Kaiser Partner Privatbank AG - Monthly Market Monitor April 2024 EN

Monthly Market Monitor

The equity market was very kind to investors in the first quarter.

Monetary-policy surprises

In a Nutshell

Our view on the markets

The global rate-cutting cycle is gaining momentum. In March, the Swiss National Bank more or less surprisingly became first major central bank in industrialized nations to pivot to a monetary easing stance. The US Federal Reserve and the European Central Bank look set to join that trend starting in June. However, the importance of the “when?” question will soon likely be overshadowed by the question of how far they will go in cutting interest rates. There’s a lot suggesting that policy interest rates in the years ahead will find an equilibrium at a much higher level than the one in the past.

The trend is your friend

The equity market was very kind to investors in the first quarter. However, along with the rise in stock prices, investor sentiment has continually become more enthusiastic. A short-term correction looms now at any time. But a correction mustn’t necessarily mean the end of the current bull market if corporate fundamentals meet investors’ high expectations. Profit-taking and diversification are an appropriate way for investors to overcome potential cognitive dissonance. But apart from that, the trend is your friend for the time being.

Chart of the Month

Made in Europe

High profit margins, above-average growth, and a strong performance – this delightful triad is not reserved exclusively for the shareholders of the big US technology companies. A small group of stocks also on this side of the Atlantic shares those very same attributes. Moreover, they are more broadly diversified, less volatile, and better dividend payers than their counterparts from the USA. Are the GRANOLAS a better version of the Magnificent Seven?

Is sustainability still relevant in 2024?

Sustainability investing faced considerable headwinds over the last two years, but public perception and actual lived reality diverge wildly when it comes to the subject of ESG. In the wake of having gone through an arguably much-needed identity crisis, the sustainability megatrend remains just as intact as ever today. The importance of sustainability to investors and business leaders is edging further upward in 2024. All that’s needed is to search for a replacement for the three letters E, S, and G.

The market for initial public offerings is a sluggish one. Companies tend to shy away from taking to the dancefloor until stock prices have risen for a long time and sentiment on the markets is bullish enough. In the wake of an equity rally that has been underway for a year and a half, the weather for IPOs has now brightened considerably, according to the GS IPO barometer. Reddit went public in the USA in March, marking the first social-media platform IPO in that market since Pinterest’s public trading debut in 2019. Investor’s celebrated the IPO with a share-price pop of almost 50% on the first day of trading. However, undifferentiated IPO hype has not been observable to date. The stock-market debut of perfumery chain Douglas disappointed, perhaps in part because its majority owner, CVC, intends to use all of the capital raised solely to pay down the company’s huge pile of debt. Nordic private equity giant EQT was more successful with its IPO of Switzerland-based Galderma. The pipeline is bulging with further private equity exits.

The US yield curve has been inverted for more than 600 straight days now, breaking the previous inversion record from the 1970s.

Macro Radar

Taking the pulse of economic activity

The Swiss National Bank in March was the first major central bank in industrialized nations to pivot to a monetary easing stance. The Fed and the ECB look set to join that trend soon. However, the importance of the “when?” question will soon likely be overshadowed by the question of how far they will go in cutting interest rates.

Mounting confidence in the Eurozone

The US yield curve has been inverted for more than 600 straight days now, breaking the previous inversion record from the 1970s. However, the expectation of an imminent recession associated with this phenomenon must continue to be incrementally pushed farther into the future. Another heretofore reliable recession indicator – the US Leading Economic Index – rose in February for the first time in two years. The Conference Board, in the meantime, has given up on constantly deferring its projected economic contraction. While the USA is cruising at an economic-growth altitude of around +2% at the moment, a stabilization has also been discernible in Europe recently, albeit at a much lower level. The Eurozone composite purchasing managers’ index climbed to 49.9 points in March and is now just a tick below the threshold that signifies economic expansion. Receding inflation and rising real wages are prompting the services sector in particular to view the future more optimistically. The manufacturing sector, too, is likely to have found a floor by now on the back of the pullback in energy prices and the trend toward economic stabilization in China.

