraging economic data from both the US and Europe. In the US, the Commerce Department said gross domestic product (GDP) growth slowed to an annual rate of 2.1% in July to September, slightly better than its initial estimate of 2.0%. Weekly jobless claims dropped to 199,000, the lowest level since 1969.

In Europe, business activity growth unexpectedly accelerated in November after slipping to a six-month high the previous month, according to IHS Markit’s provisional flash PMI data. The index’s reading of 56.6 was the highest for three months and was accompanied by a further marked increase in firms’ costs and average selling prices.

Chris Williamson, chief business economist at IHS Markit, said: “A stronger expansion of business activity in November defied economists’ expectations of a slowdown, but is unlikely to prevent the eurozone from suffering slower growth in the fourth quarter, especially as rising virus cases look set to cause renewed disruptions to the economy in December.”

Stocks suffer worst day since June 2020

The upbeat mood was quickly overshadowed by news of the Omicron variant. On Friday, the World Health Organization warned the new variant may spread more quickly than other forms and that preliminary evidence suggested there was an increased risk of reinfection.

Concerns about the virus and its impact on the global economy drove investors out of riskier assets on Friday, with European equities hit the hardest. The STOXX 600 recorded its worst session for 17 months, losing 3.7%. Europe had already seen an increase in the number of new coronavirus cases and hospitalisations, resulting in several countries reimposing restrictions the previous week.

The travel and leisure sector bore the brunt of the selloff, losing 8.8% in its worst day since March 2020, as England imposed a temporary ban on flights from southern Africa. Oil and gas producers and miners also fell, as the new variant triggered concerns about a slump in demand.

Wall Street ‘fear gauge’ jumps

Over in the US, the S&P 500 saw its biggest one-day fall in nine months on Friday, while the CBOE Volatility Index, known as Wall Street’s ‘fear gauge’, surged to its highest level since early 2021.

The yield on the benchmark US ten-year Treasury note fell by around 0.16 percentage points, marking its biggest decline since March 2020, as investors turned to traditionally lower risk assets. Elsewhere, the price of West Texas Intermediate crude oil plummeted by around 10% on concerns the Omicron variant will spark an economic slowdown.

Moderna boss casts doubt over vaccine efficacy

Indices managed to claw back some of last week’s losses on Monday (29 November), with the S&P 500 and the FTSE 100 finishing the trading session up 1.3% and 0.9%, respectively. However, markets fell sharply again on Tuesday after the chief executive of Moderna warned existing vaccines would be much less effective at tackling Omicron than earlier strains of the virus. Stéphane Bancel told the Financial Times that the high number of Omicron mutations on the spike protein, which the virus uses to infect human cells, and the rapid spread of the variant suggested existing vaccines may need to be modified next year.

Bancel’s comments rattled markets in Asia, with the Nikkei 225 finishing down 1.6% on Tuesday, and resulted in the price of oil dropping to its lowest level since mid-September. The FTSE 100 and the STOXX 600 opened their trading sessions around 1.5% lower, as investors feared further restrictions and lower demand in the weeks ahead.

Please continue to check back for our latest blog posts and updates.

Charlotte Clarke

01/12/2021

Team No Comments

Omicron and Markets – Our Asset Allocation team’s key beliefs

Please find below a insight into the impact of the Omicron variant on world markets, received from Legal & General yesterday afternoon.

 The COVID-19 situation had not been looking good across Europe anyway, but at least there was the hope that the shift into an endemic scenario was not far away, especially with a re-acceleration in vaccinations, boosters and the availability of antiviral drugs. This may well still be the case, but the emergence of a new variant of concern has added to the tail risk that it won’t be.
 
Déjà vu all over again

We are neither virologists nor epidemiologists. But from a market perspective, there are a few things we can say about the virus without their expertise.

It’s still very early and there is little data about B.1.1.529, now known as ‘Omicron’, but it appears to be spreading faster than the Delta variant did in South Africa. It has many mutations that in other variants have been associated with greater transmissibility and evading immunity.

The variables we will be watching most closely are:
Is it more transmissible?
Is it more likely to lead to hospitalisation and is it more lethal?
Do vaccines and antivirals still work against it, and how well?

We must also consider the response of policymakers. It’s relatively easy for major central banks to do nothing for the time being, should market worries intensify. Rates are already at zero with some tapering underway. It’s a bit trickier for the Bank of England, given expectations of a December hike, but the Federal Reserve (Fed) does not have to speed up tapering in December.

