The crash in equity prices Monday 9th March was largely driven by a sharp sell off in the price of oil and on-going concerns about a coronavirus induced recession.
The oil price crash was the result of Russia pulling out of commitments to OPEC production cuts and the wider repercussions for global oil supply. In response, Saudi Arabia took retaliatory measures to drop prices, whilst increasing production.
Such significant changes in oil market dynamics caused the the biggest drop in the oil price in history. While the decisions by Russia and Saudi Arabia were mostly aimed at each other, the country that will likely suffer the most is the United States, and it’s shale gas industry.
US oil companies were rocked by the drop in the oil price as many shale operations are unable to produce oil profitably at such low levels.
Investors pulled their money from the world’s largest oil companies and the future isn’t promising for oil majors, with oil at such low prices.
Fossil Fuel Exodus
There has been mounting pressure for asset managers to pull their money from fossil fuel companies, and for many, this may be the last straw.
This capital has to be deployed somewhere and with fund managers making a concerted effort to increase their exposure to sustainable and ethical investments, it is inevitable some of this capital is deployed to investments providing a positive impact.
Notwithstanding reallocation due to prospects of lower profitability in fossil fuel companies, such periods of volatility naturally drive investors to defensive equities and safe haven assets.
The healthcare sector historically receives inflows during periods of volatility due to its defensive attributes. Companies in the sector also provide a measurable positive impact contributing to the UN’s SDGs, and healthcare companies typically are included in impact investing portfolios.
Impact Investment Repositioning
Tactical amendments to equity portfolios will mean investors increase their exposure to impact investments in healthcare while some may consider the environmental options through green bonds.
As stocks fell during the sell off, treasury yields sank to record lows. Income investors will seek alternatives to government and green bonds present themselves as a destination for capital with greater yields than that of benchmark gilts and treasuries.
Of course the higher yields reflects the greater risk of green bonds, but importantly green bonds are targeted at projects providing a positive environmental impact that could produce above average returns in the future making them an ever attractive options for investors. The green bond markets has steadily grown over the part decade but have seen inflows increase in recent years.
The discussion around creating financial value from environmental and impact investments will be a core topic and the Impact Investing & Circular Economy Conference 2020.