Logo

Passionate about investing

Broadgate: Weekly Briefing 28/9

28 September 2012

Global – Christine Lagarde has warned that the International Monetary Fund (IMF) will probably cut its global growth forecast in the coming weeks.

Speaking at the Peterson Institute for International Economics, the IMF managing director warned that global growth is likely to be “a little weaker” than in its most recent forecast.

In July, the IMF’s World Economic Outlook predict that global output will expand by 3.5% this year and by 3.9% in 2013. The group is due to publish its updated forecast in next couple of weeks.

Lagarde said: “We continue to project a gradual recovery, but global growth will likely be a bit weaker than we had anticipated even in July, and our forecast has trended downward over the last 12 months.”

Spain/Europe – European stock markets fell on Wednesday amid concerns about Spain and as trade unions hold a general strike in Greece. Spain’s Ibex index was down 3.5%, while markets in London, Paris and Frankfurt were down up to 2%.

The Bank of Spain said in a report that the Spanish economy had continued to shrink at a “significant rate” in the third quarter of the year.

Spain is currently in a deepening recession, with the unemployment rate at its highest level since the 1970s. Worries about Spain also caused the country’s borrowing costs to rise, with the yield on 10-year Spanish bonds traded on international markets rising to 6.02% from 5.67%.

On Thursday, the government will unveil a new budget, its latest attempt to get its borrowing under control. Then on Friday, independent auditors will tell the world the extent of the country’s banks problems.

China – Some of China’s richest people have felt the effects of economic slowdown in the country, with their wealth reducing in the past year, according to the Hurun Rich List.

China has 251 people worth $1bn or more, 20 fewer than last year. However, the number is still a huge increase compared with 2006, when there were only 15.

It is the first time in seven years that the number of billionaires in China has fallen.

India – Foreign investors are showing renewed interest in India following reforms recently announced by the government, but further steps are needed to improve the environment for economic growth, experts say.

According to a research report by Bank of America Merrill Lynch, there has been a sea change in interest in India post the reforms announced last week that included allowing Foreign Direct Investment in multi-brand retail and the civil aviation sector.

“Clients sensed a change in the political environment in India and some investors who earlier were staying away from India were keen to meet and understand the shape of things to come,” Bank of America – Merrill Lynch Research Analyst Jyotivardhan Jaipuria said.

China – The Chinese central bank has injected a record amount of money into the financial system this week to alleviate a cash crunch that had driven up borrowing costs.

The People’s Bank of China has poured Rmb365bn ($58bn) into money markets over the past three days through reverse repurchase agreements, the largest weekly amount in history.

With the Chinese economy grinding to its slowest growth in three years, analysts and investors have been looking to the central bank to intensify its monetary easing by cutting the portion of deposits that commercial banks must hold in reserve.

Trends – Global mergers and acquisitions slumped this quarter to a level not seen since the aftermath of the financial crisis, amid increasing concern that the economic recovery is deteriorating.

Companies have announced $446bn of takeovers since June 30, the smallest amount since the third quarter of 2009, according to data compiled by Bloomberg.

Cross-border takeovers have accounted for about half of all announced deals this year, while chief executive officers worldwide are reluctant to spend an estimated $3.4tn in cash reserves Europe’s sovereign-debt crisis drags on and some signs suggest that China’s economy is slowing.

Commodities – Gold prices edged higher on Thursday, recovering from the previous day’s two-week low in line with stock markets and other commodities, but uncertainty over when Spain would request a rescue program limited investors’ confidence.

Spot gold was up 0.2% at $1,755.69 an ounce, while U.S. gold futures for December delivery were up $5.00 an ounce at $1,758.60.

Gold is on track to end September with its largest quarterly gain in more than two years, of nearly 10%, after the Federal Reserve unveiled a third round of ‘bullion-friendly’ monetary stimulus measures earlier this month.

Spotlight on: Investing with a social conscience

Sarah Mumford, marketing director at Alquity Investments, says the recent debacle at Barclays serves as a reminder that considering a company’s corporate social responsibility principles is something investment providers should be doing as a matter of course.

Over the past few weeks, the goings on at Barclays (colluding in the fixing of the LIBOR rate) have illustrated perfectly how poor behaviour within a company towards the outside world (or how seriously it takes its corporate social responsibility (CSR) obligations), can have devastating consequences for both that organisation and its stakeholders, be they employees, suppliers, customers or indeed shareholders.

The long-term impact on the bank’s reputation, and in turn its share price, can only at this point be guessed at, but the outrage felt by many at the behaviour of members of the banking fraternity, will live on.

And for those of us involved in the marketing of investment funds, we can be sure that many more questions will start to be asked about what safeguards are taken to ensure that our investors’ money is not going into companies whose actions could lead to reputational damage, and in turn, to a loss in company value.

Noted business strategist, Michael Porter, recently argued in the Harvard Business Review that ensuring genuine and strong CSR credentials is now something that should be a part of every business’s long-term planning.

There has also been plenty of research done which shows consumers not only understand the importance of a genuine CSR policy, but are more and more frequently considering this as a part of their purchasing process.

Sustainable practices

Ethical or sustainable investing (which is really what the consideration of CSR policy amounts to) is becoming more and more important to the consumer.

Investment management marketing material generally focuses on either performance, the fund manager’s skills or the size and strength of their businesses, and no doubt some of these factors are important to the end consumers.

But independent research, along with fund sales data, show this is not all the consumer care about.

An EIRIS survey recently showed that 44% of consumers want to look seriously at ethical financial products and that a massive 75% of them intended to act on this interest the next time they buy.

Combine this with the fact in the UK, the amount of money in ethical investment funds has trebled to over GBP11bn in the last ten years, and this demand has to be taken seriously.

So how does this consumer need for a good CSR agenda marry up with a widespread perception that sustainable or ethical funds perform poorly in comparison to those managed without screening? Well the answer is this perception is a false one. Investing sustainably does not detract from portfolio returns. In fact, quite the contrary.

Environmental, social and governance (ESG) screening as a part of an investment process considers the reality behind a company’s CSR policy, including the impact that the business has on the local community, its employees, health and safety record, and its record/approach to corporate governance.

If ESG standards had been applied to British Petroleum (BP) prior to the April 2010 Gulf of Mexico disaster, they would have highlighted the fact that in the three years up to that point the company had been fined 760 times by U.S. Health and Safety Executives for safety violations, while Exxon had been fined once.

Over the three years to the end of June 2012, the share prices of BP and Exxon have fallen by 15% and risen by 22% respectively.

Boosting returns

So all of this points to one conclusion. Poor CSR standards are likely to hit the value of the company and consumers are becoming more and more aware of this.

There is a large market out there for ‘ethical’ funds, and as the consumer continues to increase its awareness of the impact of businesses’ actions on their world, this market is likely to get bigger.

If we add into the mix the potential for increasing returns to investors by actually applying sustainable principles, then we can really start providing products for investors that tick a lot more than just the ‘performance’ box.

Alquity Investment Management offers a new model for investment management built around three core principles: attractive returns, sustainable investment and transforming lives.

The information set out herein has been obtained from various public sources and is by way of information only. Broadgate Financial can accept no liability of any sort in relation thereto and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.

Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.

clientservices@broadgatefinancial.com