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For sustainability, diversification and upside potential: US value equities

It’s payback time for investors who have been seeing a return to favour of the equity value investment style after years of underperformance versus growth…

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This article was originally published by BNP Paribas Asset Managment Blog ( Investor's Corner)

It’s payback time for investors who have been seeing a return to favour of the equity value investment style after years of underperformance versus growth stocks. A sustainable investing approach in value equities can enable investors to benefit from attractive valuations of responsibly managed companies that can deliver steady long-term returns.  

At BNP Paribas Asset Management, we offer investors the combination of both the value style and  a sustainability-based investment philosophy in the US equities universe in the form of a strategy designed to generate higher risk-adjusted returns than the MSCI USA Value index.

Value investing is not dead

In the recently published paper, Value Investing: Capitulation or Opportunity, we explained why we believe that the underperformance of value versus growth stocks may well end sooner rather than later.

The current, relatively high level of the value spread (the difference between valuations of value stocks and those of their peers) in conjunction with the risk of rising inflation in the US leads us to view the market environment as offering the best opportunity for US value stocks this decade.

In Value investing:Is this the biggest opportunity since the tech bubble?, we argued that value spreads were at their widest across all regions since the tech bubble in the late 1990s. Such a large gap in valuations explains why we see the odds of value spread compression as high in most regions of the main global equity markets.

The graph shows the value spread for the respective indices for the period between July 1996 and April 2021.

Source: MSCI, BNP Paribas Asset Management, as of April 2021

Combining value, sustainability and diversification  

The quantitative equity portfolio management team at BNP Paribas Asset Management has managed a sustainable US value multi-factor equity strategy since 2017. Our strategy targets cheaper (value factor), less risky (low risk factor) and outperforming (momentum factor) stocks that have the highest profitability (quality factor).

This approach can offer investors diversification both via the range of factors taken into account and the integration of ESG considerations into the investment process.

Indeed, the strategy takes both sustainability and carbon reduction considerations into account. These tilt the portfolio towards stocks in companies that have strong environmental, social and governance (ESG) qualities and a low-carbon footprint. As a result, it has received both the French SRI (Socially Responsible Investment) label and the Belgian ‘Towards Sustainability’ label. In financial terms, we believe the results are impressive. Since inception, the strategy has outperformed the MSCI USA Value index by more than 4% (see exhibit 2) and delivered an information ratio of 1.0 as of August 2021.

Over a period when value stocks significantly underperformed growth stocks, especially in the US equity market, our strategy has tended to offer a significantly superior long-term performance thanks to its diversified factor approach.

Table 1: Risk/Return profile of the Sustainable US Value Multi Factor Equity strategy since inception (September 2017)

Source: BNP Paribas Asset Management, as of August 2021. Past performance (gross of fees) is not indicative of future performance. Denominated in US dollars. Calendar performance (classic share class) -6.66% in 2018; 21.97% in 2019; 0.45% in 2020.  

In addition to its strong risk/return profile over the long term, the strategy has a significantly stronger ESG profile than its reference index, as well as a carbon footprint that is at least 50% below that of the benchmark, making it a reliable sustainable US value strategy for investors.

Table 2: Key features

Source: BNP Paribas Asset Management, August 2021

Conclusion

At BNP Paribas Asset Management, we integrate sustainability criteria when investing in US value equities as we aim to deliver higher risk-adjusted returns than those of the US Value index over the long term.

With inflation risk rising in the US and the value spread close to its highest in the last two decades, we believe value investing will be a successful strategy in the near future.

For this reason, it is our view that investors interested in value investing with an integrated sustainability and carbon reduction approach should consider the Sustainable US Value Multi Factor Equity strategy.


[1] BNPP AM’s internal ESG scoring methodology determines an issuer’s ESG score by evaluating performance vs. scoring peers on a narrow set of key ESG issues related to the environment (e.g. climate change), social issues (e.g. human resources management) and governance (e.g. independence and competence of directors). BNPP AM uses numerous research inputs and data sources (e.g. Sustainalytics, ISS & Trucost) to determine issuers’ ESG scores. If the issuer’s commitments and practices on a pillar of assessment (E, S or G) are better than scoring peers are, it will receive a positive ‘contribution’ for this pillar. Each issuer is assigned a final score from 1 to 99 that is the result of 50 as a reference plus the sum of the contributions from each of the three pillars. For more information on ESG indicators, please refer to BNPP AM’s webpage  

[2]The portfolio carbon footprint is the sum of companies’ carbon emissions divided by companies’ Enterprise Value multiplied by the weight of companies in the portfolio. Carbon emissions are the sum of Scope 1 emissions (direct emission from the company’s facilities) & Scope 2 emissions (indirect emissions linked to the company’s energy consumption). Carbon data provider is Trucost. The footprint is expressed in tons of CO2 equivalent per year and per million euros invested. Enterprise Value (EV) is the measure of a company’s total value. It is calculated by summing the market capitalisation and the financial debt of a company.


Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher than average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity, or due to greater sensitivity to changes in market conditions (social, political and economic conditions). For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Writen by Gregory Taïeb. The post For sustainability, diversification and upside potential: US value equities appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management, the sustainable investor for a changing world.

Economics

Top Shipper Warns Commodity Freight Rates About “To Go Parabolic”

Top Shipper Warns Commodity Freight Rates About "To Go Parabolic"

Similar to container rates, dry bulk shipping rates are poised to move…

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Top Shipper Warns Commodity Freight Rates About "To Go Parabolic"

Similar to container rates, dry bulk shipping rates are poised to move higher on limited vessel capacity and robust demand, according to Genco Shipping President and CEO John Wobensmith, who spoke with Bloomberg

"I think rates can go higher from here," Wobensmith said. "You do get to a point, and you've seen this in containers, where you hit a certain utilization rate, and you start to go parabolic on rates. I think we're getting close to that period."

He said, "fundamentally, you've got demand outstripping supply growth," adding that freight agreements are above $20,000 for 1Q, a level not seen seasonally in a decade. 

More than 5 billion tons of commodities, such as coal, steel, and grain, are shipped worldwide in bulk carriers in a given year. A move higher in the Baltic Dry Index (BDI) indicates increasing commodity demand on top shipping lanes. 

Lending credit to Wobensmith's argument is BDI on a seasonal basis that shows demand is currently outpacing vessel supply and pressuring rates higher. 

He doesn't expect bulk carrier rates to experience a significant reversal until early next year as demand troughs seasonally. "You need very little demand growth to just continue to build off what we've seen this year," he said. "It's more about higher highs and higher lows than anything else."

China's credit impulse needs to turn higher for the commodity boom and bulk carrier rates to stay elevated. 

Besides China, passage of a US infrastructure bill could be the fiscal injection that could also spark higher commodity prices, thus continue driving bulk carrier rates higher. 

All of this is feeding into inflation that the Federal Reserve convinces everyone it's only "transitory." 

 

 

Tyler Durden Thu, 09/16/2021 - 16:50
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Economics

Ethereum 2.0 Has What It Takes to Knock Bitcoin off Its Perch

Ethereum (CCC:ETH-USD), the world’s second-largest cryptocurrency, is more than just an internet token. It is the top smart contract and decentralized…

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Ethereum (CCC:ETH-USD), the world’s second-largest cryptocurrency, is more than just an internet token. It is the top smart contract and decentralized application network, with more use cases than other digital assets.

Source: shutterstock

As it moves to a proof-of-stake model, the network’s capacity will increase substantially and significantly reduce its energy requirements. Therefore, ETH-USD represents the cream of the crop as far as crypto investing is concerned.

The ETH token has shot up more than 380% in value since the beginning of the year. At the same time, industry stalwart Bitcoin (CCC:BTC-USD) is only up about 60% in the same period.

The Ethereum platform is undergoing major changes to increase its scalability, transaction throughput and efficiency while reducing its gas fees. The platform has already shown significantly more real-world utility than its peers, and future upgrades will create more divergence between them.

The London and Shanghai Hard Fork

The whole crypto sector has been buzzing since the release of Ethereum’s London hard fork. This is a major step towards Ethereum 2.0 and introduced some critical changes to the network.

Most notably, it updated the fee structure to an algorithmically determined model. It involves a base fee, which is usually 25% to 75% transaction value, and a priority fee that incentivizes miners to put a particular user’s transaction first.

In contrast to the first-price auction model the platform ran on previously, the new model was said to significantly boost efficiency. However, the base fee is burned after each transaction is complete, making ETH a deflationary asset. The currency’s supply is likely to reduce overtime, pushing its price higher.

The Shanghai hard fork is the next and perhaps final upgrade that will wrap up the Ethereum 2.0 update. It will go live anytime between the end of this year and early to mid-2022. The update is likely to merge Ethereum’s mainnet and Beacon Chain to implement proof-of-stake protocol.

Ethereum Has an Abundance of Use Cases

Bitcoin, the undisputed leader in the crypto space, is more of a safe haven asset for investors against fiat currencies. However, Ethereum is an ecosystem that is powering the digital economy.

Aside from the typical staking involved with most cryptos, it is the foundation for decentralized finance (DeFi) protocols. These are based on smart contracts, which execute when a predetermined criterion is met. Crypto investors have at least 7.7 million ETH tokens in DeFi protocols at this time.

Moreover, Ethereum is a dominant force in the nonfungible tokens, or NFT, space. NFTs are unique tokens that can represent avatars, art, music and other related items.

