Mildly positive outlook 2023

Inflation, interest rate hikes, recession. Last year financial markets recorded one of the worst year of modern financial markets. Tightening monetary policies of the major central banks to face surging inflation led to significant market drawdowns both among equity - with growth stocks leading the worst performers, as both hit by interest rate hikes and economic growth concerns - and bond markets, with 10Y gives back to interesting positive yields after a prolonged period of low to negative yields and monetary stimulus which had been sustaining the economy for more than 10 years. 
In this uncertain market framework, last macroeconomic data releases seems providing encouraging signals that central banks are succeeding in slowly easing inflationary pressure, despite still not leading to severe negative impacts on economy leading indicators and labor market (mainly in the US). There is an increasing consensus among analysts and strategists of a favorable perspective for a rebound in 2023 of equity markets – mostly for Emerging Markets and China among all – and with interesting yield opportunities among IG bond segment, especially in Europe. 
Furthermore, after COVID-19 crisis and 2021 market retracement, there has been a considerable demand increase among institutional investors of sustainable investing strategies, but not only with clean energy and green infrastructure strategies, but also with “classic” sectors with higher ESG standpoint. Especially in Europe, thanks to the supporting regulatory framework for sustainable investments, major companies started not only to disclose on their sustainable metrics, but also to concretely embed them among their business strategies. 

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Supporting regulatory framework for sustainable investmentsThe Sustainable Finance Disclosure Regulation (“SFDR”) established increasingly obligations for European financial market participants with regard to ESG (environmental, social and governance) pillars. The regulation started providing more concrete transparency in terms of environmental and social responsibility within the financial markets, notably through the provision of comparable information on sustainability of financial products. 
After some delays in its implementation to grant market players to align themselves to the new EU taxonomy within a difficult market environment following COVID-19 crisis, inflation spike and economic growth concerns, SFDR Level 2 finally came into effect on the 1 January 2023. This led to a substantial challenge for fund industry, as it starts to be obliged to comply with “Regulatory Technical Standards” (RTS), to disclose taxonomy-related information needed and to provide periodic reporting disclosure templates for SFDR Article 8 and 9 products. 
As a result, in the last quarter several fund houses decided to downgrade some of the sub-funds which previously were classified as SFDR Article 9 into SFDR Article 8 products, increasing the uncertainty among investors which are willing to select sustainable investments.

FARAD I.M.’s sustainable investment solution

In this context, FARAD I.M. developed a unique sustainable investment product, called “AMC Energy Transition & Human Capital” (“AMC ET & HC “, ISIN CH1185519621), which invests among companies with a significant alignment of their revenues towards the SDGs (“UN Sustainable Development Goals”) involved between two specific sustainable clusters, “Energy Transition” (SDGs involved in environmental objectives, as SDG 7 “Affordable and Clean Energy”, SDG 13 “Climate Action” or SDG 12 “Responsible Consumption and Production”), and “Human Capital” (as for example SDG 3 “Good Health and Well-Being” or SDG 6 “Clean Water and Sanitation”). 
Compared to other sustainable strategies, we start our investment analysis directly with the SDG screenings of the revenues of the companies, targeting ones with more than 50% alignments towards the sustainable clusters identified above, and excluding completely ones with less than 25% alignments. 
As a second layer of screening, we combine a sustainable investment philosophy based on purely quantitative ESG features with also “standard” financial metrics analysis, and we implement it through a diversified portfolio among different sectors involved into the two sustainable clusters. 
In terms of sustainable metrics analyzed in our strategy, ESG KPIs are compared with companies within the same sectors, in order to assess their absolute and relative impacts and whether they are delivering positive or negative extra-financial outputs. We embrace carbon emission analysis within your investment process, and it led to selecting portfolio constituents with almost 1/3 of the GHG total emissions of sustainable European indexes. More in details, comparing the carbon footprint sector breakdown, our AMC ET & HC selects companies which produce far less carbon emissions also among “polluting sectors” (1/4 among materials sector and ½ among utilities and industrials), instead of merely excluding them by the investable universe.
Concretely speaking, the quantitative investment process ensures a dynamic selection approach, and not “dogmatic” as some other strategies, granting an adaptation of the portfolio construction in case of adverse market momentum among growth stocks, and implementing a lower concentration to pure players on green transition, while adopting the healthcare and anti-cyclical sectors as size/style diversifications. 
The quantitative investment process and the dynamic portfolio construction between the two sustainable clusters ensures the strategy could be well positioned for this challenging 2023 year, also in the perspective of a recession framework. On the other hand, the bias towards green transition stocks with strong financial fundamentals and ESG metrics ensure a significant uptrend potential compared to current valuations. 
 

If you want to learn more about our sustainable investing products and services offering, please contact CRM@greenethica.eu