The Fed and the ECB are trying not to cause surprises

The US Federal Reserve’s updated “dot plot” in March projected three quarter-point interest-rate cuts for

this year, just like in December. At the same time, Fed officials substantially raised their forecasts for economic growth (from +1.4% to +2.1%) and core inflation (from 2.4% to 2.6%). Financial markets interpreted that combination as a confirmation of upcoming monetary easing. The somewhat stubborn inflation data of late were downplayed by Fed Chairman Jerome Powell. If there are no major data surprises in the near term, an initial rate cut will likely be on the agenda in June. However, the subsequent rate-cutting cycle could turn out to be shorter than currently expected because the Fed’s new projections contain a higher long-term equilibrium rate of interest than before. The European Central Bank is also trying its hardest not to catch markets on the wrong foot, but with only moderate success due to the almost daily and often contradictory comments from various ECB officials. Recent statements, though, by ECB President Christine Lagarde communicated unmistakably that there will be an initial rate cut in the Eurozone as well in June.

The SNB and the BoJ spring surprises

Two other central banks, on the other hand, served up big surprises in March. In the case of the Swiss National Bank, the majority of economists surveyed by Bloomberg (20 out of 24) did not foresee a rate cut yet in the first quarter, but SNB Chairman Thomas Jordan defied that expectation, lowering Switzerland’s policy rate from 1.75% to 1.50%. The pivot to monetary easing was made against the backdrop of a sharp downward adjustment to the inflation forecast path – the SNB now sees the inflation rate in Switzerland at just 1.2% for next year (previously 1.6%). Turning to the Bank of Japan, expectations of a monetary-policy pivot definitely existed to some degree ahead of its March meeting, but the BoJ’s move to tighten all of the screws at its disposal at once (by ending negative interest rates, yield curve controls, and purchases of equity ETFs and real estate funds) came as a surprise in the end. The BoJ, meanwhile, will continue to purchase a small amount Japanese government bonds for the time being. Any further return of monetary policy to normal in Japan is likely to proceed only gradually.

Asset Allocation

Notes from the Investment Committee

The equity market was very kind to investors in the first quarter. However, along with the rise in stock prices, investor sentiment has continually become more enthusiastic. A short-term correction looms now at any time. Profit-taking and diversification are an appropriate way for investors to deal with potential cognitive dissonance.

Stock markets around the world remained kind to investors again in March. Meanwhile, share-price gains for the first quarter amounted to a good 10% in the case of the MSCI World index.

US dollar

Swiss franc

Euro

British pound

Equities: Is the trend your friend?

• Stock markets around the world remained kind to investors again in March. Meanwhile, share-price gains for the first quarter amounted to a good 10% in the case of the MSCI World index. Investor sentiment has become frothier along with the rise in stock prices. In the latest Investors Intelligence survey, the percentage of bulls climbed to over 60%. The bulls-to-bears ratio of more than 4x at present is the highest it’s been since the end of 2017, when overheated sentiment heralded a volatile year on equity markets in 2018. This time around as well, investors shouldn’t look through rose-colored glasses with both eyes in the current stage of AI euphoria. Taking profits here and there on stocks that have had a good run is a wise strategy for tactical investors to help them deal with potential cognitive dissonance.

• The arguments making a case for exercising a certain degree of caution don’t confine themselves solely to mass investor psychology. Technical factors are also on the list of early warning signals. One of them, for example, is an extreme crowding effect in the momentum factor. Only a quarter of the stocks in the S&P 500 have outperformed the index over the last 12 months. Market breadth wasn’t as narrow

