There are six reasons why Morgan Stanley analyst Stephen Byrd expects Environmental, Social, and Governance investing to accelerate in 2023, supporting related asset prices. They are: an increased focus on ‘rate of change investing’, the integration of ESG criteria in valuation, more attention to the water security and the food-related dangers of climate change, regulation supporting ESG change, more scrutiny on human rights issues in the global supply chain and better corporate governance.
Overall, Mr. Byrd is confident in what he terms rate of change investing. Rather than fully avoiding non-ESG compliant market sectors like fossil fuels, rate of change investing focuses on any company that is reducing their carbon footprint. For instance, an electric utility with declining coal usage and rising renewable power capacity is a potential investment.
Where the damage from climate change is concerned, Mr. Byrd used the example of Florida where the cost of commercial property insurance has more than doubled in the past year. He also notes a recent exhibit from the U.S. National Oceanic and Atmospheric Administration showing a sharp increase in weather events causing more than US$1-billion in damages.
In Asia, there are numerous countries considering legislation to incentivize investment in companies aiding the decarbonization transition. Many nations are also supporting renewable power development to ensure energy security. Mr. Byrd writes that government regulation is “resulting in unprecedented demand for a wide range of decarbonization technologies, and we expect this demand to accelerate further in the future.”
The analyst provided stock ideas categorized by region. Deere and Co., Eastman Chemical, New Fortress Energy, Nu Holdings and Raizen are the suggestions for the Americas. In Europe the picks are British Petroleum, Holcim, RWE, SSAB and Vinci, and in Asia the stocks are Delta Electronics, Korea Zinc., Macquarie Group Ltd., Mitsubishi Chemical Group, and PTT Public Company.
-- Scott Barlow, Globe and Mail market strategist
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The Rundown
Foreigners’ dry powder is fuel for a long stock market rally in China
Foreign investors have barely begun buying back beaten-down stocks in China, but there are growing signs that the end of the country’s tough COVID-zero policy marks the beginning of a long global march back into Chinese equities. MSCI China has gained a staggering 50 per cent since November, when hopes of reopening first emerged, while Hong Kong’s Hang Seng Index is up 47 per cent, against roughly 6% gains for world stocks. But participation has been narrow, as Xie Yu and Ankur Banerjee of Reuters report.
Is Brazil another BRIC in the wall?
Almost as surprising as the weekend’s shock events in Brasilia was how little world markets appeared to react - showing investors may already be braced for an era of more volatile geopolitics after 2022′s tensions over Russia and China. Mike Dolan of Reuters explains.
Move over TINA, it’s time for TARA
A shakeout in financial markets triggered by central banks’ sudden move to abandon ultra-low interest rates has created a casualty money managers will not miss: TINA. The acronym for There Is No Alternative to owning equities described how loose monetary policy since 2009 put stocks on steroids because yields on fixed income products such as government bonds became too low to bother with. TINA was the only trade in town. But as high inflation has forced major central banks to increase the cost of money, TINA’s reign is over, leaving trillions of dollars worth of investments looking for a new home as investors adjust to a new, more varied, era. Naomi Rovnick of Reuters reports.
‘Lightly levered’ and yield-focused single stock ETFs among new funds in December
Five new exchange-traded funds were launched in December, bringing the total number of ETFs launched during the year to 152. Some 72 per cent of these new products were actively managed ETFs that did not track an index. One of the most popular categories among new launches were “lightly levered” ETFs, which provide a relatively low amount of cash leverage to enhance returns. There was also the launch of a handful of yield-focused single stock ETFs. Ben Kleinberg of Inovestor reports.
Bitcoin digs in for a bumpy new year
Bitcoin’s looking steady in 2023. But it’s only been a week. While lower trading volumes are common around the turn of the year, the crypto market apathy has been exacerbated by a “general exodus” of active retail investors, according to Arcane Research. For some market players, though, subdued sounds pretty good after the bitcoin bloodbath of 2022. So what happens now? Here’s a look at the bull and bear cases.
Others (for subscribers)
Gordon Pape: These three stocks should outperform the market in 2023
Number Cruncher: 11 Canadian stocks set to benefit from new guidelines on sustainable investing
Wednesday’s upgrades and downgrades
Tuesday’s analyst upgrades and downgrades
Globe Advisor
How retirees can make up for an income shortfall if they’re unable to work
Companies rush to tap U.S. bond market as credit conditions ease
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Ask Globe Investor
Question: Do you have any thoughts on inflation-linked bonds? Any recommendations? – John M.
Answer: These bonds are issued by governments and both the principal and interest payments are protected against inflation. Sounds like a winning combination, but things are not always what they seem. The FTSE Russell Real Return Bond Index was down 13.81 per cent for 2022. The iShares Canadian Real Return Bond Index ETF (XRB-T) lost 14.14 per cent.
One of the problems with XRB is that it’s a long-dated fund with a weighted average maturity of 16.43 years and a real yield of 1.41 per cent. That’s not a combination that’s likely to attract investors.
Another difficulty with these bonds in general is that investors don’t receive the inflation bonus on the principal until the bond matures. That could be many years in the future and a lot can happen in the interim.
If you want to invest in this sector of the bond market, I advise staying short term. In September, my Income Investor newsletter recommended the iShares 0-5 Years TIPS Bond Index ETF (XSTP-T) for risk-averse investors. Since then, we’ve recorded a small capital gain of 41 cents and received distributions of 55.6 cents. The gain on our original recommended price is about 2.4 per cent in a little over three months. It’s not a lot, but it’s on the plus side of the ledger. A word of caution if cash flow is important to you: the fund makes monthly distributions, but they are erratic and twice recently there has been no monthly payout at all.
– Gordon Pape
What’s up in the days ahead
Rob Carrick updates the two-minute portfolio and Tim Shufelt takes a look at the sudden rebound in European stocks.
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Compiled by Globe Investor Staff