Note: The views and opinions expressed in this newsletter are those of the authors and do not necessarily reflect the official policy or position of Newday Impact. Any content provided by our authors is of their opinion and is not intended to malign any religion, ethnic group, club, organization, company, individual, or anyone or anything.

Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Past performance does not guarantee future performance.

IMPACT COMMENTARY

Does ESG Have a Political Agenda?

As ESG investing has grown in popularity over the years, with AUM in global sustainable funds in the U.S. nearing $2.5 trillion as of the first half of this year, according to Morningstar, so has the criticism and politicization associated with it. From being touted as a framework to find good companies that maximize shareholder value and avoid risk, to being called “an outrageous scam” associated with “woke politics” and “radical agendas”, the polarization of our country continues with the rise of anti-ESG sentiment. 

This year we’ve seen a growing number of Republican-leaning states push back, saying ESG funds force investors to focus on considerations other than financial returns and have enacted anti-ESG legislation, thereby restricting ESG investing in their state and public retirement funds. Their concern is due to the exclusionary policies relating to fossil fuels and/or firearms at certain financial institutions and are suggesting they won’t back banks they deem too ESG-friendly or not willing to invest in fossil fuels, or financial institutions that are eliminating fossil fuel companies from their investment portfolios. 

While 11 of the 14 Democrat-leaning states put forward bills in support of ESG, an Arizona lead coalition of 19 state attorney generals sent a letter to BlackRock, the world’s largest asset manager, essentially saying it’s putting left-leaning politics above investor interests and returns (see chart below). BlackRock rebutted those comments and stated they are solely focused on their fiduciary duty to make money for their clients and increase shareholder returns. They also said they’ve joined climate organizations merely for dialogue, and it’s not a political statement by any means. In fact, it was stated in a separate and earlier statement by a BlackRock spokesperson, “BlackRock does not boycott fossil fuels – investing over $100 billion in Texas energy companies on behalf of their clients proves it”.

This contentious political rhetoric has also manifested itself into a proliferation of Anti-woke funds, funds set out to jump on the Anti-ESG bandwagon. Strive Asset Management is one of them, as it recently launched its U.S. Energy ETF ($DRLL), which has nearly $400 million in AUM and is allegedly focused solely on maximizing returns without ESG constraints with a “profits over politics” tagline, according to its website. Point Bridge Capital is another such fund with its “Politically Responsible Investing” motto. Its MAGA ETF (MAGA) with nearly $14 million in AUM “tracks the performance of U.S. companies whose employees and political action committees (PACS) are highly supportive of Republican candidates.” The God Bless America ETF (YALL) is another fund that was recently launched by Curran Financial Partners with over $23 million in AUM that screens out companies that are listed as “activists” stating they “eliminate companies that have emphasized politically left and/or liberal political activism and social agendas at the expense of maximizing shareholder returns.” The irony of the Republican argument of “forcing an agenda”, in essence, is happening with these anti-ESG funds as they are just swapping one set of values for another.

The ideological war going on has many politicians misinformed about what ESG really means and creating disinformation in the process. We cannot overlook the fact that climate risk is now considered the biggest threat facing our world. Governments around the world accounting for 90% of global GDP, have committed to a long-term net-zero policy and are moving forward with their energy transition plans. 

We at Newday will continue to do our fiduciary duty to drive investment results by incorporating the potential risks associated with the impacts of science-based climate hazards and the energy transition that is currently happening into our overall investment analysis. And for those still needing an education on ESG investing, it merely adds an additional layer of risk analysis to the investment process and is a way for investors to identify and assess material 21st-century risks while fulfilling 21st-century opportunities … NO POLITICAL AGENDA IS REQUIRED. 

GLOBAL EQUITY COMMENTARY

Written by: Newday Investment Team

In October we saw the positive bond-equity correlation that’s persisted most of the year break down, as rates continued to rise while equities rallied along with high yield bonds.  Value stocks and small caps significantly outperformed growth equities as the energy sector led the way.  Tech and consumer-oriented stocks underperformed along with bond-like sectors.  The US dollar and commodities were a mixed bag with EM falling after China’s leadership summit reaffirmed the status quo and a strict commitment to COVID-zero policies.  Volatility declined across markets.  

