Category: Chart of the Week

ESG Assets Continue Their Dramatic Rise

The demand for — and supply of — ESG investment opportunities has surged over the past several years. This week’s chart depicts the rise in U.S. based ESG assets. After doubling in size between 2012 and 2016, the value of sustainable, responsible and impact investing assets grew by another 38% from 2016 to 2018. These investments now account for more than ¼th of total U.S. assets under professional management.

From the demand side, signatories to the Principles for Responsible Investment, a set of investment principles that enables the incorporation of ESG considerations into investment practices, grew in combined assets from less than $6 trillion in 2006 to over $81 trillion by the end of April 2018. In response, the supply of ESG strategies in the market continues to increase as well, with investment firms offering ESG products in both the traditional and alternative asset classes.

Regulatory changes, new research, and shifting investor demographics continue to foster increased interest in ESG investing, and plan sponsors should be prepared to adapt their investment options to accommodate the changing landscape.

Print PDF> ESG Assets Continue Their Dramatic Rise

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Brexit – Deal or Delay?

With merely 21 days left before Britain is due to leave the European Union, global investors are keenly watching their daily news feeds in hopes of clarity on the likely outcome – deal or delay. Note that hard exit was excluded from the list of options. Many economists and leading global financial institutions, like JPMorgan, Credit Suisse, and RBC, have lowered that probability to less than 10%1,2 in response to Prime Minister Theresa May’s compromise on February 28th that allows MPs to vote on a short delay and to rule out a no deal exit in the short term.

So what has exactly transpired since the initial divorce deal’s failed vote and May miraculously passing the no-confidence vote on January 25th? There have been several debates within the Parliament chambers on revisions necessary to secure a positive vote, including an option to remove the 21-day wait period required before voting on an international treaty and amendments to the Irish backstop. As of March 6th, a revised deal between Britain and the European Union has yet to be accepted, with recent talks being characterized as difficult and inconclusive. Albeit too early to know, there’s a strong likelihood that one of the following scenarios will occur: 1) May’s top lawyers will come to compromise with EU and present a palatable deal to Parliament by March 12th, or 2) MPs will vote no on the revised deal and agree to an extension on March 14th.

In this week’s chart, we show FRED’s Economic Policy Uncertainty Index for the United Kingdom3 along with U.K.’s Economic Sentiment Indicator over the last three years. As depicted, indecision over the Brexit outcome remains and drives the uncertainty index into the 450 range, up 56 points from January month-end. At the same time, sentiment within the world’s fifth largest-economy continues to wane as both consumers and many businesses hedge their stakes and prepare for the worst-case scenario, a disorderly Brexit.

Print PDF> Brexit – Deal or Delay?

 

1. Bloomberg, “Things Are Looking Up for the Pound, Strategists Say”, March 4, 2019.
2. Business Insider, “The City of London is finally starting to believe that the UK will avoid a no-deal Brexit”, March 3, 2019.
3. Baker, Scott R., Bloom, Nick and Davis, Stephen J., Economic Policy Uncertainty Index for United Kingdom [UKEPUINDXM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UKEPUINDXM, March 7, 2019.

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Will Assets Flow to Water Infrastructure Opportunities?

U.S. water infrastructure provides and treats around 355 million gallons of water per day to support cooking, bathing, and productivity in virtually all sectors of the economy. The infrastructure in place, however, is in poor condition; the American Society of Civil Engineers (“ASCE”) assigned a “D” and “D+” grade to both drinking water and wastewater infrastructure, respectively. Based on this assessment, the ASCE estimated that a minimum of $123 billion per year over the next 10 years needs to be invested in U.S. water infrastructure. As illustrated in this week’s chart, current annual spending on water infrastructure totals around $41 billion per year, but only one-third of capital needs are expected to be funded over the next ten years, representing an annual funding gap of $82 billion.¹ Consequently, we would anticipate water infrastructure improvement projects and water reuse² as a source of investment over the next several decades.

Print PDF> Will Assets Flow to Water Infrastructure Opportunities?

 

1 Value of Water Campaign, ”The Economic Benefits of Investing in Water Infrastructure,” 2017.
2 Water reuse refers to reclaimed or recycled water, which is the process of converting wastewater into water that can be reused for other purposes

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Slower Earnings Growth in 2019?

