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Investors pivot to conscious investing in 2020: How markets are adapting




Markets have grown a conscience.

Environmental, social and governance factors have been dominant forces at the midyear mark.

Check out these stats:

  • 14 out of 17 ESG-focused ETFs and funds outperformed the S&P 500 from January 1 to May 15, according to S&P Global Market Intelligence.
  • Morningstar says 23 new ESG funds launched this year and anticipates a record number of launches in 2020.
  • And, U.S. sustainable funds hit record net flows in 2019, four times the previous high, according to Morningstar. This year is already on track to surpass last year. 

The drivers in 2020 are clear. The most obvious example is the collective response to the Covid-19 pandemic, which has compromised our interconnected world. Social inequality has also come to the fore amid civic protest and global unrest. What this first half of the year tells us is that ESG risks increasingly are playing a central role across the entire investment landscape.

In combating the coronavirus, for example, most governments essentially closed their economies to mitigate its spread and save lives, arguably resulting in the most monumental “S” (social) impact in decades. Further, the aggressive use of fiscal and monetary support to help individuals and companies financially survive was not just a matter of necessity but also social responsibility. “G” (governance) also comes into play here, as the structure of various political systems around the world have allowed certain countries to respond more robustly in terms of health, fiscal and monetary policy relative to their peers.

Looking forward, social and governance considerations likely will take on even greater importance as governments and societies seek to refine the balance between safety, individual freedom, privacy and growth.

How the public and private sectors react to the issues surrounding racial disparity in the wake of continuing demonstrations across the globe clearly will have an impact on redefining our social contract. When combined with the ramifications of Covid-19, the lack of preparedness to manage the well-being and equality of many communities is at some level a failure of governance and social responsibility.

Part of good governance at the company level is proactive risk management and emergency preparedness, along with an implicit or explicit social contract supportive of employees and communities. Similarly, the success or failure of certain companies is being determined by their ability to have sound business continuity plans and purposeful leadership. Some companies and governments have demonstrated their resilience and are adapting well, but many were so blindsided they may need to hit the reset button.  

Tensions with China also are tied to ESG concerns even if market participants fail to make that direct connection. The very origins of the pandemic may be related to improper environmental and/or safety policies, and the lack of transparency with regards to the magnitude of the growing epidemic during the early days of the outbreak showcased the need for disclosure on social factors. Longer term, trade tensions continue to be of great concern regarding intellectual property protection (“S”), privacy protections (“S”), human rights issues (“S”) and environmental concerns (“E”). Continued sociopolitical unrest in Hong Kong also represents issues of social accountability, with the commercial consequence being the potential delisting of major Chinese companies on U.S. stock exchanges.

As all of the above attests, the days of responsible investing simply being a subset of investors seeking to “do good” have long past. These days, keeping a finger on the ESG pulse of regions, countries, sectors and companies can be critical to understanding risks and opportunities in a portfolio.

As we reflect on the first half of 2020, it’s clear that ESG factors represent prudent macro risk considerations that should be taken into account when seeking long-term value creation. In fact, according to our proprietary ESG data as well as third-party scores, year-to-date, S&P 500 constituents in the top-quintile of social sustainability have outperformed the bottom-quintile social laggards.

With the year’s second half underway, there may be no better argument to “think” ESG.

Steve Chiavarone is portfolio manager and equity strategist at Federated Hermes. Martin Jarzebowski is director of responsible investing at Federated Hermes. 

Federated Hermes, Inc. is a leading global asset manager focused on meeting the diverse and evolving needs of today’s investors. It has $605.8 billion in assets under management.




Investors have more faith in bonds issued by airports than might be expected




With airlines suffering from low traffic and billions in losses, investing in airports right now may seem unwise. 

But, in fact, airport bonds have been outperforming the broader municipal bond market. Strategists say it’s because airports went into the Covid crisis with a lot of cash on hand and that should help them weather the storm.

 According to Moody’s, airports had an average 659 days worth of cash.

“I would describe that as a very good cushion of liquidity,” said Tom Kozlik, head of municipal strategy and credit at Hilltop Securities. He said that data on cash holdings was from fiscal year 2018, and the airports were able to build up their hordes even more in 2019.

 “They’ve had several years since the end of the last recession, where enplanements were relatively higher. But plenty of them also had infrastructure upgrades they wanted to do,” said Kozlik. “It seems they took advantage of a situation where activity was higher-than-expected, but they also socked some money away.”

