Posts Categorized: Strategy

Evolving Lifecycles in an ESG Materiality Matrix

For most sectors, the likelihood of adverse ESG events and their potential financial impacts evolve through a lifecycle. ESG lifecycles determine the time it takes for a sustainability issue to become relevant to a sector as well as the magnitude of the financial impact. We believe the ability to anticipate ESG lifecycles can enhance the investment decision-making process.

Sector and Regional Strategy: Monthly Update

Executive Summary Sector implications of Brexit fallout. Uncertainty likely to prevail globally, at least until U.S. presidential election. Major corporate and consumer spending decisions potentially on hold, a negative for Information Technology, Industrials, and Consumer Discretionary (downgraded to Neutral). Low rates continue to pressure Financials. Regional strategy. Russia and Australia still rank at top of… Read more »

Regional and Sector Strategy: Monthly Update

Executive Summary Upgrade U.S. to Overweight from Neutral. Earnings estimate revisions turned sharply positive, adding to other favorable fundamentals including margins, share buybacks. Information Technology: Still Neutral; Earnings Outlook Remains Unfavorable. We downgraded Information Technology to Neutral last month reflecting, in part, negative earnings estimate revision trends and a deceleration in expected earnings momentum. Both… Read more »

Regional and Sector Strategy: Monthly Update

Our earnings momentum metric has been refined. In addition, we have also introduced a methodology for weighting ESG factors in sectors and regions. These modifications have resulted in an unusually large number of changes in recommendations.

Global Earnings Synthesis: On Track for Modest Gains in 2016

Building on the recent analysis in our Regional and Sector Strategy: Monthly Update, we continue to embrace an outlook for just a single-digit increase in profits in 2016, which is in contrast to consensus estimates that imply a 21% gain in earnings.

Regional and Sector Strategy: Monthly Update

We remain Overweight Information Technology (largest weighting in Overweight North America region) and Consumer Discretionary (largest weighting in Japan, our other Overweight). We continue to avoid regions with heavy exposure to commodities, most notably Latin America (Underweight), South Africa and Russia (both ranked Neutral).

Regional and Sector Strategy: Monthly Update

We are becoming a little more cyclical once again. We are now upgrading the Industrials sector to Neutral from Underweight, largely reflecting improved valuation. We remain Neutral on the two sectors that are widely considered the most defensive: Consumer Staples and Health Care.

A Shifting ESG Materiality Matrix: What Has Mattered, What May Matter

As we continue our research on sustainability factors that play a role in market outcomes, we embrace a more nuanced view. ESG factors that impact different sectors are not static, and are determined by a wide range of lifecycles.

Regional and Sector Strategy: Monthly Update

We are Underweight Energy, Materials, and Industrials. Our only Overweight is in Financials. We upgrade China and Russia to Neutral from Underweight.

Sustainable Investing: Addressing the Myth of Underperformance

Despite growing demand for sustainable and impact investment solutions and a body of evidence to support the effectiveness of sustainable investing from a strictly financial perspective, many investors are still unclear about the relationship between ESG factors and financial performance.

Four Questions for Alphabet

Google’s impending restructuring into a holding company called Alphabet doesn’t change the underlying business so much as make explicit the company’s dual-track nature. On one track, Google has a mature search/advertising business; on the other, an investment company with a focus on speculative technology investments and basic research. The new structure, intended to provide transparency to investors about the relative performance of each side of the business, will be welcomed by investors.

Learning from History: How do Historical and Forecast Electricity Prices Connect?

We believe that the rising electricity prices forecast by the US Energy Information Agency (EIA) in their Annual Energy Outlook 2015 do not account for the dampening effect of rapidly declining renewable energy costs and low financing costs. In particular, rooftop solar should act as a cap on the price that utilities will be able to charge retail customers while falling wholesale solar prices, set at a fixed price for up to 20 years, could reduce wholesale electricity prices for the long term.

Uber: Red Light, Green Light

The decision by New York City to drop a proposed bill that would limit growth of for-hire vehicle (FHV) companies – such as Uber and Lyft – attracted significant media attention. Based on prior analysis, we reiterate our view that the status of providers (i.e., employees versus independent contractors) poses a greater risk to FHV companies…. Read more »

Regional and Sector Strategy: May Update

We are now underweight the most cyclically sensitive sectors: Industrials, Materials, Energy. While we upgrade the CEEMEA region to Neutral from Underweight — in large part because of an improved earnings outlook — this likely reflects a modest rebound in oil prices, which remain 40% below year-ago levels.

