Commentary from Jeen Peers, Mirova US
During the crisis, we’ve seen that many ESG strategies have seen inflows while non-ESG strategies on average have experienced outflows. By taking a longer term view and focusing on companies that are believed to help create a more sustainable future, most ESG strategies, including ourselves, have little to no investments in some sectors which have underperformed the most during the coronavirus crisis, such as fossil fuels, tourism, aviation and financials.
On the other side, a preference for health care stocks and companies with on average lower levels of debt compared to the broad market, certainly helped as well. Looking ahead to any potential recovery or normalization, long-term trends–demographic, technological, environmental and governance-related transitions–will continue to drive performance. We’ll still need to adapt to urbanization and invest in solutions for climate change–even though we’ve seen that pollution and CO2 emissions have actually been lower during the crisis. However, we’re also going to see an acceleration of the digitalization of our economy. Many people are now used to doing video conferences, working from home and ordering things online, but many businesses are starting to think about that a lot more too.
Supply chain management will also be increasingly important. We’ve seen that Wuhan is probably the global production center for many different industries, including many basic components for pharmaceuticals and the car manufacturing industry. Centralizing all your production centers in one specific city can lead to significant disruptions in your supply chain management, so companies that have a wider distribution or sourcing network will continue to benefit in the future.
I think it’s really important to construct your portfolios around the things that you’ll believe will create a sustainable, long term future. That’s why we only invest in the companies we like–and we like them because they have the right products to benefit from these important long-term trends, they are well managed and they don’t take irresponsible risks.
Commentary from Philippe Berthelot, Ostrum AM
Nearing the end of April, one can notice that the bulk of risky assets has recovered more than half of the slaughter in prices that occurred since mid-March 2020. Investment Grade and High Yield corporate bonds are still lagging in this respect. But one could wonder whether or not credit as a whole is the right place to be in such turmoil as the global economy is entering into its largest contraction wince WWII! Let’s not hide the fact that credit will be featured with further waves of downgrades ($€550 bn to $€850 bn for Euro denominated€ Investment Grade) including several fallen angels but as we can see, a lot of it is already priced in at current levels. On top of it, we do not foresee default rates skyrocketing in Europe like in the US but rather a rise to 7.5% by year-end at worst (much above 10% for the US default rate because of the Shale oil sector massacre to come).
This is a crucial moment when active investments can make the difference vs passive investments: active sector allocation and active issuer picking will be key in the end: some issuers will suffer like hell or eventually vanish in the case of bankruptcy. Even if we’re still navigating into uncharted territory, with some genuine uncertainty about the letter defining the recovery to come (U, V, L or W shape?), we are constructive on credit at current levels for both IG and HY in Europe (1.5% yield in IG vs -0.5% for the 5 y German Sovereign bond).
What’s next? This all-time unknown pandemic crisis, will have structural consequences comprising a shift from global to local supply chains: the «just in time» rule with zero inventories will soon be replaced by the « Just in case » one. Let’s forget about the double digit ROE obsession for CEOs or CFOS! The short-term earnings focus will morph into longer one, combining a robust and quality focus for employees, clients or providers including much more green consumerism, i.e. a ‘sustainable’ Capitalism: welcome to Capitalism 2.0!