Airport bonds were among the hardest hit when the credit markets seized up in February and March, as investors feared the worst for air travel. While air traffic is still weak and enplanement, or passenger boardings, are low, the airport bonds have been able to recover.

“Right now, investors are leaning toward the larger airports,” said Kozlik. “I think the reason is because the market opinion is such they feel there’s less risk in a situation where enplanements might continue to be lower than what we’ve seen pre-Covid. I think folks believe those large airports aren’t going anywhere. There’s just more positive sentiment for those larger airports as a result.”

A $460 billion offering Thursday for Dallas-Fort Worth International Airport, for instance, was met with strong demand. The cities of Dallas and Fort Worth issued the Series 2020B joint revenue refunding bonds for the airport. According to Bond Buyer, they were repriced to yield from 0.27% with a 5% coupon in 2021 to 1.97% with a 4% coupon in 2040. The 2045 maturity was repriced to yield 2.12%, with a 4% coupon.

There were also bonds issued for the airport last week. The spread on the 10-year revenue bond issued was just 63 basis points above the AAA rated muni benchmark, according to Kozlik. The bonds were rated A1 by Moody’s and A by Standard and Poor’s. Another $1.14 billion offering is expected for the Dallas-Fort Worth next week.

 “Along with the boarder market, the airport sector has tightened up quite a bit,” said Jeffrey Lipton, head of municipal research and strategy at Oppenheimer. “We are seeing evidence that a number of airport bonds are being priced tighter than some other higher end credits.” 

 While airlines were given relief under the CARES Act, Congress also gave funds to airports. Kozlik said the funds amounted to 22% of revenues for a list of airports he follows.

Still, rating agencies have a negative outlook on the sector, and strategists warn there could be downgrades. Not all airports are attractive, and investors should pick among the better rated, bigger airports.

“Heading into Covid-19, I was a fan of the airport sector, and I’m still a fan of the airport sector,” said Lipton. “But we have to be more selective now. If you look at gateway airports, those aren’t going anywhere.” Gateways would be Los Angeles or San Francisco or New York.

 Moody’s warns that airports could be at risk if they have a high concentration of service by one airline, since an airline can cancel where it travels to and from. They also are at risk if an airline undergoes massive layoffs.

 “Though large airports can bear the risk of high airport concentration, they also benefit from being essential to the airline’s network and are typically highly profitable for airlines,” Moody’s wrote. “However, small airports with high airline concentration do not share this benefit. We expect the hubs that are the most profitable for airlines to see quicker recovery from the effects of the coronavirus because of their outsized contribution to the airlines’ route networks and profitability.”

 In a note from earlier this month, Moody’s said Charlotte, N.C. Airport Enterprise, which it rates Aa3 stable, and Dallas-Fort Worth are among the airports with the best recovery in enplanements so far.

 “Small airports in highly competitive markets are likely to face some service consolidations by the airlines into larger airports, as demonstrated by JetBlue’s decision to consolidate its West Coast operations in Los Angeles Departments of Airports- Los Angeles International Airport Enterprise (Aa2 stable) and moving away from LGB (Long Beach Airport),” Moody’s wrote.

Hawaiian airports, which posted the sharpest overall drop in passenger volume in April and May, are likely to see the slowest recovery in passenger volume as long as the state’s stringent travel restrictions remain in place,” noted Moody’s.  Hawaii requires that travelers to the state be quarantined for two weeks.

 Lipton said airports are difficult to analyze because they have very different revenue streams that go into their debt service.

 “Revenues come from parking, revenues can come from hot dogs being sold, alcohol and various products you see in the airports. Often times, they have minimum guarantee revenue agreements” with concessions, he said. They also collect landing fees, and can pass along some of their costs by raising fees.

 Lipton said there could be downgrade activity affecting airport bonds. “I think it’s going to be confined to a single notch. We’re not ruling out downgrades, but those downgrades would probably be confined to a single notch as opposed to multiple notch downgrades. I think the sector overall will display relative resiliency throughout this cycle,” Lipton said.

 Kozlik said it helps airports to have strong carriers. In the years before Covid, airports were breaking financial records as enplanements grew. Kozlik said the airports that will be better positioned to take advantage of the recovery will be those that stress sound finances and are located in regions and cities with industries and demographic bases that are growing. 

 In addition to different revenue sources, airports also had widely different amounts of cash. For fiscal year 2018, Miami International, for instance, had 318 days worth of cash, while Boston’s Logan Airport had 628 days, according to Moody’s data. Hartsfield-Jackson in Atlanta had more than 1,000 days worth of cash. This is based on fiscal year 2018 data.