The Drought in California: The New Normal? What Investors Need to Know…

California’s drought poses a resource crisis on a scale that has not been seen in the US for several decades. Experts forecast the drought, now in its third year, will continue at least through 2016, and the lack of rain, combined with a record low water table beneath the Central Valley, may be a “new… Read more »

Updating the Global Equity Strategy Investment Clock

An Increasingly Cautious Near-Term Equity Outlook — Plotting our sector and regional equity recommendations on the face of an “investment clock” suggests an increasingly cautious near-term outlook for global equities. A Tilt Away from Cyclical Sectors and Regions — Last month, we tilted further from cyclical sectors and regions. As for sectors, we are underweight Energy and Materials, neutral Industrials. In terms of regions, we are underweight CEEMEA and Latin America.

Regional and Sector Strategy: April Update

We continue to have a defensive tilt in our regional recommendations, and are Underweight the commodity-rich regions of Central and Eastern Europe, Middle East and Africa (CEEMEA) and Latin America …

Japan’s New Corporate Codes – Studying the Impact on Valuations

Corporate governance represents the relationship among various corporate stakeholders that determines the strategic direction of a company. Practically, corporate governance adjudicates the balance among key stakeholder interests within the firm. Japan is unveiling a new corporate governance code for companies …

Judges Announced for “Sustainable Games” Competition

Harvard Business School, Intel Education among Business and Entrepreneurial Leaders to Select Winner of $25,000 Prize Five global leaders from across business, the capital markets and academia have been selected as judges for “Sustainable Games:  The Business Model Challenge.”  The competition, which offers a $25,000 prize, is sponsored by Cornerstone Capital Inc., together with the Clinton… Read more »

Environmental Issues & Country Valuations: What Matters?

What Matters? — Some environmental issues that are the subject of popular focus — such as carbon dioxide emissions — do not appear to be statistically significant for global investors. Moreover, many countries’ environmental “health” has moved in the opposite direction of their economic development i.e., more pollution and higher per capita GDP.

The Economics of Automation: Quick Serve Restaurant Industry

Increasing cost pressure. Labor and food represent a significant portion of restaurants’ cost structure. While these inputs have been relatively predictable in the past, the twin threats of rising wages and increasingly volatile food prices suggest a more challenging environment ahead. It’s not clear that cost inflation can be consistently offset by raising menu prices, so companies are considering new strategies to protect margins . . .

Regional and Sector Strategy: March Update

Our regional strategy is unchanged. We continue to have a defensive tilt in our regional recommendations, and are Underweight the commodity-rich regions of CEEMEA and Latin America. Japan continues to be the top-ranked country. Over the past twelve months, share buybacks in Japan have been the largest of any country / region, the first time that country has been the global buyback leader since we launched the regional model in April 2014. We highlight changes in the Energy suggesting, perhaps, that stock prices in the sector have not fallen as fast as earnings estimates . . .

A Closer Look at Alibaba’s Corporate Governance

The recent, apparently resolved conflict between Alibaba and the Chinese government agency SAIC over counterfeit goods raises questions about whether shareholders should have confidence in the future growth of the company. With a valuation of over 30 times earnings, the market is pricing in a high degree of conviction about the company’s future growth. In… Read more »

Regional and Sector Strategy: February Update

Our regional strategy is unchanged, even with a heightened focus on monetary policies and exchange rates in the past month driven, in part, by fears of deflation. We continue to have a defensive tilt in our regional recommendations, and are Underweight the commodity-rich regions of CEEMEA and Latin America. Our sector strategy is also unchanged and remains “less cyclical, more defensive.” We maintain our relatively defensive posture given pockets of economic weakness globally. We are Overweight Health Care in North America, the U.K. and Europe ex U.K. We are Underweight or Neutral Energy in the majority of regions….

Introducing the Global Equity Strategy Investment Clock

Developing a multi-class asset allocation model — that also incorporates Environmental, Social and Governance (ESG) factors — is a lofty undertaking. In this report, we take a first step by introducing our global equity strategy “investment clock”, which helps flesh out the equity outlook implied by our sector and regional recommendations….

“Legitimacy” in the Banking Sector

Earnings and valuation uncertainty – In a post Global Financial Crisis world, investors are questioning long-term earnings and valuation prospects for the banking sector. Tougher regulation, particularly on capital, liquidity and structure, are exerting pressure on the traditional banking business and clouding the outlook for investors….

