Essentials

In line with recent high-frequency data, economic indicators published in China last week showed that a two-phase recovery is under way, with consumer spending lagging behind output. Retail sales were down 7.5% year on year – despite a sharp rebound in car sales – while industrial production was up 3.9% in April.

Although most stock-market indexes, including those in Switzerland, are still down sharply on the start of the year, some stocks are faring well and have even reached record highs. This is the case for Swiss health care companies like Roche and Lonza, which have both held up impressively despite the current environment.

The eurozone economy contracted more than expected in Q1 2020. Southern European countries and France were hit harder than Northern Europe This disparity can be explained by the uneven impact of the public health crisis and the length of the lockdown. However, economies should have bottomed out in April, and we should now start to see a gradual recovery.

The Fed : whatever it takes, except negative rates?

The US Federal Reserve (Fed) did not simply stand by and watch the COVID-19 pandemic and the ensuing economic crisis unfold. It was actually quite innovative in its response to the urgency of the situation. First, it cut its benchmark rate to zero and then began expanding its balance sheet. In other words, money is once again printed and being pumped into the US economy. As stock markets plummeted in March, the Fed first needed to ensure that the bond market was running smoothly, as it had shown some signs of stress and the tap was starting to close on corporate lending. Then later on, the Fed had to make sure that the economy would be able to get moving again once the pandemic was over. For the moment, the Fed should be happy with its response. It purchased hundreds of billions – and even trillions – of dollars in assets and diverted from its usual policy course, which helped to bring calm to the financial markets. It also invested directly in corporate bonds and even in high yields. And it rolled out another programme to support smaller companies that don’t have access to the capital markets. Given its innovative approach, some people have wondered whether negative rates would be brought in, as they have in Europe. But this option has been categorically ruled out by most Fed officials. In a much-awaited speech last week, Fed Chair Jerome Powell spoke of some of the unwanted side effects, especially in terms of the impact on the banking industry. And the situation in Europe seems to prove him right. But as is often the case, the Fed is under pressure primarily from the White House. Donald Trump, who is in the midst of his election campaign, thinks the Fed hasn’t done enough. He is calling for negative rates to be brought in to ease the debt burden resulting from the COVID-19 crisis. Mr Powell pointed out that the NY Empire State and Michigan University confidence indicators have improved recently, and he seems to believe that the worst is over and that the economy will soon recover. If that’s not the case, Donald Trump’s attacks will only become more ferocious.

ESG in crisis?

COVID-19 is the first real test of the resilience of sustainable investments since the 2008 global financial crisis. And the pandemic has bought to light the materiality of environmental, social and governance (ESG) risks in financial markets.

Sustainable portfolios usually have limited exposure to the fossil fuels industry, which has helped them to outperform in recent months. Even if this exclusion was not directly related to the public health crisis, it reflects the structural risk that oil companies are exposed to as the world becomes less and less dependent on fossil fuels. In the long run, the flattening of the CO2 emissions curve will be just as important as that of the coronavirus.

The recent crisis has also heightened the focus on the ‘S’ in ESG investing. Social risks, such as workforce safety and the closely intertwined supply chains, have rapidly come to the fore. There are direct financial consequences but also reputational impacts to consider.

“Only when the tide goes out do you discover who’s been swimming naked” said Warren Buffett. Crises often go hand in hand with an increase in cases of fraud on the financial markets. A thorough governance analysis today can therefore help to prevent nasty surprises going forward.  

It is important to keep in mind why sustainable investments make sense in times like these. Integrating sustainability into a portfolio is not only about using ESG factors to enhance performance, it is also about incentivizing business leaders to take a more holistic, long-term approach to risk management by, for instance, preparing for adaptation to the reality of climate transition.

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