We are almost approaching the end of the summer but it looks like we are back to April 2015 in Turkey. The election outcome and aftermath did not work as politicians had desired and the efforts to form a government have failed so far.
Equities, bonds affected by default risk, commodities, and emerging markets currencies are currently subject to corrections, which, noticeably, have now gone beyond the purview of emerging markets: while the emerging markets equity index declined by almost 6% (Performance-Data Source: Bloomberg, MSCI) last week, the index for developed markets lost 5.3% (Performance-Data Source: Bloomberg, MSCI). The fear that the economic weakening in the emerging markets might come with significant spill-over effects for the industrialised countries has increased. This prompts the question whether a phase of profound corrections is upon us in the risky asset classes. The question alone has caused the risk aversion of investors to rise. The liquidity is temporarily parked in safe havens such as US Treasury bonds, the euro, and the Japanese yen.
Gerold Permoser, Chief Sustainable Investment Officer at Erste Asset Management, finds a perfectly clear answer to this: When investors communicate with companies (both investable and not), this dialogue will lead to improvements. The publicity that might follow does not harm, either.
On 11 August China devalued its currency by 1.9% relative to the US Dollar and announced that in the future it would expose the exchange rate of the Renminbi to the forces of supply and demand on the foreign exchange market. In a press conference the Central Bank did say, however, that it would continue to intervene if the development of the Chinese currency were “volatile”, “irrational”, or “distorted”.
If you thought “quarterly” was a simple adverb characterizing a regularly recurring activity, you may need to reconsider. A new term is making the rounds: “quarterly capitalism” – and in this context, “quarterly” stands for “short-term, myopic, greedy and dysfunctional”. In fact, the term was already invented four years ago by Dominic Barton of McKinsey and was swiftly embraced by, among others, Al Gore and Prince Charles to call for a major overhaul of current business practices of listed companies and fund managers. Recently the term has reached a new level of prominence after presidential candidate Hillary Clinton, in a series of appearances, complained that the “tyranny of the next earnings report” resulted in companies’ paying “too little attention on the sources of long-term growth: research and development, physical capital and talent”. Unsurprisingly, Mrs. Clinton’s proposed remedy consists of a mixture of higher taxes and more regulation.
Commodity prices have fallen drastically since the beginning of July. The commodity price index provided by Bloomberg has fallen by nearly 12%. In fact, many commodity prices are locked in a bear market. The index is currently almost 50% below the level of the beginning of 2011.
Over the same period the currencies of emerging countries have depreciated by about 35% vis-à-vis the US dollar, and equities have fallen by about 26%.
Being our Chief Sustainable Investment Officer, Gerold Permoser is responsible for all Environmental, Social and Corporate Governance (ESG) investments of Erste Asset Management. In our magazine ERSTE RESPONSIBLE RETURN he tells how a dreaded French exam did not go “perdu”, what Engagement means exactly and why it pays off for companies and investors.