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Five insights in five minutes

Five in Five: healthcare, China, ESG ETFs, Alternatives, Germany
26 November 2021

    Covid redux

    There are many reasons to invest in healthcare right now. For example, Europe’s worrisome 140 per cent jump in new covid-19 cases versus a month ago underlines the urgent need for sustainable healthcare solutions that won’t cripple state budgets over the long-run. Allocating capital to this crucial area looks attractive from an investment perspective at the moment, too. Take the US, still home to the most innovative and best resourced healthcare firms in the world. As can be seen in the chart below, sector earnings per share as a proportion of the equity market’s overall have been trending up for almost eight years. On the other hand, the relative size of healthcare by value has decreased by about a fifth – to 12 per cent of the S&P 500 index. Indeed, the gap between earnings share and market cap share is about three times wider than the average since the financial crisis. That’s above one standard deviation, based on Bloomberg data. Or simply put, investors currently receive relatively more healthcare profits for their money than they have done in a long time.

    Conversation starter for… healthcare funds, US equities, global equities

    Covid redux  

    China inclusion

    A mere two years ago, the China onshore bond market appeared in a major global bond index for the first time. This resulted in the renminbi becoming the fourth biggest currency weight in the Bloomberg Barclays Global Aggregate. This month, the world’s second largest bond market has entered the FTSE World Government Bond Index too. FTSE Russell has just started including 50 onshore Chinese government bonds into this flagship  index, phased in over a 36-month period. As illustrated below, the estimated weight of CGBs in the index will be 5.6 per cent by the end of the process. Based on similar index moves by Bloomberg Barclays and JP Morgan, the inclusion in WGBI is expected to drive another $110 billion of inflows. As the China bond market has already received $91 billion of foreign inflows over the first three quarters of the year, this latest inclusion is another good reason for investors to consider one of the few sovereign bond markets able to offer a positive real yield.

    Conversation starter for…China fixed income

    China inclusion  

    Sustainable ETFs

    An eye-sore of capital letters they may be, but ESG ETFs have displayed stunning growth in recent years and are forecast to reach $1.5 trillion in assets under management globally by 2025, according to SSGA. Equities were first to dazzle. It is fixed income, however, which is now expected to steal the show. Indeed, ESG fixed income indices grew by a record breaking 60 per cent last year. There is some debate in the ESG front row around equity versus fixed income ETFs when it comes to engagement, a crucial element of responsible investing. Some argue that equity ownership is the only path to corporate influence. This is not only false in theory (credit is akin to rolling primary finance as bonds have a finite life) but also practice. Last year, in fact, 85 per cent of reported PRI signatories engaged with financial and non-financial corporates on a portion of their fixed income holdings. Investors keen on sustainable ETFs should seek managers with large credit and engagement teams.

    Conversation starter for… fixed income ESG ETFs

    Sustainable ETFs  

    ESG and alternatives

    Traditional asset classes such as equities and bonds have been dancing to ESG tunes for years. More recently, alternatives joined the rave, with responsible investing already making a significant mark on the private capital industry. Indeed, there are more than $3 trillion of ESG-committed private capital assets globally, according to Preqin data. Europe is at the forefront, with accelerating growth. The region is estimated to reach about one trillion dollars of assets in the next four years, roughly one third of the global total based on current trends. That’s up from 15 per cent at the end of last year. As illustrated below, it also means that between now and 2025, around 40 per cent of new private investments would be directed to ESG-committed solutions. The party is just beginning.

    Conversation starter for… infrastructure, private markets, venture capital, real estate

    ESG and  alternatives  

    German leadership

    After two months of negotiations, German politicians have agreed a new coalition government under incoming chancellor, Olaf Scholz. Voters hope the new leader can boost the economy, much like his Frozen namesake did for Disney revenues. German equities may warm up before then. Political uncertainty has contributed to their recent underperformance – down five per cent against the Euro STOXX index over the past six months. But with the ECB happy to delay monetary tightening far longer than the Fed, this will support risk assets across the eurozone going forward. Furthermore, the rollout of up to €800 billion of funding from the European Recovery Fund leaves the eurozone primed for a catch up in growth. With Germany particularly exposed to the economic cycle – manufacturing makes up around a fifth of output and industrials and materials over a third of the DAX index – we could soon see the valuation discount, shown below, start to shrink.

    Conversation starter for… European equities, German equities, active multi-asset

    German leadership  


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