With the Tax Cut and Jobs Act (“TCJA”) now a little over a year old, this week’s chart looks at the effect of the tax cut on companies in the S&P 500. Despite a headline corporate tax rate of 35%, S&P companies in aggregate were paying an effective tax of only 25% over the twelve months leading up to the tax cut. Lowering the headline rate from 35% to 21% has clearly had an effect, as the tax rate for the S&P at the end of the third quarter was down to just 18.4% (a reduction of almost 27% year-over-year). This was one of the main drivers of strong growth in profits for U.S. companies, as the S&P 500 earnings growth peaked at 27% year-over-year in the third quarter (blue dotted line in the second chart). However, as we move into 2019 the positive effects on earnings growth from the tax cuts will fade, and corporate earnings growth in 2019 is likely to be significantly slower than what investors experienced in 2018, which could be a headwind for the equity market as the year progresses.

Print PDF> Slower Earnings Growth in 2019?

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

 

Can a Government Shutdown Slow the IPO Market?

Companies have been staying private longer, but expectations for Initial Public Offerings (IPOs) in 2019 are high. Uber and Lyft filed their intent to list their shares publicly with the SEC in December. Most recently, other private companies have been exploring if it makes sense to go public at current valuations. Peloton, the popular exercise bike company, has been exploring an IPO this year as its valuation has climbed to more than $4 billion, roughly 3 times as much as its $1.25 billion valuation in 2017. The chart above shows the amount of money raised via IPOs in each calendar year. But what risk does the previous government shutdown have for the IPO market?

The most favorable time for an IPO is typically when the stock market is doing well, volatility is low, and political risks are mitigated. Due to the recent partial government shutdown, the SEC is backlogged with paperwork, which has delayed planned IPOs during this current favorable environment. The risk is that if another shutdown occurs, there could be an extended delay featuring stale financial statements and other administrative delays, which would naturally discourage companies from wanting to go public. The companies that are most at risk are those that are running low on cash and need capital to continue operating. Business owners and venture capitalists are also at risk of not being able to cash out as quickly as they would like. Though the shutdown has caused a delay in listing, it should not prevent the blockbuster companies from listing publicly. Companies like Uber – which has been valued as high as $120 billion – are looking to tap the larger pool of capital in the public markets. Even though the government shutdown has already caused delays of around 30 days, the expectation is that 2019 will ultimately provide a record amount of capital raised through IPOs.

Print PDF > Can a Government Shutdown Slow the IPO Market?

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Can the PG&E Bankruptcy Create Profits for Hedge Funds?

This week’s chart of the week examines the price performance of Pacific Gas and Electric (“PG&E”) Corporation’s public debt and equity. Because of what they provide, publicly traded utilities have long been considered defensive investments due to their relative stability throughout economic cycles.

In the third quarter of 2018 hedge funds began buying shares of this California public utility on the view that PG&E’s liability for 2017 wildfires would be much lower than expected. This buying took place ahead of the deadliest wildfire in California history which many blamed on PG&E electrical lines.  PG&E’s exposure to wildfire liabilities is heightened by the state’s inverse condemnation, a legal standard which holds utilities responsible for all damages caused by their equipment. On January 29th PG&E filed for bankruptcy related to the more than $30 billion in liabilities it faces related to California wildfires in 2017 and 2018.

Many hedge funds that bought both debt and equity of PG&E in the third quarter of last year have seen the equity and debt sell-off over 60% and 18% respectively through January. This price drop has caused some managers to exit their positions. With the company announcing a bankruptcy filing, distressed hedge funds have stepped in to buy up both the equity and debt of the company.  Their rationale for doing so is that the payout of the liabilities will be smaller than originally expected and thus both equity and debt prices can recover enough to deliver a profit relative to the currently depressed prices.

Print PDF > Can the PG&E Bankruptcy Create Profits for Hedge Funds?

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Equities Close to a Key Resistance Level

This week’s chart looks at price action of the Value Line Geometric Index. Originally launched in 1961, the Value Line Geometric Index provides exposure to North American equities. It is comprised of over 1,600 companies from the NYSE, Nasdaq, Toronto Stock Exchange, and various over-the-counter markets. The index is equally weighted, and thus can provide insight into the health or breadth of the overall equity market relative to more commonly referenced market cap weighted indices. Market cap weighted indices, by design, are disproportionately driven by their larger market cap weighted components. Thus, an examination of equally weighted indices can shed light on trends often missed when focused solely on the actions of market cap weighted indices.

As seen in the chart above, the Value Line index has historically encountered resistance at the $500 price level. The index traded near this key resistance level in 1998, 2007, and 2015. More recently, the index was able to break out above this resistance level beginning in December 2016. Following the 2016 election, the index saw broad market participation as a result of the current administration’s pro-growth narrative and late cycle fiscal stimulus effects. A host of factors contributed to the recent retracement of the index below this $500 level starting in mid-2018 including concerns over rising interest rates, slowing global growth, trade/tariff effects, and various political uncertainties.

