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ESG – Bubble or Bandwagon?

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Portfolios that a daring young investor may choose

By Josh Gregory, Founder of Sugi

Isaac Newton was a successful investor, but he lost a fortune (£15m in today’s money) in the South Sea Bubble of 1720. When asked about his misadventure, he supposedly replied that he ‘could calculate the motions of the heavenly stars, but not the madness of people’ (presumably, himself included). 

The rise and fall of South Sea stock was one of the earliest and largest instances of a market bubble and crash. Three hundred years later, we’re facing another massive investing trend: sustainable investing. In the last year or so, almost every investment institution has jumped on the sustainability bandwagon. 

It’s now arguably more notable to find an asset manager who hasn’t committed to sustainable, ethical, responsible, impact and/or ESG (environmental, social and governance) investing than one who has. The numbers are telling: in August 2020, assets in global ESG exchange traded funds and products topped $100 billion (£73 billion) globally. 

Demand for sustainable investments has been bolstered by two main factors. Firstly, with climate change firmly on the global agenda and all eyes watching the Biden administration’s transition to power (and the subsequent climate change policy that will follow), ‘greening up’ has never been more of a priority for businesses and individuals. This includes the investment industry, with both retail and institutional investors increasingly demanding that their money has a positive impact on our planet. 

Secondly, since the start of the COVID-19 pandemic reports have continually claimed that ESG funds are outperforming ‘traditional’ investments. No longer is going green cited as a ‘nice to have’; rather, these reports demonstrate the value and resilience of ESG funds to the investor community, increasing demand. Surely, this can only be a good thing? Yes, but only if investors know what they’re buying. 

It’s no secret that ESG investing suffers from complexity, lack of transparency and a lack of any universal standard. Fundamentally, this is why we created Sugi – a new platform enabling retail investors to track the environmental impact of their investment portfolios using clear and objective carbon impact data. 

Josh Gregory

Josh Gregory

Today, ESG terms can lawfully be used to label pretty much anything. Ultimately, this means that the ESG label is not a guarantee of good practice. In fact, an ESG rating is a financial risk metric – the scores calculate the extent to which ESG issues affect a company’s economic value. Many investors, even institutional investors, don’t know how to decipher this. The scores themselves are designed to be used in tandem with portfolio dashboards and other data to make financial decisions. This effectively means that the scores on their own without any context are not of much use to anyone.

This has led to a glut of greenwashing in the sector, where investment products are described as green, ethical or sustainable, but the description is unsubstantiated. And while the top financial performance of ESG funds seems uncontroversial, those digging a little deeper may be surprised at what they find. Many ESG funds are heavily weighted in favour of technology companies, which typically have low carbon emissions. These stocks skyrocketed in 2020 but it’s important to note the context. It was largely due to the COVID-19 lockdowns and had nothing to do with the stocks’ ESG credentials. 

The EU, the UK and the US are all working on their own strict definitions of ESG. This should, in theory, go some way to clarify what investors are getting when they choose an ESG or sustainable investment product. However, this will take a while to implement and there will still not be a globally recognised definition or standard. 

It would seem many people are pouring money into investments when they don’t know what they’re buying. That’s nothing new. But underneath the ESG label lies something meaningful, worthwhile and, above all, valuable for the world in which we live – environmental, social and governance best practice.

The question remains though, is it a bubble? A bubble exists if ESG investments are over-valued (i.e. over-bought). Right now, ESG funds may be in bubble territory because many of the underlying stocks that make up the funds are themselves in a bubble. But does that make ESG a bubble? If it is, when do we call it? 

Historically, all bubbles –whether they be tulips, canals, railways or the internet – no-one knows. And if I knew now, I’d be sunning in the South Seas rather than writing this blog!

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Analysis: Big moves and liquidity woes in a U.S. bond ‘tantrum without the taper’

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Analysis: Big moves and liquidity woes in a U.S. bond 'tantrum without the taper' 1

By Kate Duguid

NEW YORK (Reuters) – A sharp jump in U.S. Treasury yields this week has bond managers talking about a “tantrum”, worrying about extreme moves and pockets of poor liquidity in the $20 trillion market.