Private equity

Private credit

Infrastructure

Real estate

Scorecard

Macro

Monetary/fiscal policy

Corporate earnings

Valuation Trend

Investor sentiment

as it is now even at the time of the dotcom bubble in the year 2000 (30%). Stock valuations admittedly aren’t as overpriced right now as they were back then, but the longer the rally continues, the more they are becoming a factor that could halt the current bull market. The 18-month-and-counting rally is based almost entirely on valuation expansion and hardly on higher corporate earnings. In the example of the MSCI World index, valuation expansion has accounted for 80% of the index’s performance since autumn 2022 while corporate earnings growth has accounted for 20%. For a (healthy) continuation of the uptrend, earnings would need to increase more substantially soon. Consensus forecasts, in fact, are projecting a significant acceleration in corporate profit growth (MSCI World 2024: +8%; 2025: +12%;

2026: +11%). If those expectations get disappointed, the equity market would increasingly stand on a shaky foundation.

• The US equity market in particular has to be judged as being mildly on the expensive side at its current price-to-earnings multiple of 21x. This constrains the further outperformance potential for (large-cap) US stocks and deflects attention toward other opportunities. The European market in particular is trading close to historic lows versus the USA in relative valuation terms. Since relative economic growth momentum is also turning in favor of Europe right now and the European Central Bank may ease its monetary policy this summer shortly before the US Federal Reserve does, European stocks may outperform in the near future. Another way to at least reduce the impact of a looming momentum crash in US big tech on one’s portfolio is to diversify into small caps. They have upside potential in both the USA and Europe and may be on the verge of entering a period of relative strength like the one they experienced in the years after the bursting of the dotcom bubble back in the 2000s.

Fixed income: Investors are locking in high yields

• A slow descent from the policy rate plateau is coming more and more into view. It was confirmed once more by the Fed’s March FOMC meeting, which was more a dovish affair than not on balance. Although the equilibrium rate of interest will probably be higher in the future than it was in the 2010s, returning the federal funds target rate to the level the Fed considers neutral would nonetheless entail more than 250 basis points of rate cutting over the longer term. This means that the window of opportunity for locking in relatively high interest will be closing soon. Investors see it the same way. Over USD 20 billion accordingly already flowed into US corporate bonds in the first 12 weeks of this year alone. The net capital inflows also benefited sub-investment-grade issuers as the credit spread on US high-yield bonds tightened to around 300 basis points at last look, the lowest level in two years. A hunt for yield was also observable in Europe, where the credit spread on Italian government bonds versus their German counterparts tightened to less than 120 basis points for a time in mid-March. “The trend is your friend” applies right now also on fixed-income markets. In a scenario of no recession in the USA and a bottoming of economic activity in Europe, credit spreads could continue to tighten in the near future, which would further worsen the risk/reward tradeoff on spread products. To gird themselves for the worse scenario, investors should continue to overweight government bonds.

Alternative assets: Gold breaks out on the upside

• Good things come to those who wait, it’s said. Although it took five tries, the gold price’s breakout above its previous all-time high of USD 2,075 per ounce in March was all the more dynamic for it. One major cause of the upward pressure that had gradually mounted over the past several quarters and then exploded lately is heavy central-bank demand for gold. Emerging-market central banks in particular have recently moved to increase the diversification of their currency reserves largely in view of escalating geopolitical tensions. Not only has this more than offset the protracted weak demand on the part of institutional investors, but has also caused the price of gold to decouple from “traditional” influencing variables like real interest rates or the equity risk premium. In the wake of the strong technical chart signal sent by the breakout, investor interest now also looks set to pick up in the near future. It would take a pullback to below the previous all-time high to flash a serious warning sign.

Currencies: Everything is relative

• EUR/USD: The Fed is the most cautious of the major central banks at the moment with regard to upcoming interest-rate cuts, so a monetary-policy first is looming: the ECB for once might move to loosen the interest screw ahead of the Fed in the new rate-cutting cycle. However, this nuance is not enough to cause sustained euro weakness. From the summer onward, both central banks are likely to cut interest rates more or less in lockstep, so the EUR/USD exchange rate looks set to stay in the last year’s trading range for the time being over the medium term.