 Kozlik said some investors are avoiding airports because of the hit to travel. “That may not be the way to look at it. Look at the underlying credit fundamentals,” he said. Airports, like water and sewer or toll roads issue revenue bonds.

 “Typically, a revenue bond, all things being equal … you’re going to get a little more spread compared to the general obligation bonds, and then when you go out the risk spectrum, that’s going to increase the amount of spread you’re going to get,” said Kozlik.

Lipton said munis overall so far are returning 1.21% month to date, based on Bloomberg Barclays data. The transportation sector, including airports, has returned 1.29% in the same period , through July 22. Health care, which outperformed in June at 2%, is returning 1.60% in July so far.

Revenue bonds typically lag general obligation bonds, but because of the outsized hit to revenue bonds earlier in the year, their comeback has helped them outperform GO debt.


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Dr. Scott Gottlieb: ‘We don’t want to find out’ what happens if as many kids get coronavirus as flu




Dr. Scott Gottlieb on Friday warned against comparing the risks of the coronavirus for children with those from the seasonal influenza, stressing that much remains unknown about Covid-19. 

“The reality is that flu last year infected 11.8 million kids. We have not infected anywhere near that number of kids with Covid, and we don’t want to find out what it might look like if we did,” Gottlieb said on “Closing Bell.”

The U.S. has nearly 4.1 million confirmed cases of Covid-19, according to a Johns Hopkins University tally

Gottlieb’s comments come as school districts across the U.S. prepare plans for fall classes amid the nation’s ongoing coronavirus epidemic. The Trump administration has in recent weeks been intensifying its calls for schools to fully reopen for in-person class. In early July, President Donald Trump threatened to withhold federal funding to those that do not open. 

And on Thursday, the U.S. Centers for Disease Control and Prevention released updated guidelines for school districts, placing a heavy emphasis on the social and emotional costs of not reopening for in-person class. The CDC guidelines said the best available evidence indicates children have a lower risk of contracting the disease than adults.

As of data from mid-July, people under the age of 18 make up less than 7% of confirmed cases and under .1% of deaths related to Covid-19, according to the CDC.

But Gottlieb said the CDC guidelines also “rather grimly” compare the number of deaths in children from Covid-19 to the number of deaths in children caused by seasonal flu. “So far in this pandemic, deaths of children are less than in each of the last five flu seasons, with only 64,” the CDC guidelines state. 

That is true, said Gottlieb, the former Food and Drug Administration commissioner under Trump. “The actual incidence of hospitalizations and deaths thankfully is low” for children with coronavirus, Gottlieb said. “But the reality is that most kids probably haven’t been infected with Covid.” 

For that reason, he said, “we really do want to prevent outbreaks in the school setting.” 

Gottlieb has consistently emphasized he believes it is possible for schools to safely reopen for in-person class during the pandemic. But he also has sought to paint the decision as a localized one that requires consideration of the region’s Covid-19 outbreak.

“It’s going to be very hard for communities to open schools for in-class learning against the backdrop of really epidemic, uncontrolled spread,” he said. “The good news is a lot of parts of the country the epidemic is under some semblance of control. … I think those states are going to have the opportunity to try to open their schools in the fall, at least for a period of time.” 

Disclosure: Scott Gottlieb is a CNBC contributor and a member of the boards of Pfizer, genetic-testing start-up Tempus and biotech company Illumina.


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Trump signs series of executive orders aimed at lowering drug costs




President Donald Trump on Friday signed four executive orders aimed at lowering the high cost of prescription drugs in the United States in what would make sweeping changes to the prescription drug market in the U.S. if they are finalized.

Industry trade group PhRMA, the Pharmaceutical Research and Manufacturers of America, called them a “reckless distraction” to the Covid-19 pandemic. The orders, which are subject to the regulatory review process, are designed to bring U.S. drug prices at least on par with their costs overseas. Trump said Americans often pay 80% more for prescription drugs than Germany, Canada and other nations for some of the most expensive medicines. 

“The four orders I’m signing today will completely restructure the prescription drug market in terms of pricing and everything else to make these medications affordable and accessible for all Americans,” Trump said at the White House. “Under my administration, we’re standing up to the lobbyists and special interests and fighting back against a rigged system.”

