We welcome the industry’s increasing focus on ESG matters, because the more investors focus on ESG, the more we raise the standards.
It is Zehrid Osmani, Head of Global, US and European Long-Term Unconstrained funds, and manager of the Global Portfolio Trust at Martin Currie.
As lockdowns are in the processing of easing or ending, we would like to take this last of the lockdown podcast series as an opportunity to congratulate the many corporates that have, during this pandemic crisis, stepped in and stepped-up efforts to help the world fight this pandemic, either through diverting some of their production capacity towards producing essentials, or donating some of their goods and services to help frontline workers and the health services in general. Putting their duties as good corporate citizens first, shows the importance of corporate values in guiding companies towards making the right decisions in periods of crisis. This applies to both large corporations, and to SMEs. Thank you for your efforts and generosity, and your good corporate citizenship in periods of crisis. “In times of storms, there are those that shelter, and there are those that help others towards a safe shelter.”
We have structured this podcast into 2 parts:
- an update on our market thoughts, focusing specifically on valuation, and
- our ESG focus and how we approach ESG at Martin Currie.
Starting with our market thoughts, we are long-term investors, we manage assets with a long horizon perspective and therefore some of the market thoughts do not impact our long-term thinking.
Markets have had a sharp recovery from the lows of mid-March after the fastest bear market since World War II, now up +35% from those lows, and only off -11% from the pre-pandemic crisis highs.1
Recovery has been driven by the market shifting its focus from the short-term reality of an unprecedented recessionary environment, profit warnings and earnings downgrades, towards the mid-term considerations of a recovery in business activity post lockdowns, as we fleshed out in our first podcast. So the bull-bear debate has, in the past two months, shifted resolutely in favour of the bull camp.
A few points to highlight, in terms of:
- earnings downgrades
- shape of recovery
- market risks
Firstly, on earnings downgrades; we highlighted in the previous podcasts that we expect a -33% decline in earnings this year - consensus is continuing to downgrade estimates towards our level, there are still about c.10% downgrades to come to get there, but consensus is now getting nearer to our estimates.2
Secondly, on the shape of recovery, our core scenario is one of a gradual recovery, with a return to previous levels of activity only by 2022, given the different shape of supply and demand post lockdowns, and the risk of a negative feedback loop from the deteriorating labour market. The next 1-3 months should see an improvement in PMI data, which could give the impression of a rapidly recovering economic situation, i.e. the impression of a V-shaped recovery. We think we need to be cautious and assess whether such recovery from the significant low levels we have seen carries momentum.
Thirdly, in terms of market risks, additional risks to take into account over and above the uncertain shape of the recovery, are the geopolitical risks, notably in terms of renewed tensions between the US and China, and pandemic relapse risk which could impact the economic pick-up.
On the positive side, personal savings have risen sharply during lockdowns, from about 8.2% of disposable income in February for the US as an example to 33.0% at the end of April3, so we might have a pent up consumer demand which could bounce sharply and be supportive early into the recovery. Fiscal stimuli that have been announced, sometimes well over 10% of GDP for some of the major economies4, will be finding their way into the real economies as they re-open, which should be supportive. And additionally, earnings downgrades are easing, and the market tends to react to the momentum of earnings downgrades, so this has also provided support to the markets in recent weeks.
Fourthly, and finally, on market valuations: on a headline PE basis, markets are looking expensive versus history now, but given the constantly evolving picture in terms of the earnings estimates at the moment, it is more appropriate to look at cyclically adjusted PE ratios - on that measure, markets are closer to their long-term average or slightly above i.e. not particularly cheap, but also not significantly expensive.
Additionally, with bond yields at extremely depressed levels, the argument of earnings yield attraction relative to bond yields is one that continues to support equity valuations at the moment, although again, earnings levels remain uncertain and therefore this is not the most accurate measure to focus on at the moment.
Within the valuation debate, it is important to highlight the increased risk of style rotation, given the stretched valuation spread between ‘Growth’ and ‘Value’ that we are seeing at the moment. This has the potential to be an important focal point for the market, even if it might be short-lived; but timing and duration of such rotation is difficult to assess.
All in all, given the risks and where valuations are, volatility both in the market and within the market is likely to remain elevated in our view.
For us, as long-term investors of course, the importance of being invested for the long term and sticking to our investment philosophy remain the key message we want to convey to investors.
…sustainable investing is about growth that is inclusive to every part of society and the environment.*
Moving to the second part of our podcast, focusing on ESG across our portfolios.
As a reminder, we manage high conviction best ideas portfolios focusing on long term sustainable quality growth stocks, which have low disruption risk, high barriers to entry, strong pricing power, attractive growth and return profiles, good ESG profile and attractive valuations. We offer our investors Global, European, International and US versions of our Long-Term Unconstrained funds, as well as Global Portfolio Trust as one of our global offerings.
On ESG, it is worth highlighting a few things up front: at Martin Currie, we have a strong expertise in ESG analysis, which we have developed over multiple decades of fundamental research. Our ESG analysis is integral to our fundamental analysis and it is carried by our fundamental analysts. Because in our view, ESG goes hand-in-hand with long term investing. We recently published our latest Annual Stewardship Report which highlights some of the initiatives that we have been focussing on in the past year. This can be found on our website, authored by our head of Stewardship, David Sheasby. Our leadership in ESG has been rewarded by the UN PRI over the past three consecutive years through top rating of A+ across all three categories.5
We continue to lead in this field, and have put in place a proprietary ESG framework which all our teams apply. That framework assesses each company we research in terms of Governance and Sustainability risks.
Within Governance, we assess four fields, which are: boards, management, remuneration and culture.
On the sustainability side, we assess environmental and social risks, the understanding, integration and ambitions of the companies in these fields, and the common factors related to climate change, cyber security and human capital. All in all, we have more than 50 fields that our analysts assess in detail and rate.
We put this proprietary ESG risk assessment framework in place at the back end of 2018 and are able to feed this analysis to our investors to give them a better understanding of the ESG risk exposures in the portfolios we manage.
We welcome the industry’s increasing focus on ESG matters, because the more investors focus on ESG, the more we raise the standards and the demands on corporates to manage their businesses in a sustainable manner.
The important aspect of assessing sustainability in a detailed way is to be able to then actively engage with the corporates we invest in to drive change and improvement in the ESG practices. All in all, we spend a lot of time talking to and working with companies on this aspect of our fundamental research work.
We find that well stewarded companies tend to have a higher potential to perform and to generate sustainable returns, and therefore to reach or sustain leadership in their sectors over the long term. For us, Stewardship goes hand in hand with long term investing. After all, sustainable investing is about growth that is inclusive to every parts of society and the environment.
Thank you for listening. It’s Zehrid Osmani, head of Global, US and European Long-Term Unconstrained Equities, and manager of Global Portfolio Trust at Martin Currie.
Wishing our listeners a good day - and perhaps I should add a long term sustainable future.
Stay safe, keep the spirits up and stay optimistic.
* Our ESG analysis is integral to our fundamental analysis and it is carried by our fundamental analysts.
1 Source: Bloomberg
2 Source: Bloomberg consensus estimates, 2020 and J.P. Morgan estimates, 2020
3 Source: Bloomberg
4 Source: JPM Research
5 Source: PRI – Principles for Responsible Investment. Engagement and voting activity is for the period 1 January 2018 to 31 December 2018