In an extremely tight labour market, screening for strong social credentials will be crucial to identifying companies who can build strong talent pipelines without higher wage bills squeezing margins.
The battle for talent has never been more intense. With labour markets staging an impressive recovery as pandemic restrictions have eased, businesses now have a major task on their hands to source the workers that they need. The balance of power between employer and employee is shifting as a result. In the US, the number of people choosing to quit their jobs hit a record high in November 2020 last year, and remains at extremely elevated levels today*. Clearly there are many explanations for why a worker may decide to move on, but it is notable that typically lower-paid industries are seeing the strongest pace of “quits”.
Wages are surging as a result, with companies fighting to both retain existing employees and to poach talent from their competitors. Pay growth is rising strongly in both the UK and the US, and while headline numbers have been complicated by a shift in sector composition, measures that adjust for pandemic distortions still paint a very robust picture. The prospect of higher wages has not only caught the eye of employees looking for more power in their pockets. Bank of England Governor Andrew Bailey won few friends in February 2022 when he called for “quite clear restraint” in annual pay setting processes given fears that an upward wage spiral may be taking hold.
Higher wage bills are a double-edged sword for businesses, and therefore for investors. While rising costs are rarely positive for corporate earnings, if higher pay boosts the consumer spending outlook then this can often come back to businesses in the form of stronger top line sales. Margins have held up strongly over the past year in the face of rising input prices, with businesses able to pass higher costs directly onto their customers. Yet with the current energy shock exacerbating supply chain pressures that are both increasing business costs and dampening consumer confidence, margin pressures are set to intensify.
Against this backdrop, investors would be wise to pay particular attention to company scoring across social factors. It’s long been evident that a company who fails to treat their employees properly, or pays little regard for the communities in which they operate, is unlikely to prosper in the long run. Yet in this highly unusual environment, social credentials that strengthen a company’s ability to build strong talent pipelines without having to break the bank on wages warrant a particularly high premium.
This type of analysis is rarely straightforward. High quality data is arguably much harder to find for S factors than “E” or “G” metrics, with index level data often patchy or lacking the appropriate nuance. In part these limitations are linked to the nature of many companies’ disclosures. Gender diversity is a good example. A company might report a significant improvement in their gender mix, but if women are still underrepresented at a senior management level then strategic decisions are unlikely to benefit from appropriate diversity of thought.
The good news is that this data is now becoming increasingly available, if you know where to look. The big data revolution has been transformational for investing with a social lens, with alternative data sources providing another window into companies. At the same time, data science techniques are enabling investors to interpret this data efficiently, using metrics that can identify stocks with both the potential to benefit from social factors, as well as companies that face significant risks.
Analysis of data taken from Glassdoor – a website where employees anonymously review companies – provides a good example of the potential power of these alternative data sources. For example, my colleagues in J.P. Morgan Asset Management’s International Equity Group developed a model that digested more than 5 million reviews for over 5,000 publicly traded companies. Over a 10 year period since 2011, backtests showed that the share prices of top quintile companies based on Glassdoor scores outperformed those in the bottom quintile by approximately 6% on an annualized basis as of March 2022.
In sum, today’s interplay between wages, inflation and margins is a key issue for both investors and policymakers alike. And just like most major macro topics, ESG factors are inextricably intertwined. Few companies are going to be able to avoid higher wage bills amid the Great Resignation, but higher pay is not the only option in the toolkit. With workers exiting the pandemic recession with greater bargaining power, businesses will need to pay much greater attention to social factors going forward if margin pressures are to be avoided.
*Source: Bureau of Labor Statistics, US 2000-2022
NOT FOR RETAIL DISTRIBUTION: This communication has been prepared exclusively for institutional, wholesale, professional clients and qualified investors only, as defined by local laws and regulations.
The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield are not a reliable indicator of current and future results. J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our privacy policies at https://am.jpmorgan.com/global/privacy. This communication is issued by the following entities: In the United States, by J.P. Morgan Investment Management Inc. or J.P. Morgan Alternative Asset Management, Inc., both regulated by the Securities and Exchange Commission; in Latin America, for intended recipients’ use only, by local J.P. Morgan entities, as the case may be; in Canada, for institutional clients’ use only, by JPMorgan Asset Management (Canada) Inc., which is a registered Portfolio Manager and Exempt Market Dealer in all Canadian provinces and territories except the Yukon and is also registered as an Investment Fund Manager in British Columbia, Ontario, Quebec and Newfoundland and Labrador. In the United Kingdom, by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other European jurisdictions, by JPMorgan Asset Management (Europe) S.à r.l. In Asia Pacific (“APAC”), by the following issuing entities and in the respective jurisdictions in which they are primarily regulated: JPMorgan Asset Management (Asia Pacific) Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited, each of which is regulated by the Securities and Futures Commission of Hong Kong; JPMorgan Asset Management (Singapore) Limited (Co. Reg. No. 197601586K), this advertisement or publication has not been reviewed by the Monetary Authority of Singapore; JPMorgan Asset Management (Taiwan) Limited; JPMorgan Asset Management (Japan) Limited, which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Australia, to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Commonwealth), by JPMorgan Asset Management (Australia) Limited (ABN 55143832080) (AFSL 376919). For U.S. only: If you are a person with a disability and need additional support in viewing the material, please call us at 1-800-343-1113 for assistance. Copyright 2021 JPMorgan Chase & Co. All rights reserved.
The information, materials or opinions contained on this website are for general information purposes only and are not intended to constitute legal or other professional advice and should not be relied on or treated as a substitute for specific advice of any kind.
We make no warranties, representations or undertakings about any of the content of this website; including without limitation any representations as to the quality, accuracy, completeness or fitness of any particular purpose of such content, or in relation to any content of articles provided by third parties and displayed on this website or any website referred to or accessed by hyperlinks through this website.
Although we make reasonable efforts to update the information on this site, we make no representations, warranties or guarantees whether express or implied that the content on our site is accurate complete or up to date.
Our emails are designed to be topical and engaging, however if you don’t like what we send, you can unsubscribe at any time. We promise never to pass your details on to a third party.