Happy Employees, Happy Life: The Key To Better Stock Market Performance

Happy Employees, Happy Life: The Key To Better Stock Market Performance
Carl Hazeley

over 2 years ago2 mins

  • New analysis from Refinitiv found that companies with the happiest employees tend to have better stock price performances than those with the unhappiest employees.

  • Outperformance isn’t solely down to happy employees, but it does suggest strong ESG practices – ones that should help companies with happy employees outperform in the long term.

  • By buying companies that score highly with Refinitiv, and avoiding those that score poorly, you can build a portfolio that should outperform the market.

New analysis from Refinitiv found that companies with the happiest employees tend to have better stock price performances than those with the unhappiest employees.

Outperformance isn’t solely down to happy employees, but it does suggest strong ESG practices – ones that should help companies with happy employees outperform in the long term.

By buying companies that score highly with Refinitiv, and avoiding those that score poorly, you can build a portfolio that should outperform the market.

Mentioned in story

Would you believe it: new analysis has just found that companies with the happiest employees tend to have the best-performing share prices. That’s information you can use to help build a successful portfolio. Here’s how.

What’s the thesis?

Refinitiv and MarketPsych – a financial data provider and an analytics firm – used natural language processing to assess the ratio of positive to negative comments about a company’s working environment on digital and social media.

They then tracked those scores against the companies’ share price performances, and found that S&P 500 companies with very high scores – in the top 5% – significantly and consistently outperformed those with very low scores – in the bottom 5%.

The value of $1 invested over time
The value of $1 invested over time

This tallies with prior academic research that’s shown the stock prices of the best US companies to work for outperform over time.

Despite this research, it’s probably unfair and untrue to say that happy employees alone are responsible for share price outperformance. In reality, happy employees are more likely the result of other good practices at the company. It’s those that, together, drive earnings growth, attractive returns on capital, and share price outperformance.

Here’s the good part: those other good practices may be represented in widely-available environmental, social, and governance (ESG) scores. That means you can leverage this data to help inform your investment decisions. Governance scores, for instance, could reflect treating employees in such a way that they’re encouraged to outperform their targets. And historically, companies with high ESG scores outperform those with poor scores over the long term.

Better yet, this seems to be a global phenomenon: just look at China. Refinitiv ranked media comments regarding the workplace safety and training efforts of companies in the CSI 300 – the country’s main stock market index – and found that the shares of those with the best employee practices outperformed those with the worst.

The value of $1 invested over time. Note the chart tracks companies in the top and bottom 20%.
The value of $1 invested over time. Note the chart tracks companies in the top and bottom 20%.

So what’s the opportunity here?

You can put together a portfolio using this analysis that should outperform the market and be ESG-friendly. It’s probably wise to set it up as a “satellite portfolio” – one that’s adjacent to your main investments.

To put this into practice, you’d buy shares in companies that appear at the top of Refinitiv’s lists most regularly and avoid those at the bottom. If you want to take on extra risk, you could even short the bottom companies.

In the US, that’d mean buying into consulting firms Accenture and Robert Half International and avoiding companies like McDonald’s and UPS.

US list

And applying the same strategy to China would mean buying into Haier Smart Home and China Merchants Bank.

China list

Speaking of China, now could be a great time to buy into companies that should outperform: Chinese stocks are down 4% this quarter. It mightn’t be smooth sailing, though: you’d be dealing with an elevated risk of immediate and aggressive government crackdowns compared to owning US stocks.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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