Global market trends and developments at the beginning of a new decade
As we start a new year and a new decade there is a lot to look forward to. What will be the main trends to watch in 2020 and the following years? Markets are changing rapidly demanding new ways to handle IR communication and of higher quality and research and here are some views to consider.
According to Kepler Cheuvreux, the next decade will be for ESG, and Europe is the leader! 2019 was exceptionally important as it has been very rewarding to investors, but the reasons have been paradoxical as bad news have been helpful to move the change. Asset price inflation due to the monetary policies driven by the US and other important central banks has resulted in stock markets increasing by 30%. The smoke screen is the story of rather disturbing events behind this development. ESG has taken off since the beginning of this decade due to the policies engaged in response to the financial crisis. A normalization of this intervention has been the result due to low inflation, negative interest rates, i.e. failure of creating sustainable growth and prosperity. Some important factors are the following:
Globalisation especially the rise of China, the US confrontation and trade wars
The economic opening of the communist world which were thought to result in liberal ideologies worldwide is not going to happen! China has no intention of becoming like the Western world i.e. our values and ideology will not prosper. Europe prefer not to talk about it, instead we will follow the US or Chinese way.
Central banks and monetary policies
We have reached a point where the overall intention of the central bank policies is coming to an end as they have not succeeded during the years they have been applied. The liberal way of thinking of the past 30-40 years is in trouble. Central banks are frightened of a recession which will lead to social discontent and political fragmentation and the threat of a collapse of the political landscape no longer divided into left and right. The fundamental problem of legitimacy is also encapsulating businesses. ESG offers greater legitimacy for capital markets. Originally, we thought that governance would have more importance than the E and the S – but now the E-part is most emphasized with its focus on the ongoing climate change; and this is a new political wave.
None-elected powers of central banks is undemocratic and hugely disliked by people
Political legitimacy is now sought through the climate change debate. But we need to invent a new terminology for a new kind of capitalization due to the institutionalization of the macroeconomy. The government bond market is dead without positive returns which is an unprecedented change. ESG is about making business more acceptable and legitimate by the political world. Consequently, regulatory tools will be imposed on corporate equity who must conform to the political codes and behavior.
What are the implications for Investor Relations and where to keep focus in 2020
ESG increasingly drives valuation and must be considered in your strategy and risk assessment just as the number of ESG funds is growing rapidly with 2/3 of young investors believing that ESG must guide their investments. Does this equal an investor revolution? Regardless of your viewpoint, most experts agree that the new focus is the wider understanding of governance and company purpose, and that the financial markets are changing. If companies don’t have ESG targets and strategies going forward, their stock will be discounted by institutional investors. ESG results and impact must be included in the business models. Investor Relations should be ready to transform as regulation and competition will drive the sustainability agenda at a very fast pace. The culture of the investor dialogue needs to evolve to create value for investors, companies, the environment and society.
With the right focus IR can act as a catalyst for this transformation with special attention to climate politics, increased digitization. Western societies are undergoing general structural change which will also affect corporate conditions and result in new challenges for IR-Managers within the framework of politics, finance and regulation. That is the consensus of IR societies in Germany, the US and the UK.
What is happening right now – A year for optimism among growing concerns
Just as fears about a wider US-Iran conflict calmed down, market sentiment got ruffled by the so-called coronavirus outbreak in China raising fears in the market about the global economic repercussions of the virus through supply-chain disruptions and tourism declines.
Britain managed to leave the EU on the 31 January, after the Withdrawal Agreement was ratified by both the British and the EU parliament. Focus now turns to negotiation of a trade agreement with the EU but time is sparse with the transition period ending by the end of the year.
Another evergreen, of sorts, is the annual letter from BlackRock CEO Larry Fink. Mr. Fink’s letter has now become like an investment-industry mid-winter solstice, a way-marker for the coming year. Like the weather, everyone had an opinion and everyone’s opinion couldn’t change the cold truth: climate change and ESG are going to remain evergreen issues for many years to come. This is especially true, says Mr. Fink, “as trillions of dollars shift to millennials … as they become CEOs and CIOs … policymakers and heads of state, they will reshape the world’s approach to sustainability.”
As we look ahead to a new year and a new decade, it’s far from clear that our world can be described right now as either cohesive or sustainable. Against the backdrop of Brexit, a divisive U.S. presidential election, growing geopolitical tensions in the Middle East and across the world, the global risk map seems to be blinking red. And yet, the economy in the U.S. and throughout much of the world remains strong, markets are setting new records, and the pace of tech-driven innovation continues at an exciting pace. As we navigate the complexity in front us, we see the following trends that will help shape the future of the capital markets:
- Tech adoption vs. tech disruption
- Market inclusion vs. market regulation
- The Corporate Culture Revolution
- ESG reaches a tipping point
There is a clear consensus when going through all of the news from the various financial stakeholders that the above are the most predominant topics influencing Investor Relations going forward. That makes it extremely exciting times for the IR profession. And with the changing dynamics in the capital markets, regulatory change and the increasing demands from responsible investors, now has never been more important for the role of IR to shine and to continue to push the boundaries in best practice. As always, we at DIRF strive to help you keep up-to-date through our committee work, activities and regular communications so stay tuned.
- Kepler Cheuvreux IR Summit, Nov. 2019
- NIRI, IR Update, Dec./Jan. 2019-2020
- IR Society, Informed, Winter 2019-20
- DIRK-Newsletter: Das Investor Relations-Update