Markets Weekly

22 May 2020

4 minute read

Week ahead

The effects of the pandemic continue to the only game in town for investors as markets approach the end of May. Gross domestic product (GDP) data for the first three months of the year (Q1) will dominate the economic headlines, with Germany kicking off the week. On the back of a first estimate of -2.2% quarter-on-quarter growth, consensus is for an unchanged outcome with the country’s export-oriented economy continuing to struggle.

Recent survey data, such as the economic sentiment index from Germany’s ZEW research institute, has improved, with the latest reading being 51.0 (where readings over 50 hint at growth rather than contraction). Markets will also focus on the May Ifo Institute for Economic Research institute business climate survey on the same day. With Germany slowly reopening its economy, the surveys will help to assess the impact on confidence as quarantine measures are eased.

The US reports its second estimate of GDP growth for Q1 on Thursday. The first estimate showed the economy contracting by 4.8%. Leading the fall was the grinding to a halt of consumption halting activity, as a result of lockdown measures, and US workers being laid off at record speed. Thus, US jobless claims data will also grab the attention of investors. On Friday, April’s core personal consumption expenditure figures are also likely to show weaker consumption from March’s -7.5% fall.

Finally, with continuing suppressed activity, the eurozone May inflation flash reading, published on Friday, will likely slip from 0.4 %, with consensus suggesting 0.1%. While we see weaker price growth, or even deflation, in the short to medium term, global monetary policy measures have been substantial and will likely lead to inflationary pressures as we emerge from the pandemic.

Chart of the week

Investors should heed social signals taking centre stage

The COVID-19 pandemic has thrust how companies manage their business’ social and human capital to the forefront of the potential consequences of the outbreak. For investors, careful attention should be given to how companies treat their employees and supply chain, to identify risks and opportunities for their portfolios.

A growing body of academic research and investor experience is demonstrating that how companies operate, in terms of the environmental, social and governance (ESG) practices, has a material effect on their quality and valuation. Before the pandemic, attention had been focused primarily on the environmental factors, notably carbon intensity and risk. Factors that will continue to matter considerably, as flagged in May’s Market Perspectives.

Meanwhile, the way companies manage their social and human capital company operations is attracting more coverage and scrutiny. Primarily, these cover issues such as customer welfare, data privacy, labour practices and employee health and safety.

Compared to the end of January, a broader range of social impact factors dominate the news and company mentions (see chart). Notably, employee health and safety and labour practices now drive 55% of the coverage, soaring from only 4% a few months ago. 

Chart of the week

Companies increasingly will be assessed on the social impact of their coronavirus response by customers, employees, and governments. In coming months, safety and wellbeing measures for employees or medical support and sick leave benefits are likely to be more visible.

Those companies perceived to be laggards risk short-term damage to brand and longer term reputational and financial hits. Those seen as leading should be expected to prosper, perhaps increasing market share or improved employee engagement. For investors, identifying the difference, before it emerges, will matter. Those that actively incorporate consideration of social factors in investment decisions are likely to mitigate risks and create long-term value for portfolios.


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Previous editions of Markets Weekly

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