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Alternative Market Briefing

Other Voices: ESG "creating 90s-style tech bubble" as investors ignore fundamentals

Thursday, February 27, 2020

By Graham Clapp, Manager of the RWC Continental European Equity Fund

Share prices for ESG focused companies are soaring, as investors ignore fundamentals in the hope of finding the long-term winners which can tackle environmental problems - a move echoing the tech bubble of the late nineties according to RWC Partner's Graham Clapp.

ESG has been an increasing focus for investors in recent years, as clear signs of climate change create the need to change human behaviour. Clapp believes this is now having a more significant impact on the stock market, with some share prices of businesses moving depending on their perceived ability to tackle issues such as climate change.

Conversely, he says there has also been a clear derating in certain areas - such as tobacco - as flows are directed towards ESG-positive stocks.

Clapp, Manager of the RWC Continental European Equity fund, said: "We are big believers in ESG investing for the long-term and consider this an important part of our investment process, but that doesn't mean you can ignore fundamentals in the short-term.

"We have seen numerous examples where markets are being driven by theme investing - buying companies just because they have an ESG angle, regardless of whether or not they're actually executing very well.

"For example, we've had multiple profit warnings from the largest manufacturer of offshore wind turbines globally yet this is not being reflected in the share price. Whilst we may see a short-term drop immediately following a warning, this very quickly rallies back and then moves higher, despite the stock looking quite expensive."

Clapp attributes this to people focusing on the longer-term potential for wind turbine generation, rather than focusing on the fundamentals of companies themselves.

"The long-term potential for ESG is very strong. But some investors seem prepared to ignore bad execution in the short term." he said.

Such trends hold the potential for ESG to create bubbles akin to those seen during the tech boom of the late 90's, Clapp warned.

He said: "You can liken it to the tech bubble where people wanted to have exposure to the new economy stocks, so a lot of money poured into certain kind of business models and valuations were pumped up and incredibly stretched. When such large influxes occur - as we're currently seeing with ESG - then supply and demand means the price is going to change."

"Back in the late 90s a lot of these tech stocks went from 20x to 80x earnings, before subsequently falling back to 30x.

"We're not quite there yet but it's getting to the point where anything related to hydrogen or other green technologies, for example, are all up 100% in six months, despite the fundamentals not having changed."

"Clearly some of these businesses may well be the future, but what we are saying is investors must look at the fundamentals, or else they may suffer the same fate as investors in the early 2000's."

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