What we’ve been reading this week

Chris’s comments:  and we are expected to buy electric cars when 58% of EV  batteries supplied to the EV market come from China. Be prepared for an industry that is likely to experience what we are seeing with the MV electronic chip market.

Chip woes grow

Bloomberg

In the latest warning for the chipmaking industry, Taiwan Semiconductor Manufacturing Co. slashed its 2022 capital spending target by roughly 10% and Applied Materials Inc. cut its earnings forecast for the fourth quarter.

Meanwhile, Intel Corp. is said to be preparing to fire thousands. Semiconductor companies are grappling with the Biden administration ‘s sweeping restrictions on doing business with China. 

The actions, which have incensed Beijing, threaten to disrupt a global economy already dealing with a potential global recession, soaring inflation and lingering supply snarls.

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The perils of forecasting in investing

Dr Shane Oliver Head of Investment Strategy and Chief Economist, AMP

Three things for investors to consider Grand prognostications of doom can be particularly alluring, and wrong.

 

Calls that the world is about to bump into some physical limit, causing some sort of “great disruption” (famine, economic catastrophe!), have been made with amusing regularity over the last two hundred years: Thomas Malthus; Paul Ehrlich’s The Population Bomb of 1968; the Club of Rome report on The Limits to Growth in 1972; and the “peak oil” fanatics who have been telling us for decades that global oil production will soon peak and when it does the world will be plunged into chaos. Such Malthusian analyses underestimate resources, the role of price increases in driving change and human ingenuity in facilitating it. (Hopefully, worst case predictions of a “climate catastrophe” will prove wrong for similar reasons!)

 

And when you’re reading books like those from Harry S Dent about The Great Depression Ahead (2009), etc, all of which had disaster happening well before now, just recall there has been a long list of prognostications for a great depression, often linked to a debt-related implosion, the bulk of which turned out to be wrong. Amongst my favourites are Ravi Batra’s The Great Depression of 1990 – well, that didn’t happen so it was just delayed to The Crash of the Millennium that foresaw an inflationary depression, which didn’t happen either. Google “the coming depression” and you’ll find 370 million search results (up from 72.3 million five years ago)!

 

The psychology of forecasting Forecasts need to be treated with care for several reasons:

 

• Forecasters, like everyone suffer from psychological biases: the tendency to assume the current state of the world will continue; the tendency to look mostly for confirming evidence; the tendency to only slowly adjust forecasts to new information; and excessive confidence in their ability to forecast accurately. As Warren Buffett has said “forecasters usually tell us more of the forecaster than of the future”.
• Point forecasts – eg, that the ASX200 will be 7000 by December 31 – convey no information about risks. They are conditional upon information available when the forecast is made. As new information appears, the forecast should change. Setting an investment strategy for the year based on forecasts at the start of the year and not adjusting for new information is a great way to lose money. This is particularly a problem if you only access forecasts periodically.
• In investment management, what counts is the relative direction of one investment alternative versus others – precisely where they end up is of less consequence in the short term.
• The difficulty in forecasting financial variables is made harder by the need to work out what is already factored into markets. Sometimes the market sets sensible share prices based on economic developments. At other times it is unstable, swinging from euphoria to pessimism. Trying to distil that into a precise forecast is not easy.

 

In the quest to be right, the danger is that clinging to a forecast will end up losing money. As Ned Davis has pointed out, for investors the key is to make money, not to be right with some forecast.

 

So why are forecasts treated with such reverence?

First, many see the world through the rear-view mirror where everything seems clear and obvious and so assume that the future must be easy to forecast too for anyone who has expertise. Second, and more fundamentally, people hate uncertainty and will try to remove it. So, precise quantified forecasts seem to provide a degree of certainty in an otherwise uncertain world. And if we don’t have the expertise, the experts must know. And finally, prognostications of doom can be alluring as investors suffer from a behavioural trait known as “loss aversion” in that a loss in financial wealth is felt more keenly than the beneficial impact of the same sized gain. This leaves us more risk averse, and it also leaves us more predisposed to bad news stories as opposed to good. Flowing from this, prognosticators of gloom are more likely to be revered as “deep thinkers”.