Fiscal support, if needed, should be no different than in previous waves. In Europe, the past few weeks have shown that countries increasing restrictions are just as willing to renew fiscal support measures as previously. In the US, Democrats being in control of both the House and Senate – and with an election coming up next November – should make building consensus to support the economy easier than in 2020.

Restrictions have already been ramping up in Europe in response to the winter wave. New variant concerns could accelerate this dynamic. The US faces a different situation, as a new variant would require a greater shift from the status quo. China’s zero-COVID strategy would be more difficult to maintain with a more transmissible variant.

Mandatory vaccination has already become more likely in several European countries, and a new variant could push more towards this step. This would have little immediate impact on markets, but could potentially be positive for 2022.

Markets will clearly remain sensitive to news on the variables mentioned above. But our initial line of thinking is that, should market weakness around a new variant intensify, similar to geopolitics, it could create an opportunity to increase risk in portfolios.            

M&A: here to stay?  

Until Omicron, the most interesting financial story in late November was merger and acquisition (M&A) activity, sparked by KKR’s* bid for Telecom Italia*.

From an equity perspective, we see M&A as a coincident indicator rather than a leading indicator in the market cycle. It’s more the case that M&A is up because markets are up, rather than markets rallying because of M&A, in our view. Business confidence has typically been the main driver of corporate M&A. Of course, cheap financing also helps, especially for private-equity transactions. Interestingly, M&A activity tends to be highest when share prices are highest. M&A happens not when it’s cheapest to buy, but when management teams feel confident about the future.

We therefore agree with our colleagues’ argument that headline-grabbing M&A can be a late-cycle indicator, but is not necessarily a leading indicator of the end of the cycle. We expect the M&A theme to be with us for the duration of this cycle and bull market, even if financing conditions become less favourable as the cycle matures. One precedent is the Fed rate-hiking cycle from 2004 to 2006, when M&A activity accelerated and kept going until the economic cycle and bull market ended.

Another macro factor that could become less favourable, but seems unlikely to derail overall activity, is US regulation. The Department of Justice and Federal Trade Commission, under new leadership, are trying to enforce antitrust rules more strictly than in the past. This is probably mostly targeted at big tech, but might also put off some other acquisitions that are borderline on antitrust and industry concentration. Aon* and WTW* was one recent example.

For equities, actual deals don’t typically have a positive first-round effect. The shares of the acquirer typically trade down, and the shares of the target trade up, but the target is usually smaller. So, if anything, it’s generally better for small-caps than large-caps. We had a good example in the telecoms sector last week. Telecom Italia was obviously up significantly following the KKR bid. But on the same day, Ericsson’s shares fell 5% on its planned acquisition of Vonage in the US.

Private equity aside, there is another incentive for corporate buyers to consider M&A. For most of this year, companies that have undertaken cash or debt-financed M&A have outperformed companies using cash for buybacks and capex. So, for management whose compensation is linked to the share price, M&A has a definite appeal.    

Earnings 2022  

Of course economic data matter. Of course COVID-19 matters. But for equities, the main reason they matter is because of what they tell us about corporate earnings.

Coming out of a solid third-quarter 2021 earnings season and heading into year-end, it’s a good time to think about what earnings will look like in 2022. The obvious caveat to all of the below is that a dangerous variant would change everything.

Our economics team’s roadmap is consistent with US earnings growth in the high single digits, more specifically around 9% by the end of 2022. That would be a slowdown from the post-recession extremes, but solidly positive and a bit above trend.

The 9% estimate is unusually close to the bottom-up consensus of 8.5%. Bottom-up forecasts were too pessimistic about the post-recession rebound, but our own analysis suggests that the big upward revisions to analyst expectations should soon come to an end. It’s too early to tell for sure, but the top-down numbers from sell-side outlooks also appear to sit in the high single-digit area.

The biggest swing factors to next year’s earnings, COVID-19 aside, are US corporate taxes. Assuming about half of the initial proposals from the Biden administration become law, that would take around 5% off earnings growth estimates. The latest proposals, however, have come in a bit smaller than previously. It’s possible the statutory tax rate could stay unchanged, with reforms focusing instead on foreign income, a minimum tax rate and a buyback tax. So the hit to US profits could end up being smaller than 5%.