The orders

The first order targets high insulin prices, requiring federal community health centers to pass discounts they receive on the drug and EpiPens directly to patients. The president said those providers shouldn’t receive those discounts while charging their patients “massive, full prices.” 

The second order would allow states, pharmacies and wholesalers to import drugs from Canada where they typically cost less than in the U.S. In most circumstances, it is illegal to import medications from other countries for personal use, according to the Food and Drug Administration. 

The pharma industry and regulators have said importing drugs could threaten consumer safety. Supporters, including Sen. Bernie Sanders, say importing drugs from other countries would increase competition and substantially lower prices.

The third order is aimed at preventing “middlemen,” also known as pharmacy benefit managers, from pocketing “gigantic discounts,” Trump said. PhRMA has argued that drug price hikes over the years have been modest and has cited concerns with the nation’s rebate system.

Alex Azar, secretary of the Department of Health and Human Services, told reporters on a conference call after the signing ceremony that drug companies currently pay about $150 billion in undisclosed kickbacks to middlemen often in exchange for more favorable insurance coverage for their drugs.

“The new rule would require those kickbacks be passed through to our seniors when they walk into the pharmacy,” Azar said, adding that it would reduce prescription drug costs for senior by about 26% to 30% or $30 billion a year.

White House meeting

The fourth order, which Trump said he may not need to implement, would allow Medicare to purchase drugs at the same price other countries pay. The order would specifically allow Medicare to implement a so-called international pricing index to bring drug prices in line with what other nations pay. 

“Everyone will get a fairer and much lower price,” Trump said. “Under our ridiculous system, which has been broken for decades, we’re not even allowed to negotiate the price of drugs.”

Trump signed the fourth order, but said he was holding it until Aug. 24 to give the industry time to “come up with something” to reduce drug prices. Pharmaceutical company executives are scheduled to meet at the White House on Tuesday, he said. 

Prescription drug spending in the U.S. far exceeds that of other high-income countries, increasing to $335 billion in 2018, according to U.S. data. Many Republicans have previously opposed such a proposal, calling it “price controls.”

Trump made lowering drug costs one of his key health-care issues early in his term. But drug pricing has taken a backseat over the last year as the Trump administration has shifted its focus to other priorities such as the teen vaping epidemic and now the coronavirus, which continues to rapidly spread through the United States with more than 4 million cases as of Friday, according to data compiled by Johns Hopkins University.

Trump also announced that the U.S. has secured 90% of the world’s supply of remdesivir, an antiviral drug used to treat Covid-19. Earlier this week, the president warned that the coronavirus pandemic in the U.S. will probably “get worse before it gets better” and urged the public to wear face masks to help curb the spread of the virus. 

‘Reckless distraction’

The pharmaceutical industry immediately pushed back on Trump’s proposed rules. 

Dr. Michelle McMurry-Heath, president and CEO of the Biotechnology Innovation Organization, said “adopting foreign price controls by executive fiat will cripple the small, innovative companies developing the vaccines and therapies that will help end this pandemic and get the American people back to work.”

PhRMA President and CEO Stephen J. Ubl said Trump was opening the country up for socialized health care. Ubl called the changes to drug prices “a radical and dangerous policy to set prices based on rates paid in countries that he has labeled as socialist, which will harm patients today and into the future.”

“The administration’s proposal today is a reckless distraction that impedes our ability to respond to the current pandemic – and those we could face in the future,” Ubl said in a statement. “It jeopardizes American leadership that rewards risk-taking and innovation and threatens the hope of patients who need better treatments and cures.”

The trade group has previously argued that drug price hikes over the years have been modest, and have cited concerns with the nation’s rebate system. Those are the discounts drugmakers give to middlemen often in exchange for more favorable insurance coverage for their drugs. The group has favored changes to Medicare, including capping the amount seniors would pay for on their own at the pharmacy counter every year.

Policy analyst Lindsay Greenleaf said there are potential unintended consequences that could actually drive prices higher on Part B Drugs, which are administered by physicians, because the drugmakers could favor large volume buyers like hospitals over physician practices. 

“The way that that model was previously proposed, there is a risk of driving consolidation because (individual) providers weren’t going to be able to compete as well as they do currently,” she said. 

The SPDR S&P Pharmaceuticals ETF (XPH), which tracks drug stocks, closed down 1.4% on Friday.

Even though Trump issued the executive orders, it may take months for the administration to finalize them. 

— CNBC’s Christina Wilkie, Bertha Coombs and Yelena Dzhanova contributed to this article. 


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