The main drivers last month continued to be inflation expectations and central bank policy, although stabilization in the UK was important as Rishi Sunak backed away from fiscal policy measures that had negatively impacted markets.  The Ukraine war and European energy shortages were less prominent in headlines as Russia retreated from key territory in Ukraine’s eastern region.  Front-end rates rose, although less aggressively, with the Fed Funds rate now expected to peak in the 4.8% range in Q1 2023.  The Fed raised rates again by 75bps, bringing the Fed Funds rate to a target range of 3.75-4%.  Recent Fed speakers have indicated further rate hikes are expected to be more measured.    

We think uncertainty will fall if inflation continues to move lower.  Headline CPI has gradually declined from a peak of 9.1% in June, hitting 7.7% in October.  US GDP rose at a 2.6% annualized pace in Q3, better than expectations.  Likewise, expectations for Q4 growth have moved higher.  The labor market remained robust but signs of overheating moderated, as job growth and wage inflation decelerated in October.  History has shown that November and December are typically strong months for the stock market, particularly in mid-term election years.  

We have maintained overall portfolio positioning although have added some new names, including Unilever and Ball Corp.  Both companies are doing impressive things for ocean health, with Unilever executing on its commitment to reduce its virgin plastics use 50% by 2025.  Likewise, Ball is one of the world’s largest manufacturers of metal containers, a key recyclable substitute for plastics.  Ball Corp also supports the work of the Surfrider Foundation and has co-hosted beach cleanups efforts as one of its sustainability initiatives.  We think Ball Corp’s valuation looks attractive now after a sharp correction following the Ukraine war, given the need to divest Russian assets.

We expect to opportunistically raise portfolio beta over the next few months from a relatively low level as downside risks look less extreme.  We are always evaluating ways to increase the impact of our portfolios by using our analytical tools to add fresh ideas that contribute both ESG and financial alpha.

S&P 500 sector performance, sorted by trailing 1mo return (Source: Fidelity)

Disclosures: This commentary is provided for information purposes only and is not an offer or solicitation of an offer to buy or sell any product or service. Unless otherwise stated, all information and opinion contained in this publication were produced by Newday Funds, Inc. (“Newday Impact”) and other sources believed by Newday Impact to be accurate and reliable. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications.

Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Past performance does not guarantee future performance.

Newday Funds, Inc. is a subsidiary of Newday Financial Technologies, Inc. and is an SEC registered investment adviser.

Newday Financial Technologies, Inc. | www.newdayimpact.com

COUNTRY GOVERNANCE RESEARCH COMMENTARY

Xi claims a precedent breaking third term leading China

As expected, Xi Jinping received a precedent breaking third five-year term as head of the Chinese Communist Party. Following the twentieth party congress, Xi was named general secretary and head of the Central Military Commission, the party’s two most important positions.  His staying in power for a third term is a departure from the collective leadership model of his recent predecessors and sets him up to be the most dominant Chinese leader in decades.  Further solidifying his position, the new lineups of the 24-member politburo and seven-person Politburo Standing Committee were both stacked with Xi loyalists. The Communist Party also approved amendments to its constitution aimed at reinforcing the core status of Xi’s political thought.  In his acceptance speech Xi prioritized security and expansion of the state’s economic role over greater reform and liberalization.  Xi also stressed the need for China to increase its self-sufficiency in the face of increasingly stringent U.S. export controls.  Past party congresses have often seen leaders elevate potential successors, but Xi has not yet named an heir apparent, leading observers to conclude he may plan to rule for a fourth term and perhaps even beyond.

Implications:  As Xi begins his new term, the Chinese economy faces numerous challenges including continuing disruptions from a rigid zero-COVID policy as well as distress in the property sector.  China posted annualized GDP growth of 3.9% in the third quarter, which while better than economists had forecast, still indicates China will miss its official full-year target of 5.5% by a wide margin.

Conservatives select the UK’s third prime minister in two months 

Rishi Sunak became the United Kingdom’s third prime minister in two months after winning a Conservative party leadership contest held following Liz Truss’s resignation only 45 days into her premiership.  Sunak will be the first British-Asian person to hold the position and at 42 years old he will also be the youngest prime minister in modern times.  Truss was forced to resign after her plans for debt-funded tax cuts led to turmoil on UK financial markets.  Sunak had been runner-up to Truss in the leadership contest held over the summer to replace Boris Johnson, and during that campaign he ran as a fiscal conservative presciently criticizing Truss’s economic plans.  In one of his first steps as prime minister, Sunak announced he would keep Jeremy Hunt as his chancellor.  Hunt, who Truss had brought in to replace Kwasi Kwarteng, helped calm financial markets when he reversed most of Truss’s economic proposals.  Following Sunak’s elevation, British yields returned to levels last seen before Truss’s controversial plans were announced in what has been dubbed a “dullness dividend” following Truss’s brief and chaotic tenure at 10 Downing Street.  

