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  • September 17, 2018
    Fixed Income
    US homebuilders - on strong foundations?
    US homebuilders have been hurt this year by concerns that rising interest rates could keep buyers at bay. But, as the sector continues to report strong demand for new housing, Fraser Lundie, Co-Head of Credit and Anna Chong, Credit Analyst, Hermes Investment Management ask: is the backdrop for US homebuilders favourable? The recent rise in interest rates – coupled with expectations of further rate hikes from the US Federal Reserve – has weighed heavily on US homebuilders this year: investors fear higher mortgage rates will weaken demand. But despite talk of a slowdown, industry fundamentals are still supportive of US homebuilders. Strength in the economy and labour market have boosted demand for housing. In Q2, US economic growth enjoyed its best performance in almost four years, increasing at an annualised rate of 4.2%, while unemployment remains low at 3.9% and job creation is solid. In July, employers added 157,000 jobs. Moreover, homebuilders’ recent robust earnings results demonstrate that demand has not been impacted by rising mortgage rates, with many reporting strong orders – an indicator of future revenue for homebuilders. Tight existing home inventory should also spur demand for new builds. Meanwhile, in a post-earnings call with analysts last month, Toll Brothers’ Chief Executive Douglas Yearley pointed to a structural shift towards the new-home industry – with buyers wanting to “create a one-of-a-kind custom home” rather than live in existing homes.
  • September 5, 2018
    Fixed Income
    US homebuilders: on strong foundations?
    US homebuilders have been hurt this year by concerns that rising interest rates could keep buyers at bay. But, as the sector continues to report strong demand for new housing, we ask: is the backdrop for US homebuilders favourable? The recent rise in interest rates – coupled with expectations of further rate hikes from the US Federal Reserve – has weighed heavily on US homebuilders this year: investors fear higher mortgage rates will weaken demand. But despite talk of a slowdown, industry fundamentals are still supportive of US homebuilders. Strength in the economy and labour market have boosted demand for housing. In Q2, US economic growth enjoyed its best performance in almost four years, increasing at an annualised rate of 4.2%, while unemployment remains low at 3.9% and job creation is solid. In July, employers added 157,000 jobs. Moreover, homebuilders’ recent robust earnings results demonstrate that demand has not been impacted by rising mortgage rates, with many reporting strong orders – an indicator of future revenue for homebuilders. Tight existing home inventory should also spur demand for new builds. Meanwhile, in a post-earnings call with analysts last month, Toll Brothers’ chief executive Douglas Yearley pointed to a structural shift towards the new-home industry – with buyers wanting to “create a one-of-a-kind custom home” rather than live in existing homes.
  • Mining a valuable resource: why ESG is material for credit investors
    Anna Chong
    Research and investment experience tells us that ESG creates a differentiating factor for investors, who need to look beyond credit metrics to develop a more complete picture of corporate risk and potential return. ESG risks influence credit spreads, and therefore the prices of credit securities. New research by Dr Michael Viehs, Engagement and Research Manager and Anna Chong, Credit Analyst at Hermes Investment Management explores how the relationship holds up in one sub-sector of the asset class: basic materials, which is particularly exposed to ESG risks. This issue also looks at two case studies – mining companies Vale and Freeport McMoran – to show how contrasting ESG profiles influence views on how instruments should be priced.
  • December 11, 2017
    Fixed Income
    Mining a valuable resource: why ESG is material for credit investors
    Anna Chong
    Our experience as investors and research shows that ESG risks influence credit spreads, and therefore the prices of credit securities: “Pricing ESG Risk in Credit Markets”, published by Hermes Investment Management as at April 2017. This empirical data support our long-held view that investors need to look beyond credit metrics to develop a more complete picture of corporate risk and potential return. In this issue of Spectrum, we dig a little deeper to reveal how the relationship holds up in one sub-sector of the asset class: basic materials, which is particularly exposed to ESG risks. Extracting and processing the world’s natural resources is both integral to the global economy but also fraught with risks due to labour relations and social and environmental concerns, which can ultimately impact financial performance. Nearly all global miners with a diversified base of operations need to mitigate ESG risk. In this issue, we also use two case studies – mining companies Vale and Freeport McMoran – to show how contrasting ESG profiles influence our view on how their instruments should be priced. Before turning to our examples, however, we highlight how the relationship between ESG and credit spreads holds in the basic materials sector.