The selloff in U.S. Treasury bonds, which pushes prices down and yields up, has gathered steam in recent weeks due to rising expectations for economic growth – and fears inflation could spike if the economy overheats.

Bond market investors and analysts drew parallels to the 2013 taper tantrum https://www.reuters.com/article/us-usa-fed-2013/powell-sought-fast-end-in-2013-to-feds-bond-buying-program-idUSKCN1P522P, when bond yields rose dramatically after then-Fed Chair Ben Bernanke told lawmakers the Fed could take a step down in its pace of purchases of assets that had been propping markets.

The benchmark 10-year yield on Thursday rose to 1.614%, its highest since the start of the pandemic. The real interest rate on the 10-year note – the bond yield minus inflation – hit a nine-month high. [US/]

“We’re definitely breaking apart here,” said Greg Peters, senior portfolio manager at PGIM Fixed Income. “Big move, bad liquidity, feels like March 2020.”

The Treasury market faced a liquidity crunch as the coronavirus was taking hold in the United States, until the Federal Reserve again intervened to backstop the market.

The fear now among investors is that the Fed will raise rates or taper asset purchases sooner than expected, despite Chair Jerome Powell’s assurances this week the Fed would not.

Thursday’s selloff was accelerated by historically weak demand at auction for $62 billion of seven-year notes.

The poor auction “was indicative of primary market dysfunction,” wrote analysts at TD Securities. Secondary markets were also showing signs of stress, they said, with bid-ask spreads widening.

The bid-ask spread on the five-year Treasury note – a measure of liquidity which shows the difference between how much a seller offers and a buyer bids – on Thursday reached its widest since January 2009.

“There is no liquidity,” said Andrew Brenner, head of international fixed income at NatAlliance Securities.

Gregory Whiteley a portfolio manager at DoubleLine Capital said the selloff was “beginning to look like a taper tantrum, where there is some panic shedding of market exposure.”

This yield rise was notable for its speed, gaining more than 30 basis points in just over two weeks.

“Tantrum without the taper,” wrote TD analysts in a research note that said recent price action was “eerily reminiscent of the 2013 taper tantrum.” But unlike then “there has been no mention of an imminent taper by Fed officials.”

Hopes that the vaccination rollout and fiscal stimulus would further bolster the economy “created taper concerns and the Fed has thus far not been willing to soothe markets” said TD.

Analysts at Citi had the same thought, penning a paper: “Tantrum Without Any Taper.” They noted a primary reason for the sharp pace of the selloff may be convexity hedging, in which investors holding mortgage-backed securities reduce the risks on the loans they manage during rising rate environments, by selling Treasuries.

TEMPORARY MOVE?

Still, many bond managers argued the move was likely temporary.

“All tantrums come to an end after inflicting pain, and we seem to be reaching a pain point,” wrote analysts at Societe Generale.

DoubleLine’s Whiteley said “part of what is feeding this selloff is the Fed telling us, in so many words, that they are not going to step in and stop this rise in rates.”

Nevertheless, he’s convinced the Fed are at some point “going to say that this rise in rates is becoming a headwind to the recovery… and they will step in.”

“It seems overdone to me,” Whiteley said.

(Reporting by Kate Duguid; Writing by Megan Davies; Editing by Lincoln Feast.)

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Analysis: Investors jumping the gun as TIPS, futures flag early Fed tightening

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Analysis: Investors jumping the gun as TIPS, futures flag early Fed tightening 2

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – Some investors may be getting ahead of themselves as they price in a move by the Federal Reserve to pivot away from an ultra-easy monetary policy sooner than most expected just weeks ago.

Two key market indicators – rising yields on U.S. Treasury Inflation-Protected Securities (TIPS) and eurodollar futures – are suggesting a tightening of Fed policy is looming on expectations of a strong economic recovery in the second half as COVID-19 vaccine rollouts gather pace.

But those expectations may prove premature if U.S. jobless numbers remain stubbornly high and the Fed’s patience after the 2008 global financial crisis is anything to go by.

Yields on TIPS have climbed across the curve so far this year, from five-year to 30-year debt. U.S 30-year TIPS yield, for one, turned positive last week and on Thursday hit 0.214%, its highest since March last year. Since early January, that yield has increased by more than 60 basis points.