Another factor to consider is slower economic growth in China, given that we are at the bearish end of forecasts for the country’s GDP. However, the first-order impact on US profits should be manageable. We estimate that 1% off Chinese GDP growth takes a bit less than 1% off S&P 500 profits. Given the other uncertainties around earnings growth, this should not be a dominant driver of the US earnings debate next year.

*For illustrative purposes only. Reference to a particular security is on a historical basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.    

Please continue to check back for a range of blog content from us and from some of the world’s leading fund management houses.

David Purcell

30th November 2021

Team No Comments

The Dirty Business of Greenwashing

Please see the below article received from AJ Bell late on Friday afternoon:

The 2021 United Nations Climate Change Conference, known as the COP26 summit, was held in Glasgow earlier this month and brought together heads of state, government leaders and important industry figures from nearly 200 nations. The main objectives of the conference were to restrict the level of global warming to 1.5 degrees Celsius above pre-industrial levels, and to achieve net-zero emissions by 2050.

The global finance industry has always been seen as an important factor in the drive to achieve climate change targets, and indeed the COP26 meeting included a dedicated ‘finance day’ where key players from governments, central banks and business discussed how the industry could rise to meet the ambitious challenges of the conference

Investment strategies where values are taken into account, often known as Environmental, Social and Governance (ESG) investing, have been available for many years, but they are now very well established as a strong market trend, with consumers around the world placing ever-larger amounts into ESG products. A recent FCA survey indicated that 80% of respondents wanted their investment portfolios to “do some good” as well as providing them with a financial return, and 71% wanted to invest in a way that “is protecting the environment”.

For their part, the UK authorities such as HM Treasury, the Bank of England and the Financial Conduct Authority (FCA) have been working on a number of initiatives. On the COP26 finance day, the FCA published its strategy on ESG, indicating its desired outcomes and the actions needed to achieve them.

The strategy codifies a number of items that the regulator has previously announced, with themes of transparency, trust, tools, transition, and team. The overarching objective is to support the financial sector to drive positive change, particularly in the transition to net zero emissions.

One potentially important piece of work is the discussion paper published by the FCA on 3 November – Sustainability Disclosure Requirements and Investment Labels. The European Union’s Sustainable Finance Disclosure Regulation (SFDR) contains a variety of provisions, including an obligation for financial advisers to take into account the ESG/sustainability preferences of clients as part of the advice process. SFDR was not implemented into UK law prior to Brexit, but the FCA has now launched its own Sustainability Disclosure Requirements which will cover much of the same ground as SFDR would have done.

Although the discussion paper is centred around the investment management industry, financial advisers are also referenced as a critical part of the value chain. The FCA’s proposals for advisers are not fully fleshed out in its paper, but a clear steer is given, so advisers should pay keen attention to the regulator’s moves in this area:

“…we recognise the important role that financial advisers play in providing consumers with sufficient information to assess which products meet their needs. We are also exploring how best to introduce specific sustainability-related requirements for these firms and individuals. Building on existing rules, a key aim will be to confirm that they should take sustainability matters into account in their investment advice and understand investors’ preferences on sustainability to ensure their advice is suitable. We will develop proposals on this in due course, working with Government…”

One core problem associated with the area of ESG investing is that of labelling. The FCA has a concern that there is the potential for ‘greenwashing’, where sustainability claims made by investment management firms do not stand up to scrutiny. There is a litany of different labels which can be confusing for investors and advisers looking for suitable products. These products can be variously labelled as ethical, ESG, SRI, responsible, green, impact and so on. With labels being an important driver of consumer choice, the FCA is looking to enhance trust in this area and develop a set of objective classifications for products. Its proposal is to classify them into five high-level categories, as follows:

  • Not promoted as sustainable’ – Here, sustainability risks have not been integrated into the investment philosophy of the product and there are no specific sustainability objectives.
  • Responsible’ – The impact of sustainability factors on risk and return has been considered. There should be a level of ESG integration into the product’s management, with evidence of ESG capabilities and resources from the manager, and demonstrable investment stewardship.
  • Sustainable – Transitioning’ – Products with sustainability characteristics, themes or objectives which do not yet have a substantial proportion of underlying assets that meet the sustainability criteria set out in the UK Taxonomy, but the expectation is that this proportion will rise over time.
  • Sustainable – Aligned’ – Products with sustainability characteristics, themes or objectives which have a substantial proportion of underlying assets that meet the sustainability criteria set out in the UK Taxonomy.
  • Sustainable Impact’ – Products with explicit objectives to deliver net positive social and/or environmental impact as well as a financial return.