• GBP/USD: The Bank of England in March signaled very clearly that its monetary policy committee from now on will actively debate cutting interest rates in view of pleasing developments on the inflation front. Financial markets currently are pricing in three quarter-point rate cuts by the BoE this year starting in June, just like they are doing for the Fed. In the absence of any additional impelling forces, the GBP/USD exchange rate will probably continue to oscillate in its current horizontal channel.

• EUR/CHF: More movement in the EUR/CHF exchange rate has been observable this year. The franc’s recently intensified depreciation impetus against the euro was caused by the surprise interest-rate cut by the Swiss National Bank. By substantially lowering its conditional inflation forecast, the SNB distinctly signaled an easing of inflation risks and thus less need for an overly strong franc. From a technical analysis standpoint, there is room for the euro to appreciate further against the franc to as high as the EUR/CHF cross’s long-term downtrend line at the 1.02 level.

A slow descent from the policy rate plateau is coming more and more into view.

The phenomenon of top-heavy market concentration in the major stock indices is well-known to many investors by now in the wake of extensive media reporting and commentary on the Magnificent Seven in the USA and the GRANOLAS in Europe. However, this trend hasn’t reversed yet; the situation, in fact, has tended to become more exaggerated lately. Investor demand is focused mainly on the following attributes: big (company size), expensive (valuation), high-quality (high profit margins and stable revenue growth), and high-return (high momentum). There are only a few stocks that meet all of those criteria, and they accordingly are in hot demand. The resulting self-reinforcing dynamics have caused momentum stocks to skyrocket to nosebleed levels lately. The last time such an awesome performance was observable was during the final stage of euphoria in the dotcom bubble in the year 2000. Stock-market history teaches that momentum begets more momentum – and eventually leads to a momentum crash someday. People who are invested in the high flyers should at least take some profits in the currently overheated market.

Chart in the Spotlight

Theme in Focus

Made in Europe

High profit margins, above-average growth, and a strong performance – this delightful triad is not reserved exclusively for the shareholders of the big US technology companies. A small group of stocks also on this side of the Atlantic shares those very same attributes. Moreover, they are more broadly diversified, less volatile, and better dividend payers than their counterparts from the USA. Are the GRANOLAS a better version of the Magnificent Seven?

(Overlooked) European Champions League

Europe, too, is highly skilled in deep tech, innovation, and cloud computing. Without equipment from ASML, Nvidia would be incapable of producing its graphics processing units that are currently in hot demand for artificial intelligence applications. Years of research by Novo Nordisk have brought forth Ozempic and Wegovy, two modern effective drugs against diabetes (and obesity). And with SAP, the old continent also boasts an IT giant that is capable of keeping up with the competition from Silicon Valley at least in some subdomains. All three of those names belong to a small group of companies that embody a combination of robust, highquality growth and a correspondingly strong stock-price performance just like the Magnificent Seven (Mag 7 for short) in the USA do, though with the small but distinctive difference that the stocks in the European Champions League stand less in the spotlight than the Mag 7. Their relative obscurity may owe in part to the fact that the financial industry hasn’t yet come up with a better collective name for the European equity heavyweights than the acronym coined by Goldman Sachs, which has dubbed them the GRANOLAS (GSK, Roche, ASML, Nestlé, Novartis, Novo Nordisk, L’Oréal, LVMH, AstraZeneca, SAP, Sanofi). However, this group of eleven stocks is by no means as bland and boring as a bowl of Swiss Bircher muesli. Quite the contrary, in fact, their performance over the last three years bordered on spectacular. With a share-price advance of 65% (in euro terms), they were more or less at eye level with the Mag 7. This is not a contradiction in the face of the booming US economy of late versus Europe’s rather sluggish economic activity. It instead is much more a reminder that the world’s largest companies today operate internationally – exceptions confirm the rule.

