Franklin Templeton Insights: Adaptability Goes a Long Way for UK Small & Mid-Cap Stocks

As the United Kingdom falls under further social distancing measures to combat the coronavirus pandemic, what lies ahead for the UK economy? Franklin UK Equity Team’s Richard Bullas and Dan Green share their perspective, and what a slowdown in economic activity could mean for UK small- and mid-capitalisation stocks.

Given the improving UK economic outlook many of us previously anticipated for 2020 and beyond, the expected negative economic impact of the coronavirus pandemic on the UK economy has caught many investors by surprise. We had entered the year with optimism, given the recent UK election result and the government’s commitment to spending.

Now, we think a recession is unavoidable in the United Kingdom, as upcoming economic data is likely to show a massive reduction in economic activity due to the pandemic. The question everyone’s asking is how long this recession could last – whether it’s a temporary three to six-month event, or a deeper and more prolonged one.

What’s been encouraging to us during this pandemic is the coordinated response between the Bank of England (BoE) and the UK government. The BoE’s decision to reduce interest rates to near zero—at the same time newly-appointed UK Chancellor of the Exchequer Rishi Sunak essentially promised a blank cheque to support the economy – is a concerted effort to move early and avoid anything similar to the panic we saw during the 2008-2009 global financial crisis.

The UK government is really living up to the mantra of doing “whatever it takes” to cushion those most vulnerable during this period by supporting the overall economy through National Health Service (NHS) funding, business support grants and job retention schemes.

While we don’t expect the UK government to solve all the nation’s problems, what it is doing is pumping cash into the real economy to cushion it though this period by supporting incomes and those business affected. We’re hopeful this economic slowdown could be temporary, but whether we see a sharp V-shaped rebound –  marked by a rapid downturn and then rapid rebound from the trough or a more gradual U-shaped recovery, remains to be seen.

Ramifications of a Truly Global Event

The coronavirus is unique because it has affected so many people, businesses, governments and markets across the globe in a scale and scope we have never seen before.

What started as a supply shock in China that disrupted global business supply chains has now created a demand shockwave in the West. Economic activity in many cities or countries has all but shut, and a severe recession is now unavoidable.

But this hugely disruptive period will end. As long-term investors, we need to think about how the world will look and behave coming out of the other side. We believe this experience will have far-reaching implications for businesses, governments, society, consumer habits, demand patterns and working practices.

We could see an acceleration of underlying structural trends in many industries, such as online retail, working practices and capabilities, and the network and data infrastructure that supports them. We may see a faster upgrade to a fifth-generation (5G) world through better communications infrastructure.

Implications for UK Stocks

Unsurprisingly, many UK businesses are now in survival mode given that they are temporarily closed. This creates a cash flow crisis and the reality is some won’t likely survive the economic fallout from the coronavirus. Companies are being forced to remove financial guidance to shareholders, suspend dividends and buybacks, and cut costs to conserve cash.

Small and mid-cap stocks have generally underperformed during the recent market crash relative to the wider market, primarily due to differing sector makeup – there’s a greater domestic bias for these types of stocks, which are more cyclical in nature.  Many of these stocks have seen declines in the region of 30%-40% of market value, as a result of this “risk-off” period and a clamour for cash and poor liquidity.

Without a doubt, the sectors with the largest declines have been oil and gas, consumer discretionary and retail. Within these sectors, companies in travel and leisure, such as cinema chains, gyms and restaurants, have been hit particularly hard. The cancellation of major UK sporting events and the closure of some cross-country routes has also affected bus and railway companies. We’ve seen a selloff in the more cyclical names at the smaller end of the market, including housebuilding companies and those that are involved in the construction supply chain. Businesses within the financial sector have borne the brunt of the selloff, too.

Adaptability Goes a Long Way

As we would generally expect, companies with stronger balance sheets before the pandemic have been more resilient, such as health care and utility companies in the more defensive sectors of the market. Food retail and food producers, for example a leading UK pork producer, have seen extra demand due to customers stockpiling ahead of the shutdown but also consuming more food at home.

Other companies that are beneficiaries of this environment include video game producers. Unsurprisingly, online gaming platforms have reported an increase in video game consumption as people are forced to stay at home.

