The EdenTree Blog
Our blog aims to bring you the latest insights and reactive commentary from our fund managers, analysts and responsible investment team as we navigate unprecedented times in financial markets and for responsible and sustainable investors.
November might seem just around the corner, but in political terms it is a lifetime away. Thomas Fitzgerald, co-manager of the Amity International Fund, looks at what the upcoming US presidential elections might bring investors:
History suggests in the absence of a recession, presidential elections in the United States strongly favour the incumbent. Out of only five incumbent presidents losing re-election, three of these were during a recession. 2020 is also set to be a recession year, and based on recent poling data, former Vice President Joe Biden appears well positioned to become the 46th President of the United States.
Public sentiment has changed materially over the last few months with approval ratings for President Trump dropping significantly. Odds makers currently give Biden an approximately 58% chance of winning the election. However, at this stage, market participants should be cautious about drawing a firm conclusion on the election. COVID-19 outbreaks could significantly affect voter turnout, particularly in states that do not have easily accessible vote-by-mail policies.
While it is difficult to determine the probable outcomes at this stage, the impact that any president can have on the economy and market depends on their ability to enact legislation. To be able to put in place more controversial policies, control of both the House of Representatives and the Senate is necessary. It is difficult to see President Trump regaining control of the House of Representatives, were he to win. Similarly, it is difficult to see the Senate shift to a Democrat majority. Therefore, a divided Congress appears the most likely outcome.
While political gridlock is not a desirable scenario, it may comfort investors to know that it could act as a considerable restraint on the more radical proposals on both sides. Regardless of the election outcome, it seems unlikely the trade conflict with China will be fully resolved, which may prove to have a greater impact on global investment markets than the composition of Congress or the governing administration.
As a signatory to the Principles of Responsible Investment (PRI) since 2013, each year EdenTree subjects itself to a rigorous assessment of our organisation; our RI processes, activity, strategy and governance by the PRI.
PRI reporting is the largest global reporting project on responsible investment, aimed at providing accountability, transparency and feedback to the responsible investment community. We were thrilled to once again to have achieved great scores across the board, including an A+ rating for RI strategy and governance.
A summary of our main scores is above, and the full assessment report is also available on our website, here.
We reflect on the recent revelations around fast fashion retailer Boohoo, and what the episode can teach ESG investors:
The recent media attention on Boohoo and the alleged exploitative working conditions at its factory in Leicester has been shocking – although unfortunately, not altogether unsurprising. The reality is that it is very hard to produce a £5 dress without cheap labour appearing somewhere in the supply chain.
For the investment management community, this has also been embarrassing. There were twenty funds labelled as ‘sustainable’ that counted Boohoo as a holding, and the stock was AA rated by MSCI on ESG factors. It highlights the propensity for greenwashing and an overreliance on ratings providers to be at the core of many asset managers responsible and sustainable investment propositions.
We originally screened Boohoo back in 2014 when the company first IPO’d, and it failed to pass our ESG/ responsibility screen. Were we do have exposure to clothing and apparel companies, we look for strong supply chain management and carefully managed environmental impact. Fast fashion falls woefully short in most respects within these two core areas.
Above all, perhaps what this episode teaches ESG investors is the underlying importance of looking for responsibly run businesses to invest in and in doing their own research into these companies; by getting that right, investors will be better placed to seek out those real leaders in sustainability.
Thomas Fitzgerald, co-manager of the Amity International Fund, reflects on some key figures released last week:
US stocks drifted higher last week during a quiet stretch of trading, as investors tried to reconcile uneven economic signals with expectations of further stimulus from governments and central banks. Government stimulus has powered the stock market’s recent recovery and the Federal Reserve’s latest minutes showed that central bankers think that more government support is needed to help the economy. Investor sentiment has been discriminate regionally, with markets in Europe and Asia lower on the week, in-keeping with a trend that has transpired year-to-date (rest of the world equities are still far from pre-COVID levels).
The transition from manufacturing to services rebound has also been uneven, with August Purchasing Manager Indexes (PMIs) in the US and UK outperforming those in Europe and Japan. Policymakers continue to debate whether fiscal resources should be geared toward providing additional emergency relief or promoting longer-term industrial transition. A potential reduction in fiscal support remains an important source of downside risk to the global economy. Growth momentum is slowing and becoming more uneven as the effects of lockdowns (and their removal) move further into the rear view mirror. In addition, with goods output having recovered more quickly than expected, further recovery in global activity will need to come disproportionately from services. Flash PMIs in Europe for August are a reminder that recovery in services could prove difficult. While Eurozone manufacturing held steady at 51.7, services dropped from 54.9 to 51.6.
The lack of seasonal demand for tourism was likely exacerbated by the reintroduction of travel restrictions in the face of accelerating COVID-19 cases. Subcomponents also pointed to weakness in services employment, which may be a contributor to the stalling of consumer confidence. PMI softness was not concentrated in Europe; the August manufacturing PMI in Japan (at 46.6) continues to lag other major economies, and Japan’s services PMI deteriorated slightly to 45.0. In contrast, August PMIs in the UK and US showed better momentum, with the UK services PMI rising to 60.1 and services in the US coming in at 54.7. That said, the weakness in the composite employment subcomponent in the UK suggests that unemployment is set to reach cyclical highs last seen during the global financial crisis
Ketan Patel, manager of the Amity UK Fund:
As many countries in Europe focus on lifting lockdowns and relaxing restrictions, a lot of people are now turning to the question of whether there will be a second wave of coronavirus to contend with later in the year. Taking a global view however, this seems premature given that we are very clearly still in the midst of grappling with the first wave of the pandemic – India and Brazil remain particular hotspots and in recent days we’ve seen a huge resurgence of the virus in the US, particularly in the southern and western states.
In the US, many states on the verge of re-opening their economies are now backtracking, keeping businesses closed and lockdown restrictions in place. As a result, markets have been jittery of late, showing themselves to be easily spooked on the possibility of bad news. Such a response shows just how fragile the equity rally that we have seen over the last two months really is.
Rightly so, as the macro picture globally continues to look increasingly gloomy and any degree of ‘recovery’ can be considered fragmented, at best. It also seems to be heavily polarised – on the one hand, one in twelve people in the US are now behind on their mortgage payments; on the other, America’s billionaire class has managed to increase their net wealth to the tune of over $400bn since the start of the pandemic.
It’s clear that there are still short-term effects of the pandemic that have yet to make their impact felt, and we should expect markets to react accordingly. However there is also a need to acknowledge and begin to tackle some of the longer-term problems that the virus has exacerbated, such as rising social inequality.
Given that the markets seem to be completely disconnected to this reality, we still think there is a lot to be cautious about.