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BIG Market Update & ESG Investing

Dylan Bredo - Sep 21, 2021
The stock market has yet to have a formal correction all year, and many strategists are now calling for one. Click here to read more!
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Click here for an easy-to-read PDF version of the blog post!

BIG Market Update

The stock market has yet to have a formal correction all year, and many strategists are now calling for one. Several of these are looking for a correction of at least 10%. Falling bond yields, which make future profits worth more in current terms, have lifted valuations, with the 10-year Treasury yield currently at 1.31%, well below long-term inflation expectations of above 2%. Morgan Stanley's Chief US Equity Strategist, Mike Wilson, sees the 10-year yield hitting 1.75% by year-end, resulting in a compression of S&P 500's earnings multiples[1].

Not all strategists forecast a pull back; one bank still sees gains ahead because companies' earnings are too good to ignore. Amid a handful of Wall Street firms scaling back their stock market outlook for the rest of the year, JPMorgan remains bullish. J.P. Morgan's Dubravko Lakos-Bujas believes that improving fundamentals in the labour market combined with easy monetary policy and record household savings will continue to boost the stock market, even as many market watchers predict more downside.

"As long as Covid continues to ease, strong momentum should continue into 2022 as businesses start to rebuild depleted inventories and ramp-up capex from historically depressed levels," said JPMorgan. "At the same time, cross-border activity has the potential to more meaningfully rebound for the first time since the onset of the pandemic."

At BIG, we believe the S&P 500 will experience a short-term correction by the end of the year. This short-term downward movement of prices will present investors with an excellent opportunity to take advantage of discounted prices and put idle cash to use. As Warren Buffet stated, "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

Through the longer term and out to 2023, we expect the S&P 500 trajectory to be higher. The earnings growth rate is likely to peak soon with the tapering of fiscal policy, but research suggests that earnings will continue to trend higher but with moderation. This will inject some volatility, gains and opportunities below the surface of the headline indexes. As a result, investors can expect the major indices to continue to climb, however, at a slower rate than we have seen since the COVID downturn.

If you would like to discuss our market outlook further, reach out to a BIG representative to book a meeting on our website today!

ESG Investing: Debunking the Myths

Just a half-century ago, Nobel-winning economist Milton Friedman championed the concept of maximizing shareholder wealth: “There is one and only one social responsibility of business: to engage in activities designed to increase its profits.”

With growing unrest due to economic, social and environmental concerns, a movement towards “moral capitalism” has emerged. Prior to the pandemic, the Business Roundtable, a consortium of CEOs from 181 of the largest corporations, declared a shift in corporate attitude and a new social consciousness in serving all stakeholders including employees, communities and the environment.

Investing is also experiencing a shift in purpose. Socially responsible investing (SRI) continues to grow in popularity as investors recognize the opportunity to invest in companies that are making positive changes in the world. SRI involves including environmental, social and governance (ESG) factors in investment selection and management. Environmental issues include climate change and resource depletion; social factors involve human rights, people management and consumer protection; and governance refers to the responsibility and accountability of company management.

Canadian assets under management using ESG factors are in excess of $2 trillion[2]. As SRI continues to grow, so do certain perceptions. Here are four common myths, debunked.

SRI strategies underperform conventional strategies. It has been argued that investing with SRI strategies reduces the number of investment opportunities, thereby lowering an investor’s potential returns. However, companies that wisely manage ESG risks and opportunities may actually show improvements to certain financial metrics, potentially enhancing profitability and/or share prices. There is evidence to suggest that correlations exist between strong sustainability practices and company performance[3]. One of the reasons may be because corporations that apply ESG factors across their organizations can reduce various business risks.

SRI mainly involves screening out “sin” stocks. In the past, many SRI methodologies focused on exclusion-based investing, with the purpose of avoiding companies that were considered to be in sin industries like tobacco, gambling, or alcohol. However, as SRI has grown in popularity, there has been a distinct move towards screening investments using inclusionary factors, such as focusing on those companies who are better at managing sustainability-related issues. SRI is limited to equity investments. While SRI was initially focused on equity investing, over recent years there has been a growing movement in SRI across all asset classes. For example, in the fixed income market, municipal “green bonds” have grown in popularity. These bonds are used to finance climate and environmentally-friendly projects, such as clean-tech. In 2019, global green bond issuance rose by 51 percent (as compared to 2018), raising over US$250 billion[4]. While Canada remains a small player in the global green bond market, it is expected that positive investor interest will help to drive continued growth in this segment of the market. Alternative investments, such as real estate and private equity, have also been increasingly integrating ESG factors into their investing practices.

SRI is a “fad.” Many industry observers believe that a long-term structural shift to socially responsible investing is taking place. Sustainability is quickly becoming a standard. In January, the world’s largest fund manager announced sweeping changes to help position itself as a leader in sustainable investing. It will now assess ESG factors in its investments “with the same rigor that it analyzes traditional measures such as credit and liquidity risk.”[5] This demonstrates just one of many significant commitments by industry players to support SRI.

Most of us want to do good for the world. SRI gives investors the opportunity to actively invest and contribute to a better tomorrow. We can help you explore the alternatives based on your ESG values and provide support and clarity in the selection and monitoring process.

Big Proposal

Have you worked with a financial advisor before and had a frustrating experience? Do you feel as if your current financial plan does not align with future objectives? Do you have any pressing financial concerns? Are you looking for a comprehensive performance and risk analysis of your investment portfolio? Do you simply want to get a second opinion on your current portfolio for peace of mind?

At BIG, we use one of the investment industry's most comprehensive performance tools called Zephyr. This program provides people with detailed performance and risk analysis, peer group analysis, style attribution, asset allocation and custom reporting. Using this comprehensive tool, we will create a customized report based on your current portfolio and provide you with a detailed risk and return assessment. Following our analysis and debrief of your portfolio, if we find red flags, we will provide you with a BIG tailormade alternative portfolio with a side-by-side analysis of why we believe our solution will better match your investment objectives.

We would be happy to offer this no-obligation portfolio review process to you today - and the best part is, the worst news you will receive is that your existing portfolio is thoughtfully constructed and seems to be a good fit with your current objectives!

For more information on the services we provide visit our website www.badgerinvestmentgroup.com. If you would like to book a meeting with us visit www.badgerinvestmentgroup.com/schedule-a-meeting.

 

[2] riacanada.ca/responsible-investment/

[3] tiaa.org/public/pdf/ri_delivering_competitive_performance

[4] advisor.ca/news/industry-news/ canadas-green-bond-market-still-limited-iiac

 

CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA This document is for general information only, not intended to provide tax, legal or financial advice, and under no circumstances should be interpreted as a solicitation to act as a securities broker or dealer in any jurisdiction. All views are intended for general circulation only and do not have any regard to the specific investment objectives, financial situation or general needs of any particular person, organization or institution. All investors should consult with a qualified investment advisor or tax professional before making any investment decisions. Tax & Estate advice offered through Canaccord Genuity Wealth and Estate Planning Services.