Many businesses have shown they are adaptable in times of crisis and uncertainty – and those are the ones we think have the best chance to weather the crisis. Many of these businesses managed to survive the Brexit uncertainty not so long ago – we’d expect management teams to put the lessons learned from past experiences to good use for the foreseeable future, and emerge from the coronavirus pandemic to take advantage of the opportunities this will create.


 

Franklin Templeton Key risks & Disclaimers:

Important Legal Information

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as of publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com—Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton’s U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

What are the risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. ETFs trade like stocks, fluctuate in market value and may trade above or below the ETF’s net asset value. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.



MeDirect Disclaimers:

This information has been accurately reproduced, as received from Franklin Templeton Investment Management Limited (FTIML). No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

BlackRock Commentary: Tectonic shift to sustainable investing

Jean Boivin, Head of BlackRock Investment Institute and Brian Deese, Global Head of Sustaiability Investing within BlackRock together with Vivek Paul, Senior Portfolio Strategist and Mike Pyle, Global Chief Investment Strategist within the BlackRock Investment Institute share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.

It’s important to keep a long-term perspective amid market volatility – such as the extraordinary moves of recent weeks. One enduring trend we see is a move to sustainable investing: a structural shift in investor preferences leading to large and persistent flows into assets perceived as more resilient to sustainability-related risks such as climate change. Investors rebalancing portfolios after the risk asset selloff may consider leaning into sustainable assets.

Article Image 1 30.03.2020

Sources: BlackRock Investment Institute, as of March 25, 2020. Notes: Global sustainable ETFs as any exchange-traded funds that pursue a dedicated sustainable objective, whether using a broad ESG, thematic, impact, or exclusionary strategy. Traditional ETFs are any other ETFs that are not directly focused on sustainability.

We see a sustainable investing wave playing out in financial markets over the coming decades, remaking economies and industries as capital is reallocated to sustainable assets. This year’s fund flows may offer a miniature version of this shift. Sustainable exchange-traded funds (ETFs) have kept attracting assets this year, while traditional ETFs have seen heavy outflows in the market selloff. See the chart above. Net inflows into sustainable ETFs totaled $14 billion as of March 24, already more than half of 2019’s full-year figure, our data showed. To be sure: The total assets under management of sustainable ETFs are just 1% of that of total ETFs, and flows to sustainable funds are still very small compared with those to traditional funds. Yet the growing interest offers a glimpse of what may lie ahead: a significant structural shift toward sustainable investing, driven by broad societal preferences. As a result, we see portfolio rebalancing in the current environment as an opportunity to substitute some traditional assets with sustainable ones, with an eye on potential long-term benefits.

How should we expect sustainable investing strategies to perform over the long term? Skeptics have long argued the following:

1) Financial markets are efficient, so if sustainability matters it should already be reflected in market prices;
2) if investors care about sustainability, they should be willing to accept lower returns by paying a premium for “green assets”;
3) conversely, investors will earn a greater return as compensation for owning higher-risk “brown assets.”

This logic leads to the conclusion that we can simply ignore sustainability: Tilting toward green assets will be costly and owning brown assets will offer relatively higher expected returns. We disagree.

Why? Financial markets are imperfect at pricing information about the far-off future, even when the structural shifts are well understood. Think of slow-moving demographic trends such as population ageing and its implications for asset prices. When we complete the transition to a low-carbon economy in which sustainability will be fully embedded in marketing pricing, assets backed by high sustainability will be more expensive – while other assets will have become cheaper or disappeared altogether, in our view. Sustainable assets should earn a return benefit during the long transition to this state, in addition to greater resilience against risks such as physical disruptions from climate change. This implies the conclusion that sustainable investing requires sacrificing returns is a myth, in our view. Sustainable investing will likely carry a return advantage over years and decades.

This phenomenon could already be playing out to some extent this year. We studied the performance of the MSCI World SRI Select Reduced Fossil Fuels Index as a proxy for sustainable global equities since late January, when China first acknowledged the coronavirus outbreak. This index outperformed its parent (MSCI World) over the period, likely due to its reduced exposure to the hard-hit energy sector. Our analysis of MSCI’s back-tested data suggests the index outperformed during the market selloffs of mid-2015 and the fourth quarter of 2018. Moreover, other broad ESG equity indexes slightly outperformed their traditional counterparts in developed equity markets over the recent market plunge, we find.

Bottom line: Flows into sustainable assets are still in their early days, and we believe that the full consequences of a shift to sustainable investing are not yet in market prices. This implies a return advantage may be gained over the long transition.