The NFT market has been booming this year, and Ethereum has been powering those transactions. Virtually every NFT exchange uses ETH to conduct these transactions on their respective platforms.

Ethereum is also a base layer for stable coins such as Tether (CCC:USDT-USD), pegged to the US dollar. More than 50% of transactions in Tether are based on Ethereum.

2.0 Can Help Ethereum Outpace Bitcoin

Ethereum has been on quite a roll in the past year. Since the pandemic began, major institutional investors have loaded up on the crypto, which propelled its price up more than 2,700% since January 2020.

With Ethereum 2.0 around the corner, its value is expected to rise even further. The platform will become more robust than ever before, offering even more utility for its user base. Hence, ETH-USD is perhaps the hottest crypto to invest in these days.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University. 

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Economics

It May Take Time for General Electric to Surge Again

General Electric (NYSE:GE) stock is up about 90% in the past year, but it has been treading water around a split-adjusted $100 per share since the spring….

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General Electric (NYSE:GE) stock is up about 90% in the past year, but it has been treading water around a split-adjusted $100 per share since the spring. After fully pricing in expected earnings growth in 2022, investors have been hesitant to bid up the industrial giant’s shares much higher.

Source: Sundry Photography / Shutterstock.com

Last month, I said investors should wait for lower prices before buying due to the risk of earnings falling short of expectations. But after giving the situation another look, two other catalysts could help prevent GE stock from falling below $100 per share.

The first is GE’s pending sale of its aircraft leasing unit, a move that could help unlock shareholder value. Second, a possible ramp-up in spending by the federal government could give GE stock an indirect boost as well.

Now, don’t take this to mean I think shares will pop in the coming months. Instead, it’s a situation where strengths and weaknesses cancel each other out. There’s enough to keep GE stock steady around $100 to $105 per share. Just not enough to send it higher in the near term.

GE Stock Already Trades on Next Year’s Results

The key issue with General Electric today is that upcoming earnings growth is already accounted for in its valuation. The consensus estimate projects the company will generate around $4.33 per share in earnings in 2022.

At today’s prices, that gives GE stock a forward price-to-earnings (P/E) ratio of around 24.5. That’s in line with the valuation of a similar name, Honeywell (NASDAQ:HON), which trades at 23.9 forward earnings. But other diversified industrial companies trade at even lower valuations, such as 3M (NYSE:MMM), which has a forward P/E ratio of 16.9.

It goes without saying that General Electric needs its earnings to meet or beat these estimates. If the company disappoints, GE stock could take a big hit.

In the past, I have questioned whether General Electric’s earnings will come in above $4 per share next year, mostly due to the risk of inflationary pressures. Inflation that ends up being more than just “transitory” could affect performance across all its business units.

A repeat of last year’s Covid-19 lockdowns, due to the Delta variant, is a big risk as well. This would be a major setback for the recovery of the company’s flagship aviation unit.

That said, there are a few positives to counter these negatives. They may not be enough to send shares higher soon, but they could help prevent GE stock from falling below $100 per share.

Plenty in Play to Keep GE Stock Steady

As I mentioned above, there are two positive catalysts on the horizon for General Electric.

The first catalyst is the pending sale of its aircraft leasing unit. As Barron’s reported on Aug. 27, Barclays analyst Julian Mitchell sees this as something that could result in “valuation upside.”  According to Mitchell, once GE sells this unit, investors may be more willing to value the company at a higher multiple in line with its peers in the aviation, healthcare and renewable energy sectors.

Admittedly, it’s questionable whether this happens. Given Wall Street’s preference for pure plays, a diversified company like General Electric will likely have a hard time getting to a price on par with its sum-of-the-parts valuation.

Fortunately, the second catalyst seems more likely to play out.

As fellow InvestorPlace contributor Larry Ramer wrote on Sept. 3, both the infrastructure bill and the proposed federal budget could provide an indirect boost to GE’s power and renewable energy segments. Additionally, the desire of the Biden administration and Congressional Democrats to expand government healthcare spending may benefit the company’s healthcare unit.

Strength in these areas could counter any further headwinds with the company’s aviation unit. This, in turn, may ensure that General Electric’s turnaround carries on, its earnings soar above $4 per share next year, and the company’s current valuation stays intact.

The Bottom Line on GE Stock

Despite my prior pessimism, there may be enough in play to ensure GE stock stays at its current price levels. But with regards to its next move higher, that may take time.

Shares are fully priced based on 2022 projections. Earnings will need to come in at or above the high end of analyst estimates, currently at $4.88 a share, in order for the stock to see another immediate boost.

In the long run, GE stock could continue to rise. But in the short term, expect shares to hold steady at or around today’s prices.

On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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