ESG Equity Monthly Report | June

13 June 2022

 

Sustainable ETF Monthly Report: Key Takeaways 

The consistent downward market trend that defined April continued through the first three weeks of May before staging a reversal, leading to broadly flat performance across market indices for the month. We are unconvinced that the May reversal marks the bottom of the current cycle, given continuing high inflation, rising interest rates, and the possibility of an economic downturn before year end. [1]

While broad indices were generally flat for the month, that performance was supported by strength in the energy complex as oil prices jumped following European Union efforts to further restrict Russian imports.[2] Energy strength has led to underperformance for ESG funds over the course of the year.

In May the Saturna Sustainable ESG Equity HANzero UCITS ETF slipped -0.82%, solid performance given the absence of fossil fuel investments.[3] Selection was generally good, especially in the Information Technology sector, which represents the ETF’s largest exposure. Within Technology, Software was dominant, led by good performances from Adobe and Canadian IT services firm CGI.[4] Hardware & Equipment was also solid with positive returns from TE Connectivity and Murata Manufacturing. Apart from Technology, returns were driven by Consumer stocks, both discretionary and staples. Sony, Starbucks, and TJX all contributed, the latter bucking the trend of apparel retailers being punished with the release of first quarter results. Offsetting the gains, we experienced weak performance in Materials as Novozymes declined, and in Media due to Nintendo and Disney both losing ground. Despite Nintendo’s weak May, it remains up for the year-to-date. [5]

Please note that all performance figures are showing net data. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product.

 

Macro Outlook

Looking at the United States, the yield curve moved sharply higher over the first quarter, raising the discount rate at which investors estimate the net present value of the future cash flows generated by any given investment.[6] Our Sustainable ETF has considerable exposure to Technology; that’s relevant to recent performance of the ETF because many Technology companies are considered “long duration assets” since their valuations are supported by cash anticipated to be generated over an extended time horizon, captured by what analysts refer to as the “terminal valuation.” Raising the discount rate lowers the net present value of future cash flows and, thus, the value of the investment.

In Q1 the effect of rising interest rates was exacerbated by the higher valuations of Technology stocks relative to other sectors and concerns over what effect the tapering of the pandemic and return to work might have on demand for various products and services.[7] Conversely, those companies with lower valuations and/or resilient demand, performed better. That said, there was a significant reversal of this trend in the second half of March and we are now evaluating a rebalancing given the outlook for potentially higher energy prices and inflation, met by a more aggressive central bank response. [8]

 

Sustainable ETF Performance Table (As of 31.05.2022) 

 

1M

3M

6M

YTD

12M

SI

Saturna Sustainable ESG Equity HANzero™ UCITS ETF (Acc)

-0.80%

-6.75%

-13.63%

-17.47%

NA

-14.48%

Please note that all performance figures are showing net data. Source: Bloomberg / HANetf. Data as of 31/05/2022Performance before inception is based on back tested data. Back testing is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such strategy would have been. Back tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. Investors should read the prospectus of the Issuer (“Prospectus”) before investing and should refer to the section of the Prospectus entitled ‘Risk Factors’ for further details of risks associated with an investment in this product.

Learn more about our Sustainable ETF here.

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