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.
There is no consensus about the weight to be given to ESG factors in investment decisions. We have taken a first step in addressing this issue.
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.
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).
Effective national governance (“G”) facilitates a country’s efficient transformation of environmental resources (“E”) into wealth. Both are strongly influenced by social factors (“S”). By way of example, France’s social objective of maintaining a rural economy necessitates heavy government intervention and likely detracts from its potential for economic development.
On February 9, 2016, the US Supreme Court (SCOTUS) granted a stay to the implementation of the CPP rule by the US Environmental Protection Agency (EPA). In our view, the intensity of the challenge from the states and certain industries, and the SCOTUS ruling that CPP should be halted while being litigated, demonstrates that the CPP has significant implications for the sector.
We downgrade Financials to Neutral from Overweight. The combination of plunging earnings momentum and deteriorating valuation has significantly reduced the attractiveness of the Financials sector.
As we discussed in our October 5, 2015 report Antibiotics and Animal Health: Value-Chain Implications in the US, a confluence of regulatory action and heightened consumer awareness is exerting pressure on livestock producers to reassess their usage of antibiotics. Our optimistic view on specialty and nutritional feed additives is supported by Adisseo and Novozymes’ recent launch of a probiotics product.