ESG Investing Could Be Making the ‘Bear Market for Humans’ Worse

Vincent Deluard calls it the “bear market for humans.” It’s a phenomenon he observed last year in the market: Stocks of companies that are less-reliant on employees did much better than those that rely heavily on labor and large workforces.

It sounds like the type of issue that could be tackled by the growing trend ESG investing -- or focusing on companies’ approach toward environmental, social and governance issues. Yet, Deluard’s work shows the opposite: ESG investing tends to favor the very same companies that have fueled the “bear market for humans.”

Deluard, a global market strategist at brokerage StoneX Group Inc., joined the latest “What Goes Up” podcast to discuss his research on this topic, as well as his outlook for markets and inflation in 2021. Here are some lightly edited highlights of the conversation.

On ESG and human capital:

“I actually had a piece on how ESG makes the problem worse. What I did is I looked at the largest 30 ESG equity funds in the U.S. and I compared the holdings to the Russell 3000. And I looked at the number of employees of the average ESG company. So the highest ESG rankings are about 30% smaller than the average in the Russell 3000. It’s by far the biggest difference.”

“So structurally, ESG is actually biased against humans and rewards the company that are already benefiting from those trends. So as we shift more capital toward the ESG form, I think we are making the problem a lot worse. And if I were, you know, running an energy company, I would really focus on the ‘S’ before you can worry about how good your governance is and labor issues. Do you have workers? I think the first, good thing you can do for humans is to give them jobs. And so far ESG is actually channeling capital toward companies that either have few jobs or automate other jobs.”

On the outlook for inflation:

“I think what we are looking at today is the mirror opposite of the late ‘70s, early ‘80s, where it’s a period of transition. So in the early ‘70s and ‘late 70s, early 80s, it was transition from inflation to disinflation. And this year is a transition from disinflation, or even outright deflation, to inflation, secular inflation. So that’s kind of like the secular view. Now, if you remember, ‘80, ‘81, ‘82, there were a couple of inflation scares. Like, if you look at the Fed funds rate, it really got jacked up almost needlessly. And that triggered an economic recession. So it’s not uncommon, as you reach the end of the cycle, to have one last fear.”

“So in the early ‘80s, it was inflation fears. And I think this year we’re going to have -- could be, I don’t know, it’s not looking that way right now -- but my expectation would be we’d see some deflation fears again in Q1 because the impact of the lockdowns is still going to be felt, especially if you look at certain commodities markets like oil. Yes, we are rebounding at $51 (a barrel), but I mean if you have all of Europe under lockdown, if you have record deaths again, and it is going to take some time for the vaccines to be rolled out. The economic disruption could create the illusion that we are seeing that whole environment of more deflation, more consumption online and things like that.”

“And then my guess is that by maybe Q2 or Q3, then acceleration really starts popping up and then accelerates toward secular inflation in the second half and then toward the end of the decade.”

On the transition from consumer spending on digital diversions to real-world goods and services

“So one of the reasons why I look at it is because I view the consumption of digital goods as deflationary. So when your marginal dollar goes to digital goods, which have no marginal costs, the normal laws of supply and demand don’t apply, right? You can keep consuming, it doesn’t matter how many people are watching the same movie on Netflix at the same time. Now, if people go to the movie theater instead, you need to build more theaters. You need to hire more workers, and that creates inflation because you are consuming real goods.”

“The reason why I expect that shift is that’s just what we saw in Europe this summer. Europe was a really good test case, in my opinion, because we had, you know, very nasty lockdowns in Q1 of 2020. And then by Q2, it was over. And then most things opened. Europe was open for vacation this summer. I mean, the Americans couldn’t get there, but everywhere, everyone else had a great time. And you look at restaurants bookings, for example in Germany. They were up 20% over the prior year. So we actually had a better tourism season. And who would have thought that? And I think that talks to that desire, somewhat natural after being couped up in your house, you want to experience it again. No, you don’t want to do another Netflix and chill. You want to go to the movie, you want to go to the restaurant or, you know, other venue where you where you can numb the existential angst of being a human.”

Listen to the entire podcast at the link below.

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