Perhaps the assumption that markets are still anchored by predictable economic policies needs to be challenged. For the first time since the fall of the Berlin Wall, political volatility – once background noise – is potentially reshaping investment risk at a structural level.
While the repercussions from ‘Liberation Day’ are still playing out, there can be little doubt it’s a more complex investment environment in which macro conditions, policy actions and asset-level fundamentals will interact in increasingly idiosyncratic ways.
Market shake-out creates ‘historic’ opportunities for investors
Investors need to “learn from history” to identify opportunities in volatile global stock markets and the risks of retreating from environmental, social and governance (ESG) standards, according to investment specialists.
Their warnings come amid growing fears about stock market turbulence and major regulatory changes that threaten to dilute stakeholder safeguards intended to protect their strategies, they claim.
Hubert Aarts (pictured), executive director at Impax Asset Management, which has about $AU59 billion under management, says the “exceptional” concentration of stock market performance in artificial intelligence-related stocks has overlooked many companies with compelling valuations.
“But the lesson of history is that investors make mistakes,” says London-based Aarts, who is also a portfolio manager and deputy chief investment officer specialising in sustainable investments.
Dugald Higgins, head of responsible investment and real assets at Zenith Investment Partners, says the winding-back of ESG standards could diminish business and investor appeal.
“Ignoring these factors doesn’t make them go away,” says Higgins, whose company provides investment research and manages about $AU4 billion. “Whether or not the information is there (for investors) doesn’t remove the risks,” he says.
Major Australian blue-chip companies hit by governance problems include mining giant Rio Tinto, whose share price was battered and senior management replaced after an institutional shareholder revolt following the destruction of two rock shelters in Western Australia.
“Transparency remains crucial,” Higgins says. “The reality is that ESG considerations are now deeply embedded in the investment process. Companies that integrate decision making around ESG and sustainability into their core strategy, rather than treat it as a PR exercise, will future proof their business and investor appeal.”
Global blue-chip companies including Microsoft, Unilever, BP and Walmart have recently diluted their ESG commitments in response to political and regulatory pressure.
For example, the Securities and Exchange Commission in the US has dropped its defence of mandatory climate disclosure rules, while the European Union has reduced the scope of ESG requirements.
In Australia, the future of the Australian Securities and Investments Commission (ASIC) proposed guidance on sustainability disclosures will depend on which party wins the current federal election.
“Businesses are facing a regulatory roller-coaster,” says Higgins. “This inconsistency is making companies wary of over-committing to sustainability targets that may be difficult to maintain under changing political and economic conditions,” he says. But he adds that ESG reporting “will not disappear entirely”.
“Companies are likely to adopt a more strategic and selective approach, focusing on materiality rather than broad, sweeping commitments,” he says.
Impax’s Aarts says the history of investing over the past 25 years will reveal that the exceptional concentration of stocks during 2023 and 2024 will transition to a broadening of the stock market to companies “with compelling valuations that are exposed to strong secular themes”.
Fewer than 30 per cent of global stocks outperformed the MSCI measure of global markets in 2024, an increase from 2023, but well-below the long-term trend, according to its analysis.
But the Mag 7 stocks that drove the exceptional growth – Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms and Tesla – have been posting negative stock market returns this year.
Aarts says the historical parallel is the dot.com stock boom that drove a five-fold increase in the technology stock dominated Nasdaq to more than 5,000 in March 2020 before it collapsed to about 1,100 over the next two years.
He says many investors failed to realise the bigger trend from the emergence of the digital stocks was that the underlying technology had become embedded in the broader economy, creating a new generation of investment opportunities.
“In the late 1990s many believed that only telecom stocks were benefiting from the dot.com boom. Now many they believe only the Mag 7 are benefiting from the AI boom,” says Aarts.
He says there are overlooked companies emerging from the rapidly growing integration of AI into all aspects of the economy ranging from chip-making equipment manufacturing through to digital grid infrastructure.
“Earnings growth this year will be more aligned with the broader market,” he adds. “Investors can relax more. But they need to learn from history.”