Alongside these labels, the FCA has indicated its intention for firms to provide the most pertinent sustainability-related information via consumer-facing disclosure, in order for investors to be armed with all the information required for them to make a considered choice with their capital.

The FCA’s proposals are at a very early stage, but the direction of travel is fairly clear. ESG investment is growing at a rapid pace, driven by strong consumer demand and a significant push from regulators and governments around the world. In many ways, the industry remains somewhat fragmented and its labelling can be confusing for customers. With increasing choice from asset managers, and more advisers incorporating ESG products into their advice process to meet their clients’ preferences, the regulator’s moves to build trust make the industry clearer and more harmonised will be welcomed in many quarters.

Our Comment

When we first started to write about ESG around 18 months ago, we commented that we expected the regulator to react to the growing ESG trends in the investment world.

As you can see here, we were not wrong, it seems like this is the start of their push towards giving us guidelines around ESG investing.

It’s not a bad thing though. Greenwashing is a major issue in the industry. The more investors read and hear about ESG investments, the more they discuss it with their advisers and the more likely they are to want to invest in this way.

This unfortunately means that some non ESG approved investments won’t want to lose out on the investors money and will greenwash their way into getting people to invest with them.

The proposed new disclosure requirements will help to prevent this in the industry by making the labelling of investments more clear and transparent.

Keep checking back for more ESG related content and our usual market commentary from some of the world’s leading fund management houses.

Andrew Lloyd DipPFS

29/11/2021

Team No Comments

AJ Bell – Why emerging market debt to GDP ratios are lower

Please see below an article from AJ Bell received yesterday afternoon – 25/11/2021 – analysing the difference between developing and advanced economies when it comes to borrowing:

There is a big difference in the public finances of emerging market countries and those in the developed world.

For the most part emerging market countries have much lower levels of government debt to GDP (gross domestic product).

According to the IMF (International Monetary Fund) the average debt to GDP ratio in 2021 for emerging markets and developing economies is 63.4%, a little more than half the average for advanced economies at 121.6%.

There is some variation within this: Russia, for example, comes in at just 17.9% while India’s debt to GDP ratio is 90.6% and Brazil’s is also above 90%.

In 2021 the averages for the developed world and emerging markets were lower and the difference between the two was also smaller – the respective averages coming in at 69.7% and 48.1%.

The IMF is projecting for the gap to close somewhat, by 2026 it is forecasting an average of 118.6% for advanced economies against 68.1% for the developing world.

The divergence, in part, reflects the differing responses to two great crises of the past two decades as countries in the West have taken advantage of their ability to issue debt at low interest rates to help cushion the economic impact of the 2007/8 financial crisis and the Covid-19 pandemic.

The result being that, on this measure at least, emerging economies look to be at something of a structural advantage.

Please continue to check back for our latest blog posts and updates.

Alex Kitteringham

26/11/2021.

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FT Article – Financial advice ‘intrinsically linked’ to good mental health

Please see below an article from FT Adviser, which was received late yesterday afternoon and details how financial advice is ‘intrinsically linked’ to good mental health:

As you can see from the above article, receiving financial advice putting a plan in place, especially for retirement accompanied with regular reviews can have a positive impact on an individual’s mental health.

It’s easy to understand why this is the case as by firstly receiving financial advice, we (as IFAs) can help you identify and prioritise your needs and objectives. Then, by reviewing these plans on a regular basis and knowing where you are in terms of achieving your desired goals should help give people peace of mind knowing what they need to do (if anything) in order to achieve their objectives.

The cost/benefit issue is not necessarily understood by prospective clients. As a client you can understand the value of advice. Research in this area has indicated that the ongoing advice and guidance is good value for money.

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Please keep safe and healthy.

Carl Mitchell – Dip PFS

Independent Financial Adviser

25/11/2021

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Brewin Dolphin – Markets in a Minute

Please see below this week’s Markets in a Minute update from Brewin Dolphin – received late yesterday afternoon – 23/11/2021

Stocks mixed as UK inflation hits ten-year high

Stock markets were mixed last week as UK inflation hit its highest level in nearly ten years amid surging energy prices.

