Market Update July 2020
Equity markets Year to Date
Region Performance year to date
(euro terms)
Ireland* -14.9%
UK* -22.0%
Europe* -6.1%
US* -1.5%
Japan* -4.8%
China* +3.0%
*Source: Financial Express Analytics
Focus on Environmental, Social and Governance (ESG).
As equity markets continue to follow a pattern of a step forward followed by a step back, this sense of a lack of direction reinforces our cautious outlook for markets over the short term. That said, we are still long term believers in equities and the asset class should continue to represent a core component of all but the lowest risk portfolios. However, as the world emerges from the Covid experience, there is little doubt that some sectors offer the prospect of doing significantly better than others.
In seeking to identify sectors and themes which might do relatively well in a post covid world, we have previously identified healthcare, technology and food as areas for investors to consider. There is another theme which is also likely to receive more attention and focus over the coming years, a trend which had already gained considerable momentum in recent times but we see this momentum most likely accelerating in a post Covid world – that theme is ESG.
ESG funds performed relatively well during the recent market shock in comparison with equity and bond markets generally. The chart below shows two of our key equity and one of our bond picks in the ESG space over 2020 to date.
Shifting to the Mainstream
The world of ESG has come a long way in the past 20 years and is now arguably part of the mainstream as against being a peripheral investment theme. In fact, repeated surveys have shown that the majority of millennials would be willing to sacrifice some return on their investments in exchange for an ESG investment focus (youthful idealism could be a big factor here of course and one wonders whether those views would be retained as they get older and wealthier). However research by MSCI and others have shown that in fact financial returns need not be sacrificed in favour of ESG and that ESG investment actually enhances returns in the longer run. That same research also shows however that the E, the S and the G may not necessarily be all equal in delivering superior returns but that governance tends to predominate, at least over periods of five years or less.
Government and Institutional Support
While Governments have given tacit support to these issues for quite some time, particularly as regards climate and the environment, the degree of serious commitment has clearly picked over the past eighteen months or so. Christine Lagarde, the new Head of the ECB, has put climate considerations at the heart of any future support plans for markets and economies. In addition, European financial regulators have built ESG factors into their assessment and regulation of banks and other financial institutions.
There is little doubt in our minds that Government and institutional support for most aspects of ESG will accelerate over the coming years, that companies will be forced to develop and enhance their credentials in this space. Our advice to investors is to get ahead of this curve and to start building an exposure to ESG investments now.
If you have any queries in relation to the above content or regarding Environmental Social Governance Investments, please contact us on 01 2375500 or email justask@harvestfinancial.ie
Terry Devitt
Investment Director