From a technical analysis standpoint, if the index can maintain a sustained breakout above this level then this would be a bullish signal for equities. However, a failure to retest and breach this level could signify further downside risk and warrant a cautious stance within equities.

Print PDF

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Did the Fourth Quarter Wake Up a Sleeping Bear?

Like past bull markets, this most recent one since 2009 has had relatively little daily volatility, which we define here as moves greater than two standard deviations from the mean daily return. Specifically, we look at two standard deviations to the downside during a calendar year basis as compared to its historical average over the last few market cycles. This means the S&P 500 would’ve fallen about 2.2% or more in a single day. The last three bull markets are roughly visualized through the valleys in this negative volatility, which is indicative of the smooth ride up investors have had.

Not surprisingly, the majority of total positive and negative two standard deviation moves have been on the negative side at about 60% of the time since 1990, or in days, about seven trading days per year. In 2018, investors experienced significantly more downside volatility than in recent years; however, within the context of bear market years, this move is not so bad. While this is an interesting story from the data, ultimately macroeconomic and geopolitical developments will undoubtedly determine if this bull market has any life left.

Print PDF

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Brexit Contributes to Global Uncertainty

Political instability increased dramatically in 2018 and the Brexit looms as a major contributor to the uncertainty in 2019. The UK is scheduled to leave the European Union (EU) on March 29th, 2019 however there is no current plan in place for the exit. On Tuesday, January 15th, the UK government resoundingly rejected Prime Minister May’s Brexit plan, 432 votes to 202. May had negotiated this agreement with the EU in an attempt to organize an orderly departure.

On Wednesday January 16th, a day after her plan’s defeat, Prime Minister May survived a vote of no confidence, 325 votes to 306. With her leadership role intact, May must develop an exit plan that the UK leadership will pass, and the EU will approve. This must be done with the clock ticking and as we move closer to March 29th, the possibility of a “no deal” Brexit increases. This is an outcome neither the UK nor the EU want, and if this occurs, volatility in equity markets is likely to spike. To avoid this, we may see a vote to delay the exit and should the UK fail to reach an agreement perhaps we may see a second referendum. Ultimately, as is usually the case with these types of issues, markets will welcome any resolution that clears up the uncertainty surrounding the event.

Print PDF

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

 

U.S. Credit Market Health Check

This week’s chart looks at two key indicators of the health of the U.S. credit market. The first, on the left, shows a growing portion of covenant-light (“cov-lite”) bank loans relative to full-covenant bank loans.¹ The second indicator, on the right, shows a growing portion of loan-only bank loan issuers, which remove the benefit of a credit cushion for bank loan investors.² Recent studies by Credit Suisse show that recovery rates for cov-lite issuers are 10-15% worse than non-cov-lite issuers, and recovery rates for loan-only unitranche issuers are 15% worse than non-unitranche issuers. As such, there is some structural deterioration in the bank loan market, but the general consensus is that this should not be a 2019 story, but 2-3 years out. This means that there is not a very high concern of a credit crunch in 2019, but potentially in 2020-2021 if prices get to frothy levels again by then.

That said, defaults remain low, so at least for now, there is no sign of immediate trouble. And spreads have widened out over the last couple of months to be wider than average excluding 2008 and 2009 levels, showing that there has been some release in pressure and the market is perhaps pricing in some of these concerns. Most bank loan strategies are now focused on quality credit selection, avoiding deals with high leverage and unreliable assets or unreliable earnings. That said, as this cycle wears on, we would certainly want to remember that despite their senior secured nature, bank loans are still sub-investment grade debt and should be balanced with a healthy core bond allocation.

Print PDF

¹ Covenant-light means that the bank loan issuer is subject to few restrictions, also known as covenants, in managing its business. For example, covenants could be maximum leverage (debt divided by cash flows) or minimum coverage (cash flows divided by interest expenses). The rise in cov-lite deals has been a reality since 2005 and they appear to be here to stay. One reason for their rise is due to the standardization and syndication of bank loans as a public security, thereby making them become more like high yield bonds, which have very little covenants, and less like private credit.

² This means that, in the event of bankruptcy, the bank loan investors do not have a high yield, junior subordinated debt tranche beneath them for the losses to eat into after the equity tranche. The bank loan investors will see immediate losses right after the equity tranche in this case.

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.