The FTSE 100 fell 1.7% with high inflation and an increase in employment fuelling speculation that the Bank of England will raise interest rates next month.

The pan-European STOXX 600 slipped 0.1% as an increase in the number of Covid-19 infections prompted several countries to reintroduce restrictions to curb the spread of the virus.

US indices fared better, with the Nasdaq hitting a new intraday high on Friday and ending the week up 1.2%, powered by technology stocks. The S&P 500 also rose, whereas the Dow recorded its second-consecutive weekly loss, finishing down 1.4%, as banking, energy and airline stocks slumped on fears of full lockdowns across Europe.

Japan’s Nikkei 225 managed a 0.5% gain after the government approved a larger-than-expected spending package to cushion the economic blow of the pandemic.

Powell to chair Fed for second term

Major indices were mixed on Monday (22 November) as investors digested the news that US President Joe Biden had nominated Jerome Powell as chair of the Federal Reserve for a second term. Biden cited the ‘decisive action’ Powell took during the early stages of the pandemic as a reason for the reappointment.

Bank stocks and Treasury yields rose following the decision but concerns about increasing Covid-19 infections in Europe weighed on investor sentiment. The Dow edged up 0.1% whereas the S&P 500 and the Nasdaq lost 0.3% and 1.3%, respectively. The FTSE 100 managed a 0.4% gain as telecom stocks rose following private equity firm KKR’s $12bn takeover bid for Telecom Italia. The STOXX 600 was 0.1% softer as investors feared Germany would follow Austria in imposing a full lockdown.

The FTSE 100 was 0.6% lower at the start of trading on Tuesday, while the STOXX 600 looked to be on track for its worst day in nearly two months, amid ongoing fears about Covid-19 restrictions.

UK inflation hits 4.2% in October

Consumer prices in the UK rose at their fastest pace in nearly a decade in October, hitting 4.2% on an annual basis. The Office for National Statistics (ONS) said this was mainly because of higher fuel and energy prices, although the cost of second-hand cars and eating out also increased. The figure was far higher than the 3.1% annual rise seen in September and more than double the Bank of England’s 2% target.

Speculation that the Bank of England will raise interest rates in December intensified further after figures showed the number of payrolled employees increased by 160,000 to 29.3m between September and October. Huw Pill, the Bank’s chief economist, was quoted in the Financial Times as saying the ‘burden of proof’ had shifted and that policymakers would have more explaining to do if they left interest rates unchanged than if they raised them. “I’m looking perhaps for reasons not to hike rates,” he said.

Despite soaring prices, GfK’s consumer confidence index rose three points in November to -14, better than the -18 forecast by economists. There was a seven-point jump in the sub-index of whether people think this is the right time to make big purchases. Meanwhile, the latest UK retail sales figures from the ONS showed sales rose 0.8% in October from the previous month, following no growth in September, as people shopped earlier than usual for Christmas presents.

US retail sales record biggest jump since March

Retail sales in the US also rose in October for the third consecutive month in a row. The 1.7% month-on-month increase was the largest gain since March and topped economists’ expectations for a 1.4% rise.

Sales were up by 16.3% from a year ago and are now 21.4% above their pre-pandemic level. Several retailers noted there had been an earlier start to Christmas shopping. The data suggests the recent surge in US inflation – it hit its highest level in three decades in October – hasn’t yet dampened spending, despite consumer sentiment falling to a ten-year low earlier in the month.

Europe tackles surge in infections

Austria has become the first western European country to reimpose a full national lockdown since vaccines became widely available. As of 22 November, people will only be able to leave their homes for specified reasons, such as buying essential groceries and going to the doctor. The lockdown is expected to last for a maximum of 20 days and comes amid a spike in infections to 15,809 on Friday.

Several other European countries have introduced measures that aim to stem the spread of the virus, ranging from a partial lockdown in the Netherlands to restrictions for the unvaccinated in Germany and mandatory face masks in Spain and Poland. It comes after the World Health Organization warned that Europe could see 500,000 more Covid-19 deaths by February unless measures were tightened. The restrictions led to protests in Belgium, the Netherlands, Austria, Croatia and Italy over the weekend.

Please continue to check back for our latest blog posts and updates.

Charlotte Clarke

24/11/2021