U.S. 10-year TIPS yield has risen more than 40 basis points since the beginning of the year. On Thursday, it touched -0.844%, the highest since July 2020.

Typically purchased when investors believe higher inflation is on the horizon, TIPS prices rose during the pandemic. Their yields are “real,” i.e., the relevant Treasury bond interest rate, minus inflation, and went negative for all maturities.

The so-called TIPS breakeven inflation rates are a gauge of investor inflation expectations. Those are the calculated difference between the TIPS yield and the nominal Treasury yield and have also been rising.

The 5-year TIPS at 2.38% is higher than the 10- or 30-year, suggesting the market thinks any rise in inflation would be of short duration. All are slightly above the Fed’s 2% target for average inflation over time and well above the 1.4% that inflation is currently running.

“The higher TIPS yield is suggesting that the market has become a bit nervous about a faster pace of economic recovery and, hence a faster exit by the Federal Reserve from monetary accommodation,” said Gennadiy Goldberg, senior rates strategist at TD Securities in New York.

Fed Chairman Jerome Powell, however, said on Tuesday it was nowhere near tightening U.S. monetary policy or scaling back its massive securities buying program to support the market.

Interest rates will remain low and the Fed’s $120 billion in monthly bond purchases will continue “at least at the current pace until we make substantial further progress towards our goals … which we have not really been making,” Powell said in a testimony before the U.S. Senate Banking Committee.

Analysts said, however, the situation could be a lot different in the second half of the year when the vaccine distribution becomes more widespread and the fiscal stimulus package creates jobs and fuels more consumer spending.

The beginning of tightening cycles tends to move slowly and markets typically make bets ahead of the Fed, said Rob Robis, chief global fixed income strategist at BCA Research in New York.

“You may start hearing conversations about tapering asset purchases in the second half of the year especially when the vaccine rollout goes well and the economy shows 4%-5% growth numbers,” Robis said. “There are a lot of things out there that can make the Fed nervous about its current policy setting.”

EURODOLLAR FUTURES BETTING ON EARLY RATE HIKE

Eurodollar futures, which track short-term U.S. interest rate expectations over the next few years, are pricing in a U.S. rate hike by March 2023. This pricing has been pulled forward from late-2023 in the past few weeks, and going back to last August, as late as mid-2024. (Graphic: TIPS and Eurodollar futures, https://fingfx.thomsonreuters.com/gfx/mkt/jbyprdbbdpe/Tips%20and%20Eurodollars.PNG)

Other rate sentiment barometers such as fed funds futures do not suggest just yet a shift toward tightening in 2023.

That said, just because the futures market has been suggesting a hike in 2023 and some analysts are betting on a move away from an easy monetary policy sooner rather than later, doesn’t mean it will happen.

The Fed was on hold for seven years after the global financial crisis in 2008. Throughout that period, market participants had predicted a rate increase within the next 12-18 months, yet the Fed only resumed hiking rates in 2015.

“I don’t believe the Fed will take any action to remove the punchbowl in 2021,” said Richard Saperstein, chief investment officer at Treasury Partners. “I believe they will remain exceptionally accommodative until the 10 million unemployed workers are back on the payroll.”

Padhraic Garvey, global head of debt and rates strategy, at ING believes though that the current recession feels different and overall there are clear risks the Fed could taper its asset purchases by the end of the year even though the U.S. central bank repeatedly said it’s not doing so.

The general market consensus was for the Fed to start reducing asset purchases in 2023.

Garvey noted the Fed could taper in a “soft” fashion much as the Bank of Canada did, moving purchases out the curve, consequently containing long-end rates.

“Without stepping into the whole pandemic vaccine health arena, we are optimistic that there would be a boom in the economy,” said Garvey.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Alden Bentley and Lincoln Feast.)

