We’ve all been talking about the seismic move that’s taken place in bond markets for an age now and I’ve written one too many pieces on it; so no comments about inverted yield curves, negative yields or tight credit spreads here. Mind you, it is quite amazing what is going on in the bond markets. Given what is a clear view being expressed by investors, it is maybe surprising that equity markets are at current levels, but that is possibly because they answer the question; just what do you buy?
There are many drivers of asset prices, at the moment cyclical ones are to the fore but we should never forget the structural political and social changes that are taking place around the world and the impact that they will have on economies and markets. These of course are very wide ranging; in demographics alone this ranges from ageing populations in some countries to the impact of the millennials in others, the wealth in the hands of a tiny minority is in stark contrast to the poverty of so many. Technology, similarly, continues to have a fundamental impact on all areas; how we spend our leisure time, how connected we are and how businesses approach today and the future in terms of mechanisation and employment. All of these structural challenges and many more are shaping the long term investment decisions of companies, those who lend to them and those who invest in them.
There is also the small matter of the issue that is most difficult to give a badge to. It started off as ESG (environment, social and governance) issues and has rapidly moved onto sustainable investing, impact investing or as we at Premier are labelling it; responsible investing. Indeed, we have appointed an experienced Head of Responsible Investing to guide us through this important area. Corporates in the developed world have accepted that considering ESG factors is appropriate, the right thing to do and good business practice. Furthermore, if they don’t, their pool of potential investors will be smaller. However, ESG matters are not treated with the same level of importance in many countries and a number of emerging economies fall well short of good practice.
My attention was caught by a headline in the FT on 19 August; Group of US corporate leaders ditches shareholder-first mantra. The US is the largest and probably the most capitalist economy on the planet and has been driven by the credence that company management should run the business for the benefit of the owners of it, in other words the shareholders. Over time, employee rights and well-being have, rightly, come to the fore as well. But now the Business Roundtable group is challenging the primacy of shareholders. The group has close to 200 members, including the CEO’s of JPMorgan, Amazon and General Motors. Influential people indeed. In a new “statement of purpose” it has just placed shareholders as one of five stakeholders equally with delivering value to customers, investing in employees, dealing fairly with suppliers and supporting communities. The group has stated that companies should “protect the environment” amongst obligations that include generating long-term value for shareholders.
The move towards investors and companies embracing all the factors within responsible investing is embedded and accelerating, but this new feature takes it to a new level and challenges historical investment norms. The cynics will say that as there are few details or hard targets to the commitments, that lip-service is being paid to avoid any legislative or imposed changes. But the advocates will argue that this is a step in the right direction, with corporates finally embracing the need for change.
Who knows who is right in this particular instance? However, this structural shift in how companies manage themselves and how investors will allocate capital to them is irreversible. Over time it will play a huge part in the returns that come from share prices. The logical conclusion is that if a company does not behave responsibly, it will struggle to raise capital, struggle to operate efficiently and consequently provide poor returns to shareholders and so in all probability, wither and fail. If the company operates in the opposite way it will prosper and investors will be rewarded. Ultimately, corporate and shareholder interests will be aligned.
This article is for information purposes and only to be issued to financial intermediaries. It is not for circulation to retail clients. It expresses the opinion of the author and does not constitute investment advice. Persons who do not have professional experience in matters relating to investments should always speak with a financial adviser before making an investment decision.
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