The World Economic Forum: Implications Beyond Climate Change
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 1/24/2020. Rates and Economic Calendar Data from Bloomberg as of 1/24/2020. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Equities retreated across the board last week as investors weighed the potential impacts of the outbreak of the coronavirus in China. In the U.S., the S&P 500 Index fell to a level of 3,295, representing a loss of 1.01%, while the Russell Midcap Index gave back 1.07%. The Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned -2.19% over the week. In the U.S., the impact could have been worse if it weren’t for generally positive earnings results and economic data releases. On the international equities front, developed markets also finished in the red, returning -0.61%, while emerging markets were hit the hardest with a weekly loss of 2.39%. This should not come as too much of a surprise seeing that the coronavirus originated and is currently concentrated in China. Finally, the 10-year U.S. Treasury yield dropped to 1.70% amid the “risk-off” sentiment.
The World Economic Forum (WEF), an annual meeting featuring world leaders in business and politics, concluded last week in the Swiss city of Davos. Globalization, technology, and creating a better world are generally common themes at the event. However, this year’s theme, “Stakeholders for a Cohesive and Sustainable World,” draws upon a very important concept; stakeholders vs. shareholders. The theme especially relates to businesses and is reflected in this excerpt from the WEF’s website:
“Since the first Industrial Revolution, businesses have been on the frontline of technological and social change. There’s no way we’ll create a cohesive, resilient world without them. But to do this we’ll need them to shift their time horizons, look beyond short term profits, and transform themselves into sustainable and inclusive organisations. What’s a smart company to do?”
A company’s reach often impacts far more than shareholders, who typically benefit from activity leading to tangible gains such as stock price appreciation, share buybacks, and/or dividends. The argument is that companies need to look through a broader lense and expand their horizon from short-term profits to longer-term impact, which includes how operations affect all stakeholders. Headlines from the forum seemed to focus on climate change, but that’s only one aspect of the entire stakeholder picture. Others may include a company’s workers, customers, communities, the environment, AND shareholders. It’s this comprehensive view of a company that may lead to a more sustainable economic environment that benefits all stakeholders and society as a whole.
With that said, it appears the right conversations are taking place worldwide as financial assets are flowing into funds that take into account a company’s Environmental, Social, and Governance (ESG) ratings and firms are responding (see Microsoft’s “carbon negative by 2030” pledge). There are also a growing number of companies and organizations conducting research dedicated to placing a value on companies to help promote better business practices. One such company is JUST Capital who measures and ranks company performance on topics Americans care about most, as determined through their proprietary polling process. In fact, JUST attended the forum in Davos and published their “5 Takeaways on the Future of Stakeholder Capitalism” which may provide some insight into topics discussed. These include:
• Stakeholder capitalism is the systems reboot we need
• We need less talk, more action
• We need to simplify – and agree on – how we measure stakeholder performance
• Stakeholder capitalism will make companies more resilient to downside risks
• Stakeholder value versus shareholder value is a false choice
We encourage investors to educate themselves on how this growing trend may impact their portfolios and, as always, work with experienced financial professionals to help manage their portfolios through various market cycles within a well-diversified framework that is consistent with their objectives, time-frame and tolerance for risk.
Disclosure: Hennion & Walsh Asset Management currently has allocations within its managed money program and Hennion & Walsh currently has allocations within certain SmartTrust® Unit Investment Trusts (UITs) consistent with several of the portfolio management ideas for consideration cited above.
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