Commonalities with the Magnificent Seven…

The absolute performance in recent years wasn’t the only similarity. A comparison of the GRANOLAS with the Mag 7 also reveals quite a few other things in common:

Less volatility, same result | The GRANOLAS exhibit a better risk-adjusted performance

Performance comparison: GRANOLAS vs. Magnificent Seven, indexed (Jan. 1, 2021 = 100)

Magnificient 7

Sources: Bloomberg, Kaiser Partner Privatbank

• Weight: Both groups of stocks accounted for over 60% of the performance of their respective local equity markets last year. Their constant outperformance has continually increased their weight in the respective blue-chip indices in recent years. With a combined weight of more than 25% in the Stoxx 600 (GRANOLAS) and almost 30% in the S&P 500 (Mag 7), that handful of stocks is increasingly determining the trajectory of equity markets on both sides of the Atlantic these days.

• Fundamentals: In both cases, the stellar performance of the GRANOLAS and the Mag 7 is no accident, but has been driven by rock-solid fundamentals. On one hand, their share-price gains are based for the most part on corresponding corporate earnings growth. And on the other hand, both groups of companies are outgrowing the rest of the equity market by a factor of three to four times and are doing that with less sensitivity to fluctuations in economic activity. And the explanation for this above-average growth is the same for both the European and the American champions. The GRANOLAS and the Mag 7 both spend around three

However, this group of eleven stocks is by no means as bland and boring as a bowl of Swiss Bircher muesli.

The (out)performance by the GRANOLAS is very attractive not just in absolute terms, but also on a risk-adjusted basis.

Highly concentrated

times more on research, development, and other investment expenditures than the rest of the companies on the equity market do. In addition, they also resort to acquisitive growth more frequently than other companies do. The eleven GRANOLAS companies, for example, were involved in almost half of all M&A transactions in the Stoxx 600 over the last five years.

• Capital flows: However, the fundamentals are not the only explanation for the better-than-average performance on both sides of the Atlantic. The structural shift toward passive investments is a global trend. When investors withdraw money from active funds to invest it in ETFs, this benefits the largest companies the most. What was already big thus tends to get even bigger.

• Valuation: Last but not least, the two groups also have high valuations in common. The heavyweights in Europe have a 60% higher price-toearnings ratio than the broad market, and the P/E premium in the USA stands at 50%. However, adjusting for the robust growth, rich cash flows, and earnings quality makes the valuation premium on both sides of the pond appear to be at a “fair” level.

| The big are getting bigger and bigger also in Europe

Weight of the GRANOLAS in the Stoxx 600 index

…and differences relevant from an investment standpoint

Despite the many things they have in common, viewing the top stocks in Europe versus their counterparts in the USA is more like comparing apples with oranges than comparing fruit from the same crate. And the differences are definitely of relevance for investors.

• Volatility: The (out)performance by the GRANOLAS is very attractive not just in absolute terms, but also on a risk-adjusted basis. The GRANOLAS are much less volatile than the broad market and other growth stocks. Since 2018, those 11 European stocks have exhibited realized volatility that is only around half as high as that of the Mag 7 in the USA. This means that in recent years, an investor could notably reduce a portfolio’s risk/return ratio by blending in the GRANOLAS.

• Diversification: The Mag 7 are almost all technology companies. The GRANOLAS encompass the technology sector, but also the healthcare, consumer staples, and discretionary consumer goods industries and therefore are a much more broadly diversified bet.

• Dividends: The GRANOLAS place a high priority on shareholder value. Their dividend yield of 2.5% on average far exceeds the dividend yield of the S&P 500 (1.5%) and the Mag 7 (0.3%). US technology companies compensate for their dearth of payouts by frequently buying back their own stock. But even if the dividend and buyback yields are added together, stocks in the European Champions League yield around 2 percentage points more than the Mag 7 do. Last but not least, the GRANOLAS are also more attractive than the real yield on German government bonds (0.3%) and US Treasurys (1.6%).

Profitable growth | Advantage: Europe Yield comparison (dividend yield and real bond yield)

Buy or wait?

