Laurence Porteu de la Morandière, PHD Finance, Finance Faculty at ESC Pau Business School, Pau, France
Odile Carru, Certified Executive Coach at Differentcoaching, member of ICF
Is “New normal” priced by financial markets ?
The Covid-19 pandemia had an unparalleled impact on financial markets all over the world. All major organizations (IMF, OECD, Banque de France, BCE) agree on an economic shock that will be equivalent to the 1929 world economic crisis (IMF, June 2020).
Looking at European markets, the MSCI Europe index has shown a 35,8% underperformance between its highest level on January 17h, few days prior to the beginning of the lockdown in China, and its lowest level on March 23rd, just after the lockdown announcements in major European countries.
Since then, markets have shown a steady recovery (+32% for the MSCI Europe) and seem to stabilize from the middle of June. All in all, the Covid10 pandemia 6-months-period will lead European markets with an average15% decrease from the highest.
ESG and Responsible Investment, the “winners”…
If the large majority of stocks have recovered, this market crisis has confirmed global trends in the asset management industry strategies. Recent portfolio management strategies have been characterized by the increasing focus of investors on ESG investment (Eurosif, 2018), i.e. “Responsible Invesment” strategies. In Europe, about half of the total assets under management apply responsible investment strategies, within which about 50% is invested into listed equity (GSIA 2018).
Literature has identified significant positive relation between ESG behavior and corporate financial performance (Busch & al., 2019), the latter influencing stock returns (Nichols & al. 2004). MSCI provides ESG indices that select stock to be included based on their “ability to manage their ESG risks and opportunities”, measured by ESG research and ESG ratings. Looking specifically at MSCI European ESG indices, year-to-date performance, we observe that MSCI ESG Leader index, that includes companies with the highest rating in their sector, stands somewhat above global European market and general ESG European index. This overperformance of ESG stocks was not showed during the 2007-2014 period (see graph 2).
Graph 1 : MSCI indices price change – base 100 on December 2019
Graph 2 : MSCI indices – base 100 september 2007
Decorrelation between financial markets and real economy ?
European markets recovery can be explained by the investor’s positive reaction to European Governments measures to manage the sanitary crisis and to help the real economy absorbing the shock of the lock-down. (increase of debt, money put on the desk to help economy, etc.). GDP growth represents one of the financial markets drivers, among others, as it supports companies’ earnings changes and therefore stock’s values. According to the latest forecasts by the International Monetary Fund (IMF), the vast majority of world regions will be hit hard, and the euro area is no exception. The fall in eurozone GDP in 2020 will be historic (-7.5%), even sharper than in 2009 (-4.5%).
Expectations on the GDP impact of the Coronavirus show a regular downward-revision trend from the beginning of the lockdown period, although after a recovery period (see-infra), markets stabilized. We observe, therefore, a decorrelation between markets behavior and real economy forecasts.
Within the “new normal”, what about the “S” pillar
The hypothesis of “new normal” pricing emerges - could it be based on the ESG investment strategies new
paradigm ? The impact of the current “ESG awareness” on both investors and companies’ side cannot be put away.
As an example, the Coronavirus pandemic will have a huge impact on the European labor market: the International Labour Organization foresees the loss of 12 million full-time jobs in Europe in 2020. The issue for European companies will be to manage people who will leave as well as people who will stay. The “S” pillar of ESG gives insights about how the companies should manage people in a sustainable manner. In particular, social climate and talent management are two key indicators.
A whole new crisis paradigm for companies that opens the door of a new management type
Crisis comes with change, feeling of losing power and uncertainty. Those forecast have a huge impact on business. Under these conditions, the ability of companies to adapt to new working conditions plays a decisive role. High potential retention is crucial when things go wrong. Two factors appear to us to be key: the ability to manage the new remote and mixed distance / presence working methods, and the ability to keep the teams mobilized and retain talent with suitable management methods.
- Ability to manage the new remote and mixed distance / presence working methods
The particularity of the Covid 19 crisis is to generate a form of “unwanted” remote work with the lock down, and “unwanted” returning to work in presence with the end of the lock down. Psychology shows that when we are forced to change, we resist, and resistance generates stress. On top of that, we know that “bad” stress comes with unpredictability, human nature actually does not like surprise.
In order to keep people engaged and feel safe, they need to be reassured, feel empowered and more in control. Business leaders should show flexibility and use their emotional intelligence in order to be more in solution mode and show their willingness to accommodate as much as they can to individual situations. Deprived from nonverbal communication, remote work also suggests the use of more emotional Intelligence in order to hear beyond the words and get the weak signals. Big change for many managers more attuned with a culture of results.
- Ability to keep the teams mobilized using new management approaches
When financial incentive are no longer available to keep engagement, other avenues must be explored. Fostering engagement through a shared vision, a better team work and a more participative type of management are not new.
Top management should now go further. It is time to value individualized contributions, use increase positive feedback, and display exemplary type of leadership. The crisis combined with the intensification of remote work imply more communication and clarification of the expectations combined with flexibility and openness to change.
The Coronavirus pandemic, with its cascade of economic and societal changes, opens the doors to a more human type of leadership where intuition plays a central role. This new paradigm should be an opportunity for more humanity and well-being in the workplace.
 ESG for Environment, Social & Governance
 MSCI bulletin - Is There a Link Between GDP Growth and Equity Returns? - May 2010
Busch T., Friede G., 2018, “The Robustness of the Corporate Social and financial Performance relation: A Second-Order Meta-analysis”, Corporate Social Responsibility and Environmental Management, 25, 583-608.
Eurosif, European SRI Study 2018, eurosif.org.
Global Sustainable Investment Review 2018, GSIA, gsi-alliance.org.
International Monetary Fund, June 2020, “A Crisis Like No Other, An Uncertain Recovery”, World Economic Outlook Update.
MSCI bulletin - Is There a Link Between GDP Growth and Equity Returns? - May 2010
Nichols C.D., Wahlen J.., 2004, “How Do Earnings Numbers Relate to Stock Returns? A Review of Classic Accounting Research with Updated Evidence”, Accounting Horizons, 18(4), 263-286.
Daniel Goleman, “Emotional Intelligence”, 1995, Bantam Books
Nadine Greiner, “The art of executive coaching: secrets to unlock Leadership Performance”, 2018, Association for Talent Development