Market Updates

 

Article Image 2 30.03.2020

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, March 2020. Notes: The two ends of the bars show the lowest and highest returns versus the end of 2019, and the dots represent year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, MSCI USA Index, the ICE U.S. Dollar Index (DXY), MSCI Europe Index, Bank of America Merrill Lynch Global Broad Corporate Index, Bank of America Merrill Lynch Global High Yield Index, Datastream 10-year benchmark government bond (U.S. , German and Italy), MSCI Emerging Markets Index, spot gold and J.P. Morgan EMBI index.

Fiscal and monetary policy action to bridge the economic impact of the coronavirus is starting to take shape as the outbreak and related containment measures propagate across the globe. The past week’s historic U.S. policy actions initially helped stabilize markets. We believe they are paving the road for an eventual – and strong – economic and market rebound, once we better understand the scale and impact of the outbreak.

Week Ahead

 

  • Tuesday: Flash purchasing managers’ index (PMI) for the euro area, U.S., UK and Japan
  • Wednesday: Manufacturing PMI for the euro area, U.S., Japan, South Korea
  • Thursday: European Central Bank General Council meeting; U.S. factory orders
  • Friday: U.S. nonfarm payrolls, ISM non-manufacturing PMI

Markets will keep an eye out for more signs of the impact of the pandemic disruption on growth, from manufacturing activity to consumer confidence. Last week’s flash PMI data for a number of economies including the U.S. and euro area hit record lows, showing the sharp contraction in activity that we had expected. We see activity ultimately returning with limited permanent damage – with the help of an overwhelming fiscal and monetary policy response.


 

BlackRock’s Key risks & Disclaimers:

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of March 30, 2020 and may change. The information and opinions are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets. 

Issued by BlackRock Investment Management (UK) Limited, authorized and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL



MeDirect Disclaimers:

This information has been accurately reproduced, as received from  BlackRock Investment Management (UK) Limited. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

Franklin Templeton Insights: Adaptability Goes a Long Way for UK Small & Mid-Cap Stocks

As the United Kingdom falls under further social distancing measures to combat the coronavirus pandemic, what lies ahead for the UK economy? Franklin UK Equity Team’s Richard Bullas and Dan Green share their perspective, and what a slowdown in economic activity could mean for UK small- and mid-capitalisation stocks.

Given the improving UK economic outlook many of us previously anticipated for 2020 and beyond, the expected negative economic impact of the coronavirus pandemic on the UK economy has caught many investors by surprise. We had entered the year with optimism, given the recent UK election result and the government’s commitment to spending.

Now, we think a recession is unavoidable in the United Kingdom, as upcoming economic data is likely to show a massive reduction in economic activity due to the pandemic. The question everyone’s asking is how long this recession could last – whether it’s a temporary three to six-month event, or a deeper and more prolonged one.

What’s been encouraging to us during this pandemic is the coordinated response between the Bank of England (BoE) and the UK government. The BoE’s decision to reduce interest rates to near zero—at the same time newly-appointed UK Chancellor of the Exchequer Rishi Sunak essentially promised a blank cheque to support the economy – is a concerted effort to move early and avoid anything similar to the panic we saw during the 2008-2009 global financial crisis.

The UK government is really living up to the mantra of doing “whatever it takes” to cushion those most vulnerable during this period by supporting the overall economy through National Health Service (NHS) funding, business support grants and job retention schemes.

While we don’t expect the UK government to solve all the nation’s problems, what it is doing is pumping cash into the real economy to cushion it though this period by supporting incomes and those business affected. We’re hopeful this economic slowdown could be temporary, but whether we see a sharp V-shaped rebound –  marked by a rapid downturn and then rapid rebound from the trough or a more gradual U-shaped recovery, remains to be seen.

Ramifications of a Truly Global Event

The coronavirus is unique because it has affected so many people, businesses, governments and markets across the globe in a scale and scope we have never seen before.

What started as a supply shock in China that disrupted global business supply chains has now created a demand shockwave in the West. Economic activity in many cities or countries has all but shut, and a severe recession is now unavoidable.

But this hugely disruptive period will end. As long-term investors, we need to think about how the world will look and behave coming out of the other side. We believe this experience will have far-reaching implications for businesses, governments, society, consumer habits, demand patterns and working practices.

