“There are many causes of this big sell off,” Franks argued on November 13. “Growing trade tensions and slowing economic growth prospects are playing a part. Wage inflation and rising commodity prices will pressure corporate profitability.”
He noted that recent corporate filings also suggested a weakening world economy.
“There’s definitely a slow-down in some important industries, such as cars and consumer electronics,” wrote Franks.
Also, importantly, noted Franks, the U.S. Federal Reserve is hiking interest rates in the face of inflation. That environment will put downward pressure on stocks.
“The impact of this paradigm shift will be felt over longer than a single month,” he wrote. “The rise in equity markets that started in March of 2009 looks more and more vulnerable. Other things being equal, higher yields bring equity market valuations down and can also introduce risk and volatility.
In this environment, sustainability is likely to excel, Franks argued. Companies whose business models run against science, which exploit resources in a manner that sows the seeds of their own demise and which might elicit reprisals from workers and others are more likely to crack under the pressure of a more competitive marketplace.
“Over the long term, stronger fundamentals will dictate share price performance,” he wrote. “Providing a proven solution to a sustainability challenge is a strong foundation for any company. This strategy should be well set to sail through these short-term volatilities. It will do so by holding differentiated companies with strong environmental and social impact.”
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