Implications: In his first speech as the new Prime Minister, Sunak said that Britain faces a profound economic crisis, and he acknowledged that Truss had made mistakes.  His government he said would place financial stability at the center of its agenda.  Chancellor Hunt will outline their plans to fill a fiscal hole of about £40bn on November 17. 

Ukraine continues to make gains as Russia steps up infrastructure attacks

Eight months into what Putin thought would be a three-day war, Ukraine has continued to retake occupied territory though with the start of the muddy season and the impending onset of winter the pace of Ukrainian advances has slowed.  In one of the most dramatic in a series of unexplained attacks, earlier this month an explosion on the Kerch bridge linking Russia and Crimea disrupted transport on a vital Russian supply route.  As with other strikes deep behind the frontlines, Ukraine denied responsibility for the bombing, but Ukrainian officials did not hide their satisfaction with the result. Given the symbolic importance of the bridge the attack was seen as a significant humiliation for Putin, and in what he said was retaliation Russia launched its most widespread bombardment yet of critical energy infrastructure across Ukraine.  Zelensky has said that as result about 40% of the country’s entire energy system had been seriously damaged.  Also, for the first time in the war Russia deployed Iranian made kamikaze drones, which were used in swarms to hit targets and evade Ukrainian defenses.   Pointing to the difficulties Russia is having overcoming supply shortages, North Korea also has been reportedly providing artillery to the Russian military.  

Implications: Russia recently announced that it had completed the partial mobilization announced to replenish their depleted troop, with Defense Minister Shoigu claiming 82,000 men had already been deployed to the fighting.  Russia appears to be using the newly mobilized troops to improve its defense of areas it already controls rather than undertaking new offensives, which would likely be beyond their current capabilities

Consequential elections just concluded in Brazil and Israel

Over the weekend Brazilians narrowly elected former president Luiz Inácio Lula da Silva, known as Lula, defeating the right-wing incumbent Jair Bolsonaro.  Lula’s return to the presidency was a stunning comeback after having been in prison for bribery only three years ago.  Tensions have been high given Bolsonaro’s past claims about voter-fraud and a margin of victory of less than 2%, but after waiting almost two days Bolsonaro stated he would follow the constitutional process though he stopped short of mentioning his opponent or conceding defeat.  Protests by Bolsonaro supporters have continued.  Lula will have his work cut out for him governing a closely divided country when he takes office in January.

In Israel the final results of their fifth election in four years and the contours of any eventual government were not yet known.  However, early indications were that Netanyahu was on the brink of another political resurrection this time with the help of a controversial far-right politician who had previously been shunned as too extreme to serve in Netanyahu’s cabinet.  His inclusion in any eventual government could complicate US-Israeli relations.

Disclosures
 
This commentary is provided for information purposes only and is not an offer or solicitation of an offer to buy or sell any product or service. Unless otherwise stated, all information and opinion contained in this publication were produced by Newday Funds, Inc. (“Newday Impact”) and other sources believed by Newday Impact to be accurate and reliable. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions of the financial markets, general investment strategy, or particular investments are not recommendations to clients and are subject to change without notice.
 
Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Past performance does not guarantee future performance.
 
Before investing you should carefully consider a Fund’s investment objectives, risks, charges and expenses. This and other information are in each Fund’s prospectus. A prospectus may be obtained by clicking here for AHOY and here for SDGS. Please read the prospectus carefully before you invest.
 
Environmental, Social and Governance Risk. A strategy or emphasis on environmental, social and governance factors (“ESG”) may limit the investment opportunities available to a portfolio. Therefore, the portfolio may underperform or perform differently than other portfolios that do not have an ESG investment focus.
 
The Funds are distributed by Foreside Fund Services, LLC.
 
[1] The Standard and Poor’s 500 (S&P 500), is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. NASDAQ stands for National Association of Securities Dealers Automated Quotations Stock Market.
 
Investing involves risk. Principal loss is possible.