We could see an acceleration of underlying structural trends in many industries, such as online retail, working practices and capabilities, and the network and data infrastructure that supports them. We may see a faster upgrade to a fifth-generation (5G) world through better communications infrastructure.

Implications for UK Stocks

Unsurprisingly, many UK businesses are now in survival mode given that they are temporarily closed. This creates a cash flow crisis and the reality is some won’t likely survive the economic fallout from the coronavirus. Companies are being forced to remove financial guidance to shareholders, suspend dividends and buybacks, and cut costs to conserve cash.

Small and mid-cap stocks have generally underperformed during the recent market crash relative to the wider market, primarily due to differing sector makeup – there’s a greater domestic bias for these types of stocks, which are more cyclical in nature.  Many of these stocks have seen declines in the region of 30%-40% of market value, as a result of this “risk-off” period and a clamour for cash and poor liquidity.

Without a doubt, the sectors with the largest declines have been oil and gas, consumer discretionary and retail. Within these sectors, companies in travel and leisure, such as cinema chains, gyms and restaurants, have been hit particularly hard. The cancellation of major UK sporting events and the closure of some cross-country routes has also affected bus and railway companies. We’ve seen a selloff in the more cyclical names at the smaller end of the market, including housebuilding companies and those that are involved in the construction supply chain. Businesses within the financial sector have borne the brunt of the selloff, too.

Adaptability Goes a Long Way

As we would generally expect, companies with stronger balance sheets before the pandemic have been more resilient, such as health care and utility companies in the more defensive sectors of the market. Food retail and food producers, for example a leading UK pork producer, have seen extra demand due to customers stockpiling ahead of the shutdown but also consuming more food at home.

Other companies that are beneficiaries of this environment include video game producers. Unsurprisingly, online gaming platforms have reported an increase in video game consumption as people are forced to stay at home.

Many businesses have shown they are adaptable in times of crisis and uncertainty – and those are the ones we think have the best chance to weather the crisis. Many of these businesses managed to survive the Brexit uncertainty not so long ago – we’d expect management teams to put the lessons learned from past experiences to good use for the foreseeable future, and emerge from the coronavirus pandemic to take advantage of the opportunities this will create.


 

Franklin Templeton Key risks & Disclaimers:

Important Legal Information

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as of publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com—Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton’s U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

What are the risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. ETFs trade like stocks, fluctuate in market value and may trade above or below the ETF’s net asset value. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.



MeDirect Disclaimers:

This information has been accurately reproduced, as received from Franklin Templeton Investment Management Limited (FTIML). No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

BlackRock Commentary: Tectonic shift to sustainable investing

Jean Boivin, Head of BlackRock Investment Institute and Brian Deese, Global Head of Sustaiability Investing within BlackRock together with Vivek Paul, Senior Portfolio Strategist and Mike Pyle, Global Chief Investment Strategist within the BlackRock Investment Institute share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.

It’s important to keep a long-term perspective amid market volatility – such as the extraordinary moves of recent weeks. One enduring trend we see is a move to sustainable investing: a structural shift in investor preferences leading to large and persistent flows into assets perceived as more resilient to sustainability-related risks such as climate change. Investors rebalancing portfolios after the risk asset selloff may consider leaning into sustainable assets.

Article Image 1 30.03.2020

Sources: BlackRock Investment Institute, as of March 25, 2020. Notes: Global sustainable ETFs as any exchange-traded funds that pursue a dedicated sustainable objective, whether using a broad ESG, thematic, impact, or exclusionary strategy. Traditional ETFs are any other ETFs that are not directly focused on sustainability.

We see a sustainable investing wave playing out in financial markets over the coming decades, remaking economies and industries as capital is reallocated to sustainable assets. This year’s fund flows may offer a miniature version of this shift. Sustainable exchange-traded funds (ETFs) have kept attracting assets this year, while traditional ETFs have seen heavy outflows in the market selloff. See the chart above. Net inflows into sustainable ETFs totaled $14 billion as of March 24, already more than half of 2019’s full-year figure, our data showed. To be sure: The total assets under management of sustainable ETFs are just 1% of that of total ETFs, and flows to sustainable funds are still very small compared with those to traditional funds. Yet the growing interest offers a glimpse of what may lie ahead: a significant structural shift toward sustainable investing, driven by broad societal preferences. As a result, we see portfolio rebalancing in the current environment as an opportunity to substitute some traditional assets with sustainable ones, with an eye on potential long-term benefits.

