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'The biggest risk is uncertainty': AllianceBernstein's Valerie Grant on headwinds facing the market ahead of the election

Valerie Grant, Senior Vice President and Senior Portfolio Manager at AllianceBernstein, joined The Final Round to discuss the biggest risks facing the market and ESG and responsible investing in the current market environment.

Video Transcript

[DIGITAL EFFECT]

MYLES UDLAND: All right, welcome back to "The Final Round" here on Yahoo Finance. Myles Udland with you in New York. To talk a bit more about what's going on in the markets, also what's happening in the ESG space, we're joined now by Valerie Grant. She's a senior vice president and senior portfolio manager for Responsible Investing AllianceBernstein. Valerie, so great to have you on the show today. So let's just start broad markets right now, how you are thinking about the core environment. What kinds of conversations you are having with your clients right now. How they've changed and sort of where they're at in thinking about this recovery.

VALERIE GRANT: It's a very interesting time in the markets right now, because I think there's been a lot of focus perhaps on valuation, are things trading at too high a level? But I tend to focus a bit more on the level of volatility and uncertainty in the market. If you follow the VIX, which is an indication of market volatility and investor sentiment, certainly it's come down significantly from the peak in March. But it's still more than twice as high as it was at the beginning of the year.

And what that implies, is that there is still a lot of uncertainty and anticipated volatility in the market. And for good reason. We are very uncertain about the path to a orderly presidential election. There's a lot of uncertainty regarding the COVID-19 pandemic and how it will evolve. There's uncertainty regarding fiscal policy. And finally, but most importantly, there's a lot of uncertainty about the path to economic recovery. And so I think those are the things that are weighing on the minds of clients and weighing on the minds of the CEOs and CFOs of the companies in which we invest.

MYLES UDLAND: And I guess as you think about typically, you're going to have some investors and some managements that are saying, well, we're going through a restructuring, next three months is very important. Some groups might say, we'll look in five, 10 years down the line. Is everyone right now sort of forced into the same timeframe where everyone has to kind of just get through this quarter, figure out all these challenges you just outlined for us? And has that maybe change the environment a little bit?

VALERIE GRANT: No, I don't think that's true. I think that not everyone is focused on the short term. And quite frankly, not everyone is suffering and not everyone is restructuring. So what we've seen, is that some companies are actually doing quite well in the midst of the pandemic and hiring aggressively. So if you look at some of the bellwethers, Walmart, Amazon, Kroger, Dollar General, on down the line, these companies are actually looking for new employees, and they're actually confronted with quite tight labor markets.

And so I would say that it's really a mixed picture. Some of the large banks in contrast, are laying off employees. So we're starting to see a bit more unemployment among white collar workers and higher income workers. And that will certainly have a cascading effect. But it's not a universally bleak picture, not at all.

SEANA SMITH: Hey, Valerie, it's Seana. Just want to get back to what you were talking about with one of those uncertainties in the markets, and that of course, is the election. We're less than six weeks away at this point. What do you think is priced into the market? And also, how big of a risk to the market is what we heard from President Trump yesterday, when he basically refused to commit to having a peaceful transition if he were to lose in November?

VALERIE GRANT: Well, I think the biggest risk, quite frankly is continued uncertainty. The reality is, that markets can adapt and management teams can adapt to virtually any outcome. Because once you know the outcome, then you can plan for it. Then you know how to deploy capital, then you have a sense, perhaps for how the regulatory environment may evolve. But the biggest risk is uncertainty. And so if we have a protracted contested election, I think the markets will be quite volatile for a period of time until that is resolved. And hopefully, it will be resolved peacefully and in an orderly fashion.

DAN ROBERTS: Valerie, Dan Roberts here. Let's talk about ESG. I know that you focus on that as well. And amid the larger social and racial justice movement, and BLM right now, there's been a renewed focus on governance. That's very good. But because of the pandemic, it kind of seems like the environmentalism aspect has been somewhat lost in the shuffle.

That is, there's sort of more important things to focus on, and then not to mention that in a practical sense, I just feel like with everyone doing lockdown and all the concerns about safety and the virus, there has been, we talked on a recent segment about the lack of recycling. Is that something you're thinking about? How is the approach toward ESG changed in the last six or seven months because of both the pandemic and the racial justice movement in America?

VALERIE GRANT: Right. So I do think that your observation is correct to some degree. Meaning that in 2019 and in prior years, there was an intense focus on climate change and minimizing future damage to the environment. So that was absolutely top of mind for all investors who were focused on responsible investing. So again, a real anchor on the E in ESG. And I would say that since the COVID-19 pandemic, and since the calls for greater racial equality in the US and globally, there has definitely been more of a focus on the S in ESG.

And that tends to play out in a couple of ways. First, it plays out in terms of the focus on labor and labor relations, meaning, what is the composition of the workforce, are people actually being paid a sustainable wage, what types of benefits and opportunities for advancement do rank and file employees actually have. Because we know that one of the reasons that the virus was able to spread so quickly, is the fact that many people had to continue to work, even though it was not safe to do so.

The other area of focus tends to be on diversity and inclusion at the board level, at the senior leadership level, and also throughout the organization. So that's a continued focus as well. And then also, for my colleagues at AllianceBernstein who focus on municipal securities, there's a lot of focus on police departments and funding and racial justice and the flow of capital to various municipalities and from various municipal issuers as well. So that's a different asset class from the one that I invest in. But those are definitely conversations that we're having internally at the firm.

MYLES UDLAND: And then, Valerie, I guess thinking about maybe the future of ESG as a style, is the line becoming blurred between just regular old investing and being an ESG investor? What I mean is, isn't it, you heard us earlier talking about Square and some of the things that they're doing, isn't it the case now that it's table stakes for some of these major businesses to be really thinking about this? And in some ways, again, ESG was a style that got very popular in the last decade. But it seems like the industry is moving towards kind of the things that had been laid out in that investing factor and kind of not the other way around.

VALERIE GRANT: Well, I think that virtually all investors, whether you're talking about asset managers or asset owners, are increasingly focused on environmental, social and governance issues. And there's a fundamental reason for this. We know that these can be significant drivers of equity value over time. And so you have to pay attention to these environmental, social and governance issues, because you could have unintended risk in your portfolio that you don't recognize.

Or conversely, there could be opportunities to invest that you may not have uncovered had you not focused on environmental, social and governance performance. And so absolutely, I think managers across asset classes are considering environmental, social and governance issues in their investment processes to a much higher degree than they were before. That's true.

MYLES UDLAND: All right, Valerie Grant with AllianceBernstein, thank you so much for joining the program. Really great to get your thoughts. Hopefully, we can have you back soon.

VALERIE GRANT: Happy to join. Thank you.