Consolidation
Capital markets were in a dreary mood again last week, with global stocks generally ending the week down between 0.5 and 1%. That almost exactly tracks US stocks, with the S&P 500 losing just under 0.3% through the week. UK equities fared a little worse by comparison, down 0.8% but with a slight pickup into Friday that made the week’s losses milder. There was no obvious trigger to these falls, and little sign of wider market stress. As such, considering the previous monthly and year-to-date gains for investors, last week’s action felt more like consolidation through month end rebalancing, following various indices hitting new all time highs in May. Looked at in that light, the backdrop looks more reassuring than worrying for long-term investors: previous returns seem to be solidifying, and against improving earnings outlooks, stock valuations look less stretched than they did earlier in the year. That bodes well.
ESG out of fashion?
ESG investing – where investors factor in Environmental, Social and Governance factors alongside standard risk and returns – was one of the financial sector’s biggest growth areas just before, and during, the COVID19 pandemic. Recent backlashes and periods of underperformance have hit the sector, though. One of the reasons for the style’s underperformance was a strong period for oil and gas companies in the aftermath of Russia’s invasion of Ukraine, which ESG investment portfolios typically exclude. The other was weakness for Growth as an investing style during 2022, as a result of rising yields. High yields reduce valuations of earnings in the more distant future – which is the typical earnings profile for many of the companies ESG investors favour, like those developing sustainable technologies for the future.