How should we expect sustainable investing strategies to perform over the long term? Skeptics have long argued the following:

1) Financial markets are efficient, so if sustainability matters it should already be reflected in market prices;
2) if investors care about sustainability, they should be willing to accept lower returns by paying a premium for “green assets”;
3) conversely, investors will earn a greater return as compensation for owning higher-risk “brown assets.”

This logic leads to the conclusion that we can simply ignore sustainability: Tilting toward green assets will be costly and owning brown assets will offer relatively higher expected returns. We disagree.

Why? Financial markets are imperfect at pricing information about the far-off future, even when the structural shifts are well understood. Think of slow-moving demographic trends such as population ageing and its implications for asset prices. When we complete the transition to a low-carbon economy in which sustainability will be fully embedded in marketing pricing, assets backed by high sustainability will be more expensive – while other assets will have become cheaper or disappeared altogether, in our view. Sustainable assets should earn a return benefit during the long transition to this state, in addition to greater resilience against risks such as physical disruptions from climate change. This implies the conclusion that sustainable investing requires sacrificing returns is a myth, in our view. Sustainable investing will likely carry a return advantage over years and decades.

This phenomenon could already be playing out to some extent this year. We studied the performance of the MSCI World SRI Select Reduced Fossil Fuels Index as a proxy for sustainable global equities since late January, when China first acknowledged the coronavirus outbreak. This index outperformed its parent (MSCI World) over the period, likely due to its reduced exposure to the hard-hit energy sector. Our analysis of MSCI’s back-tested data suggests the index outperformed during the market selloffs of mid-2015 and the fourth quarter of 2018. Moreover, other broad ESG equity indexes slightly outperformed their traditional counterparts in developed equity markets over the recent market plunge, we find.

Bottom line: Flows into sustainable assets are still in their early days, and we believe that the full consequences of a shift to sustainable investing are not yet in market prices. This implies a return advantage may be gained over the long transition.

Market Updates

 

Article Image 2 30.03.2020

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, March 2020. Notes: The two ends of the bars show the lowest and highest returns versus the end of 2019, and the dots represent year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, MSCI USA Index, the ICE U.S. Dollar Index (DXY), MSCI Europe Index, Bank of America Merrill Lynch Global Broad Corporate Index, Bank of America Merrill Lynch Global High Yield Index, Datastream 10-year benchmark government bond (U.S. , German and Italy), MSCI Emerging Markets Index, spot gold and J.P. Morgan EMBI index.

Fiscal and monetary policy action to bridge the economic impact of the coronavirus is starting to take shape as the outbreak and related containment measures propagate across the globe. The past week’s historic U.S. policy actions initially helped stabilize markets. We believe they are paving the road for an eventual – and strong – economic and market rebound, once we better understand the scale and impact of the outbreak.

Week Ahead

 

  • Tuesday: Flash purchasing managers’ index (PMI) for the euro area, U.S., UK and Japan
  • Wednesday: Manufacturing PMI for the euro area, U.S., Japan, South Korea
  • Thursday: European Central Bank General Council meeting; U.S. factory orders
  • Friday: U.S. nonfarm payrolls, ISM non-manufacturing PMI

Markets will keep an eye out for more signs of the impact of the pandemic disruption on growth, from manufacturing activity to consumer confidence. Last week’s flash PMI data for a number of economies including the U.S. and euro area hit record lows, showing the sharp contraction in activity that we had expected. We see activity ultimately returning with limited permanent damage – with the help of an overwhelming fiscal and monetary policy response.


 

BlackRock’s Key risks & Disclaimers:

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of March 30, 2020 and may change. The information and opinions are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets. 

Issued by BlackRock Investment Management (UK) Limited, authorized and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL



MeDirect Disclaimers:

This information has been accurately reproduced, as received from  BlackRock Investment Management (UK) Limited. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

Login

We strive to ensure a streamlined account opening process, via a structured and clear set of requirements and personalised assistance during the initial communication stages. If you are interested in opening a corporate account with MeDirect, please complete an Account Opening Information Questionnaire and send it to corporate@medirect.com.mt.

For a comprehensive list of documentation required to open a corporate account please contact us by email at corporate@medirect.com.mt or by phone on (+356) 2557 4444.