The high-growth quality of the big “made in Europe” companies has paid off for their shareholders in recent years. The stock prices of the GRANOLAS have increased more than twofold since 2018 while the rest of the market has treaded water. The characteristics of the GRANOLAS – robust earnings growth, low volatility, high and stable profit margins, sound balance sheets, and sustainable dividends – are likely to remain in demand also during the further course of this decade. If those stocks retain their qualities, there’s a high probability that investors can expect to continue earning positive absolute returns with them in the future because many of those companies operate in the sweet spot of structural megatrends such as demographic aging, artificial intelligence, and automation.

However, there is no guarantee that the European heavyweights will keep on outperforming the broad market. Historical evidence shows that if market leaders don’t constantly reinvent and further develop themselves, they can get overtaken by smaller and nimbler competitors. This cyclical nature of markets and trends is also reflected in the ranking of the top ten stocks in Europe, which, though static in the short term, is relatively dynamic over a period of ten years and longer. And the outperformance by the GRANOLAS could even stall out in the nearer term, at least temporarily. If economic activity in Europe revives, cyclical companies with less muscular balance sheets

Change… | …is the only constant Top 10 in Stoxx 600 index over time

Qualitative growth pays off | The GRANOLAS have massively outperformed Performance comparison: GRANOLAS vs. broad market, indexed (Jan. 1, 2018 = 100)

Sources: Bloomberg, Kaiser Partner Privatbank

might perform better intermittently. Also, in the event of a strengthening euro, the 11 big companies, which generate less than 20% of their revenue in Europe, would arguably fall behind small caps focused on the domestic market. And last but not least, for quite some time now, the GRANOLAS, like the Mag 7, have been an overbid bet that many market participants have already joined in on. So, to buy or not to buy (yet)? There’s no way around the European Champions League for whoever would like to invest in Europe’s equity market. But in the wake of the torrid rally of late, above-average exposure to the GRANOLAS is not necessary at the moment.

However, there is no guarantee that the European heavyweights will keep on outperforming the broad market.

Sources: Goldman Sachs, Kaiser Partner Privatbank

ESG: Sustainability Corner

Is sustainability still relevant in 2024?

Sustainability investing faced considerable headwinds over the last two years, but public perception and actual lived reality diverge wildly when it comes to the subject of ESG. In the wake of having gone through an arguably much-needed identity crisis, the sustainability megatrend remains just as intact as ever today. The importance of sustainability to investors and business leaders is edging further upward in 2024. All that’s needed is to search for a replacement for the three letters E, S, and G.

Sustainability sentiment in the cellar

The sustainability finance industry was exposed to a harsh climate over the last two years. In 2022, we even found ourselves having to diagnose an identity crisis. The echoes of that identity crisis haven’t faded away yet, particularly in the USA, where green financial assets are politically under fire – a situation that will tend to intensify further in 2024 due to the stark polarization in

the USA and in the midst of the US election campaign that is heating up. Although the anti-ESG media drumfire has probably already decrescendoed lately, sustainability sentiment is still in the cellar. But there are actually no grounds for this, at least not with regard to the return performance of sustainable investment strategies. Thanks to their disproportionately high weighting of technology stocks, they outperformed in 2023, making up for their relative weakness in 2022. Strict sustainability investors, however, will view that at most as a nice side effect because in their eyes, the primary objective of sustainability strategies is not necessarily to outperform the broad market, but to earn more or less the same return as before but with less risk.

Whether a devout ESG disciple or “merely” an investor with a preference for sustainability – investing sustainably is still well-liked and much more popular on this side of the Atlantic than it is in the USA. This is reflected not least in net flows in and out of sustainable investment funds. While Europe has continued to register constant net inflows in recent quarters, the capital flow in the USA already changed direction back in 2022, and the momentum there is still negative. Whereas 55 mutual funds with an ESG focus were launched in the first half of 2023, only eight were rolled out in the second half of last year. At the same time, the universe of sustainable investment funds in the USA has actually shrunk in the meantime because more than two dozen funds closed down during the last two quarters. And the political headwinds continue to blow. In January, Republicans in New Hampshire even introduced a bill that would make investing state funds in line with ESG criteria a felony punishable by up to 20 years’ imprisonment. By the end of last year, a total of 18 US states had enacted some form of anti-ESG legislation. Some of the laws prohibit the “discrimination” of companies that sell fossil fuels and firearms while others instruct state pension funds not to take ecological and social factors into account in their investments.