 

What to do? Three things for investors to consider

If we simply relied on point forecasts for key investment market variables (like the share market, bond yields and the exchange rate) to set our investment strategy, I know it won’t be the best way to make money for our clients. By the same token, it’s not possible to avoid some sort of forecasting all together: investors who rely on charting are assuming that patterns in past asset price moves are a guide to the future; value investors are relying on implicit assumptions that things will mean revert over some time frame; and long-term investors in growth assets are assuming that economic progress will favour growth assets over the long term as they have historically. All of which, despite claims to the contrary, are some form of forecasting. So, what should one do? In my opinion, there are three things to consider in the light of issues raised in this note.

 

First, minimise the reliance on expert forecasts– particularly point forecasts and grand prognostications – when undertaking investment decisions. While point forecasts can help communicate a view, the real value in investment experts – the good ones at least – is to provide a better understanding of the issues around investing, a better understanding of what’s going on now and to put things in context so as to help avoid silly investment mistakes. While financial history does not repeat, it does rhyme and so in many cases we have seen a variant of what may be currently concerning the market before. This is particularly important in being able to turn down the noise and focus on a long-term investment strategy to meet your investment goals.

 

Second, invest for the long term. In the 1970s, Charles Ellis, a US investment professional, observed that for most of us investing is a loser’s game. A loser’s game is where bad play by the loser determines the victor. Amateur tennis is an example where the trick is to avoid stupid mistakes and win by not losing. The best way for most investors to avoid losing at investments is to invest for the long term. Get a long-term plan that suits your level of wealth, age, tolerance of volatility, etc, & stick to it.

 

Finally, if you are going to actively manage your investments, make sure you have a disciplined process. Ideally, this should rely on a wide range of indicators, such as: valuation measures (ie, whether markets are expensive or cheap); indicators that relate to where we are in the economic and profit cycle; measures of liquidity (or some guide to the flow of funds available to invest); measures of market sentiment (the crowd is often wrong); and technical readings based on historic price patterns. The key to having a disciplined process is to stick to it and let the “weight of indicators” filter the information that swirls around investment markets, so you are not distracted by the day-to-day soap opera engulfing them. Forecasting should not be central to your process. My preference is to focus on key themes as opposed to precise point forecasts.

 

Conclusion

It is tempting to believe that you or someone else can perfectly forecast the market. Getting markets right is hard enough and even then, there are plenty of investors who have been “right” on some market call but lost a bundle by executing too early or hanging on to it for too long. The key is to know where expert views can be of use, be humble and stick to a long[1]term investment strategy designed to attain your goals and, if you are going to actively manage your investments, have a disciplined process.

 

 

What is Environmental, Social, and Corporate Governance (ESG)?

By: OnBoard Meetings – Thank you Australian Institute of Governance

Boards across every industry face mounting pressure to be proactive on environmental, social, and governance (ESG) issues. Here’s how to do it.

According to Deloitte, boardrooms will take an increasing role in overseeing an organization’s environmental, social, and corporate governance (ESG) activities. It means board members will need to assume an active role to ensure that ESG initiatives align with business strategies. They will be responsible for evaluating the risk associated with ESG proposals and assessing an organization’s maturity as it relates to ESG concerns.

As standards converge and reporting requirements become mandatory, boards have an added responsibility to understand ESG frameworks. They need to ensure ESG and financial disclosures align and also consider third-party auditing of ESG initiatives. As more investors look at ESG criteria when making decisions, boards must assess their organizations’ strategies.

What is ESG?

Environmental, social, and corporate governance are the three pillars of ESG activities that the public evaluates when deciding to do business or invest in an organization. Although ESG concerns existed in the 1960s with boycotts of companies participating in the Vietnam War or negatively impacting the environment, only recently has ESG become mainstream.

When consumers and investors evaluate ESG criteria, they look at the following:

• Environmental: What is a company doing to improve and protect the environment? What conservation measures are they taking to reduce energy consumption and pollution?
• Social: Companies have an obligation to be responsible for their impact on the social fabric. How do they treat employees? Are they using child labor? What are organizations doing to support local communities?
• Governance: Are businesses behaving ethically? How do their actions compare with their policies? Organizations need to show diversity and a structure that supports environmental and social initiatives.

Forbes reported that 64% of consumers support socially responsible companies and 36% indicated they would increase spending with these businesses in 2022. Over 80% said they would base their ongoing support of a brand on how the organization treated its employees during the pandemic. Additionally, 76% are concerned about the impact corporations have on both society and the environment. 