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GameStop jumps nearly 19%; ‘meme stocks’ fade after another wild ride

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GameStop jumps nearly 19%; 'meme stocks' fade after another wild ride 3

By Aaron Saldanha, Thyagaraju Adinarayan and David Randall

(Reuters) – GameStop Corp shares rallied on Thursday, finishing with double-digit gains despite a sharp retreat from session highs and leading a surprise resurgence of so-called “stonks” championed online by passionate retail investors. GameStop shares, which doubled their value on Wednesday, hit $160 at Thursday’s open before being halted after several minutes of trading and fell to around $129 before the second halt. The stock closed for the day at $108.73 for an 18.5% gain, after soaring almost 90% at the session peak.

Other “stonks” or “meme stocks” popular on sites such as Reddit’s WallStreetBets also saw their rallies fade. Headphone company Koss Corp closed up 16.8% gain after rocketing nearly 61% during the session. AMC Entertainment ended down nearly 9% after jumping more than 15% during the session.

Analysts were puzzled by the rally that came even as the benchmark S&P dropped 2.4%. Some ruled out a short squeeze like the one in January that battered hedge funds that had bet against GameStop and were forced to cover short positions when individual investors using Robinhood and other trading apps pushed the video game retailer’s shares as high as $483.

“The power of the “three R’s” (Robinhood, Retail, Reddit) are back in play,” said Neil Campling, head of technology research at Mirabaud Securities.

The number of GameStop shares shorted stood at 15.47 million, analytics firm S3 Partners said Thursday, with short interest accounting for 28.4% of the float, compared with a peak of 142% in early January.

Wednesday’s late day rally added $664 million in mark-to-market losses for investors betting against GameStop, and short sellers were down $10.75 billion in year-to-date mark-to-market losses midday Thursday, according to S3.

Some analysts said the rally may be partly fueled by a fear of betting against GameStop.

“There are not a lot of people who are just sitting there, ‘oh yeah, let’s for fun, let’s just short GameStop and get my head ripped off.’ The investors learn.,” said Dennis Dick, a trader at Bright Trading, on the Benzinga podcast.

Some investors may be jumping on the GameStop bandwagon hoping to reap gains similar to turbo-charged advances of January and then sell the stock, said David Starr, vice president of quantitative analysis at Simpler Trading.

“All of these stocks are once again rising together. It demonstrates that there is nothing intrinsic in the companies themselves,” he said.

Former GameStop shortseller Citron Research said the company should buy online gambling company Esports Entertainment Group Inc

“It would be an easy acquisition for GameStop to tuck in right now,” Citron’s Andrew Left told Reuters in an interview. “Some people say it would be a ‘Hail Mary pass’ but I think it would be a major pivot.”

HEAVY VOLUME

More than 145 million shares of GameStop had changed hands by mid-morning, almost triple its 30-day average volume of 62 million, yet below the more than 190 million shares that traded hands daily in late January.

The surge came after Reddit trader Keith Gill, who runs the YouTube channel Roaring Kitty, bought additional GameStop shares last week. Last week, Gill testified in the U.S. Congress: “I like the stock,” words since quoted by hundreds of online followers and featured in memes on financial sites.

This week’s GameStop rally began the day after the retailer announced the resignation of Chief Financial Officer Jim Bell as the company focuses on shifting into technology-driven sales.

Reddit forums were buzzing again with bullish GameStop posts on Thursday.

“Bought lots more #GME today, let’s keep fighting !!,” wrote Reddit user Fundssqueezzer.

In January, GameStop shares skyrocketed by more than 1600% as retail investors, urged on by WallStreetBets, bought shares to punish hedge funds that had taken an outsized short bet against it.

Gabriel Plotkin’s Melvin Capital hedge fund was left needing a $2.75 billion lifeline from Citadel LLC and Point72 Asset Management.

Investing legend Charlie Munger, longtime business partner of Warren Buffett, criticized the risky trading strategies employed by some traders on Reddit.

“It’s really stupid to have a culture which encourages as much gambling in stocks by people who have the mindset of racetrack bettors,” said Munger, Berkshire Hathaway’s vice chairman.

(Reporting by Aaron Saldanha in Bengaluru, Tom Westbrook in Singapore and Danilo Masoni in Milan; Additional reporting by Lewis Krauskopf, Sagarika Jaisinghani, John McCrank and Medha Singh; Writing by Anirban Sen and David Randall; Editing by Jason Neely, Bernard Orr, Nick Macfie and David Gregorio)

 

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