Perception and reality

However, the reality of politics in the USA also includes the following observations: Comparable anti-ESG bills were proposed in 19 states but were not adopted, and four states enacted pro-ESG legislation. Furthermore, a Bloomberg Intelligence survey of 250 institutional investors and 250 top-level corporate executives also reveals that public perceptions regarding the sustainability of the sustainability trend are worse than the actual lived reality. Asked if the US political pressure on sustainability investing is prompting them to change their investment strategy, more than half of the investors surveyed (54%) said they were now focusing even more on ESG aspects than before. Roughly one in three (31%) said they were not going to change their approach. Asked additionally about their spending plans for the next two years, the majority of both groups of respondents said they would increase their sustainability budgets, but what’s more, 38% of institutional investors and 23% of businesses even want to expand their sustainability budgets by over 20%. The clear conclusion of the study is that sustainability investing is not going away anymore.

The vast majority of investors and fund managers implicitly or explicitly factor climate and social risk factors into their decisions these days. However, not all of them want to utter the letters E, S, and G anymore, including BlackRock CEO Larry Fink, who once rode atop the ESG wave a few years ago. He now asserts that the term “ESG” has been “weaponized,” but his avoidance of using that expression hasn’t changed his attitude about the sustainability issue. In fact, BlackRock’s latest bet – its acquisition of infrastructure specialist Global Infrastructure Partners – fits excellently with this megatrend because a substantial part of worldwide investments in infrastructure over the next decade will likely be funneled to projects for sustainable energy production, decarbonization, and the necessary grid infrastructure.

Sustainability research has an impact

If investors today are already intensely interested in sustainability issues and will become even more so in the future, that’s a good thing for our planet because they thus appear to be indirectly prodding businesses to reduce their greenhouse gas emissions. This theory is corroborated by a study that was conducted by researchers at the University of Leeds and Durham University.1 They investigated what happens when research departments of brokerages close or merge and the number of analysts covering a company decreases as a result. They discovered that as soon as a company is covered by fewer analysts, its greenhouse gas emissions start to increase. The researchers identified four primary channels as the cause of this correlation: (1)

Resistant | Sustainability has come to stay

Question: Has the recent anti-ESG wave changed your investment approach?

Sources: Bloomberg Intelligence, Kaiser Partner Privatbank

Now more than ever? | The majority plan to increase sustainability budgeting

Question: What are your ESG budget plans for the next two years?

Sources: Google Trends, Kaiser Partner Privatbank

fewer critical environmental questions raised during conference calls, (2) higher costs for institutional investors to monitor a company’s ESG performance, (3) less investments by companies in cleaner environmental technologies, and (4) less concentration and managerial leadership on sustainability issues. Conversely, the study shows that companies have an incentive to operate more sustainably when they are being monitored more closely by analysts. In an era in which the focus on sustainability is intensfying (and budgets for sustainability research are growing), less sustainable companies are likely to increasingly get blacklisted by investors in the future and are bound to come under pressure on the stock market if they continue to rebuff and defy the sustainability megatrend. Viewed objectively, pressure from investors is working much better than headlines in the media subjectively would lead one to believe.

1 Chenxing Jing, Kevin Keasey, Ivan Lim, Bin Xu (2023): „Analyst Coverage and Corporate Environmental Policies“

If investors today are already intensely interested in sustainability issues and will become even more so in the future, that’s a good thing for our planet because they thus appear to be indirectly prodding businesses to reduce their greenhouse gas emissions.

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