What is ESG Investing?

ESG investors look at more than financial data when deciding to invest in a company. They look at non-financial factors such as material risk, sustainability, and social responsibility. Investors consider additional factors beyond stock prices and dividends. Boards should ensure the ESG factors are part of their agenda.

Currently, the evaluation process is hampered by the lack of a single standard. Institutions such as the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI) are just two of the many organizations offering an ESG rating framework. According to Deloitte, a new International Sustainability Standards Board is being formed under the auspices of the United Nations to provide clarity for investors.

ESG Investment Criteria

Different companies use different standards to report their ESG initiatives. Many use third-party firms that provide an ESG auditing function to produce an ESG score or rating. The criteria vary based on the standards used and the firm doing the rating. However, most standards look at the following:

• Environmental Criteria: Investors look at a company’s impact on climate change, deforestation, carbon emissions, waste management, water conservation, and pollution.
• Social Criteria: Individuals are interested in how organizations perform in areas such as employee engagement, human rights, community relations, labor standards, diversity, and consumer protection.
• Governance Criteria: Consumers and investors evaluate how a business operates by assessing its anti-corruption policies, board composition, executive compensation, auditing, political contributions, and lobbying efforts.

How the criteria are applied depends on the standard and the evaluators, making it difficult for investors to determine exactly what an ESG score really means.

What are ESG Funds?

ESG funds can include mutual funds, index funds, and exchange-traded funds that show a positive impact on the environment and society through well-governed policies and procedures. Boards need to ensure their members keep ESG factors on the agenda.

Investing in ESG funds is a strategy that rewards companies that meet stringent ESG standards. In many cases, younger investors are leading the trend. If boards want to ensure a strong investment future, they need to make ESG scores a priority.

What is an ESG Score?

An ESG score rates a company’s ability to balance its sustainability risk against its financial performance. The third-party firms that perform the assessment use proprietary formulas to assign an ESG score. One company may use rankings such as AAA and BBB while another may produce a numeric value such as 15 or 13.2. Without knowing the ESG criteria used, it’s difficult for investors to know which ESG funds to support.

Industry-specific ESG factors provide an equitable set of criteria for evaluating organizations. Comparing a tech company’s ESG rating to a steel producer does not reward the manufacturer who may be leading their industry in ESG initiatives. Boards should ensure they use the appropriate evaluation criteria for ESG investments.

How Boards Measure ESG

The Sustainability Accounting Standards Board (SASB) uses an industry-specific framework to outline what information organizations should collect to produce the most accurate assessment of their ESG efforts. Boards should prepare for ongoing discussions with investors and regulators to understand what ESG concerns to address. The ESG ecosystem is extensive and companies must prioritize the factors that have the largest impact on their financial and sustainability future. 

Boards have a responsibility to understand ESG standards and guide their organizations to adopt an inclusive framework. Strong ESG outcomes depend on a cross-functional group that includes risk management, human resources, communications, and investor relations. Through effective communication, boards can break down any silos that could impede their ESG initiatives. 

• India’s GDP Grew by 4.1% in the first 3 months of 2022

📈 India’s #GDP grew by 4.1 percent in the first three months of 2022, slightly truncating annual growth in 2021-22 to 8.7 percent due to Omicron restrictions putting a damper on economic activity in this last quarter of the Indian fiscal year. In Q1 of the new fiscal year (April to June), growth was back to 13.5 percent.

📈 Looking at the big picture, Indian GDP growth is also still doing quite well on a global scale and the country is expected to surpass Japan as Asia’s second-largest economy by 2030.

📈 The IMF has forecast a GDP growth of 6.8 percent for #India in 2022. As many countries have been downgraded in this week’s release by the organization, so was India.

 

📈 In April, the IMF had still projected a growth of 8.2 percent for the country. However, this still places India in the top 10 of the fastest growing economies in the world (out of those with GDPs of $20 billion or more), albeit in rank 9, down from rank 4 in April. Counting all countries, even small island nations, India comes 20th.

📈 #Guyana was named as the fastest-growing economy in both forecasts by the IMF. The sparsely populated country is growing thanks to new oil exploitation projects. #Ireland’s growth was also revised upwards drastically, but the small nation’s GDP is notoriously volatile due to the many multinationals headquartered there which are taking advantage of favorable tax codes within the #EU.

Chart by – Katharina Buchholz