Is QE ESG-compliant?

Environmental, Social, and Governance factors are driving investors’ appetite. The rationale behind ESG investing is that in the long run, the market will put a premium on those companies that minimize their negative externalities and maximise their positive impact on society.  Since the 2008 credit crunch, quantitative easing propelled the growth of equity markets. But, is quantitative easing a friend or foe for ESG investing?

A relaxed monetary policy should at least in theory increase investors’ propensity towards assets that generate non-financial value. A massive money influx from central banks should provide enough liquidity to bolster prices of those listed firms that deliver sustainably, social equity, inclusion or low carbon growth.

But practice shows that things are different. QE is not an enabler for ESG investment for several reasons:

1. Unequal access to liquidity. The beneficiaries of the excess influx of liquidity are the regulated financial institutions, which redistribute the cash to hedge funds or other investment vehicles. The biased distribution of cash is suboptimal for channelling investments towards new targets that do not fit institutions' current narrative.
2. Short term risk horizon. The resultant investment strategies are by nature with a short term horizon. Such policies are subject to change and liquidity from central banks can dry in a matter of days or weeks.  Thus, investors need to focus on short term rallies, thereby avoiding longer-term positions. Needless to say that ESG investing is by nature long term oriented and the QE liquidity will not pour easily into such assets.
3. Status quo bias. When excess - cash is available investors tend to reinforce their positions in their current strategies rather than exploring alternative options. It is a form of confirming that what they are doing is the right thing.

I never liked quantitative easing. It's misunderstood by almost everybody. Flattening the yield curve is not stimulative; flattening the yield curve is anti-stimulative. Kenneth Fisher, American billionaire and investment analyst

Market overview

Latest figures from November show that the consumer price index in the United States rose to 6.8%,  in line with the market expectations. Investors’ optimism returned after several weeks of significant contractions fueled by fears of the new aggressive Omicron mutant.

In addition, US weekly jobless claims dropped to 184,000, the lowest level recorded since 1969. The jobless rate dropped to 4.2% the lowest level since pre-covid times. The unemployment figures should be taken with a grain of salt, as US employers exhibit 11 million unfulfilled jobs.

Focus:

Oracle

Oracle Corp, one of the old leaders in the cloud and enterprise solutions market, delivered above the market revenues for the second quarter. Oracle’s shares rose above 100 USD amid stronger demand for cloud services. More companies are moving towards a hybrid or full remote work model, thereby requiring supplemental cloud capacity. While the competition amongst cloud providers is bigger than ever, institutional clients seem to prefer robust and scalable solutions, such as those proposed by Oracle.

Commodities:

Oil gets better

Oil prices had their best week since the end of the summer. While the Omicron variant of SARS-COV2 shakes down investors’ confidence, initial intelligence about mild symptoms related to the mutant virus brought ease and optimism in the market. Two years of pandemic and a complex geopolitical configuration with tense relationships between the West, Iran and Russia put oil prices in a very volatile position.

Commodities:

Coffee

Coffee prices reached a 10-years high amid a strong rally initiated in November. A number of factors are behind this sharp increase. First, remote work led to an increase in the consumption of coffee stemming from retail consumers. Thus, the global coffee market entered a structural deficit, where production does not meet demand. Moreover, the dislocation in the shipping market and below expectations crops due to unfavourable weather bolstered the coffee prices.

Focus:

Tecnoglass

Despite being praised by inventors, SPACs mean trouble.  A negative report issued by the reputed shorter Hindenburg Research smashed Tecnoglass’s price on NASDAQ. Shares of Colombia-based glassmaker plummeted by over 35% after accusations of hidden ties with the Cali drug cartel. Tecnoglass was listed back in 2013 through a SPAC merger with Andina Acquisition Corporation, a firm headquartered in New York. The report unveils that back in the 1990s, US criminal prosecutors were actively investigating the activities of the Daes brothers, who serve currently as executives in Tecnoglass. Investigators suspected the Daes of fronting the Cali cartel’s illicit activities in the US. They were allegedly playing a crucial part in laundering the illegal proceeds stemming from the sale of smuggled cocaine from Colombia in North America. Moreover, Jose Daes, Tecnoglass CEO, was imprisoned in Colombia following corruption and binary charges brought by domestic prosecutors. This case underlines, once again, SPAC’s lack of transparency.

Market outlook

The Dow Jones Index regained the lost territory ending the week just below 36,000. The new Omicron variant and the anticipated tapering of bond repurchase can trigger at any moment the beginning of a structural market decline.

Bitcoin ended the week above USD 48,000, after a strong rally. While the market swings will continue,  technical selloff could bring the leading cryptocurrency below USD 47,000.

Oil prices boomed in the initial phase of the energy crisis. Brent surged over that past week after a certain ease related to Omicron's impact.

The Gold ounce ended the week on a positive note closing near USD 1,785. The foreseeable market contraction and the inflationary context are good arguments for believing that gold prices could soar in the near future.