Regional and Sector Strategy: January Update

This month we, upgrade Financials to Overweight from Neutral reflecting the combination of relatively attractive valuations and improving earnings momentum. In addition, Financials’ earnings estimate revisions are only modestly negative (i.e., downward revisions just outpace upward revisions), in sharp contrast to most other sectors where estimate revisions are strongly negative. Our regional strategy remains unchanged…..

The Social Costs of Business: Implications for Sector Strategy

Executive Summary The social responsibility of business — In pursuit of the goal of increasing profits, businesses incur costs to nurture relationships with key stakeholders: local communities, suppliers and their workers, the company’s own employees, customers.  Some of these costs are straightforward; others are tougher to quantify.  To be sure, many business‑stakeholder relationships have benefits too…. Read more »

ESG Essentials – A Guide for Investors

There is increasing recognition globally that environmental, social and governance (ESG) factors are relevant and material for investment decisions. If you are involved in the world of finance, the words “sustainability” or “ESG” have either crossed your desk or are about to. For investors that are new to the topic, this report will serve as a primer that provides a basis for additional avenues of inquiry. For those that are already familiar with the subject, this report will act as a supplement and may offer new or different perspectives on the most critical issues.

Regional and Sector Strategy: November Update

This month we, upgrade Financials to Overweight from Neutral reflecting the combination of relatively attractive valuations and improving earnings momentum. In addition, Financials’ earnings estimate revisions are only modestly negative (i.e., downward revisions just outpace upward revisions), in sharp contrast to most other sectors where estimate revisions are strongly negative. Our regional strategy remains unchanged. We are Overweight or Neutral the majority of developed regions (Japan, U.K., Australia, North America) and Underweight most emerging markets (Latin America, CEEMEA)….

The Economics of Environmental Issues in Sector Strategy

Increasing environmental pressures — Corporations globally are experiencing growing pressure about environmental issues reflecting, in large part, regulatory initiatives that could potentially increase costs. Among the factors driving the growth and stringency of environmental regulations: energy security issues, public health challenges, impact of pollution on economic growth. We examine the implications of a potential increase in key environmental costs for ten industry sectors. Subsequent research will examine the implications — positive or negative — of social and governance factors for these sectors.

A Closer Looks at GMOs

Are laws requiring the labeling of food containing genetically modified organisms (GMO) justified? Do consumers have a right to know what is in their food, or will the labels simply confuse the public?

Market Summary: Overview

In a year of surprisingly muted market volatility, this month we saw risk assets tumble as investor concerns reached a decisive tipping point. Anxiety over a less accommodative Fed, the pace and sustainability of global economic growth, continued conflict in Ukraine, escalating violence in the Middle East, and even the Ebola crisis have investors fleeing… Read more »

Regional and Sector Strategy October Update

Still defensive — We maintain our relatively defensive posture given pockets of economic weakness globally. We are Overweight Health Care in the U.K., North America and Europe ex U.K. We are Underweight or Neutral Energy, Materials and Utilities in the majority of regions Regional strategy — We upgrade the U.K. to Overweight from Neutral, in large part because the earnings outlook has improved materially. We downgrade CEEMEA to Underweight from Neutral….

Not Just a ‘Flash,’ But a Call to Arms

I was still at the Securities and Exchange Commission, overseeing the Division of Trading and Markets, when I first heard about a small band of traders and technology experts at the Royal Bank of Canada who were using technology to tilt the playing field back in favor of ordinary investors. I could hardly have imagined… Read more »

Flagship Research: Gauging Governance Globally – Macro & Micro Metrics

Much analysis has attempted to find an empirical link between Environmental, Social & Governance (ESG) factors and investment returns. By contrast, the focus of our research has been the significance of ESG factors for equity valuations….

Regional and Sector Strategy: Monthly Update

In this Executive Summary, we introduce the inaugural edition of a regular monthly update of our regional and sector strategy models, both of which explicitly take into account Environmental, Social & Governance (ESG) factors. More defensive — We extend our relatively defensive posture given more pockets of economic weakness globally. Regional strategy — We upgrade… Read more »

How Purpose-Driven Programs Can Solve the Employee Engagement Problem

The ripple effect of Gallup’s recent research on the State of the Workplace continues to widen. Their report basically indicted companies globally for their inattention to criticality of an engaged and motivated employee base. Based on their research, only 13% of employees worldwide are actively engaged in their work. For the U.S. alone, they assert,… Read more »