The Wellington Blog — A diverse marketplace of ideas, where our investment professionals share and challenge each other’s views. They decide independently how to draw on those ideas to sharpen their investment decisions, unconstrained by any single “house view.”

On June 4, the European Central Bank (ECB) announced significant changes to its €750 billion Pandemic Emergency Purchase Programme (PEPP), including an expansion of €600 billion and an extension until at least the end of June 2021. In my view, these moves, combined with the European Commission’s proposal for an EU recovery fund, leave euro-area equities poised to outperform US and UK equities over the next 12 months.

In particular, I have become more optimistic about German, French, Italian and Spanish equities. In macroeconomic terms, Germany looks set to outperform in the near and medium term. France has had a difficult crisis, but recent structural reforms should help its recovery. In Spain and especially Italy, I remain worried about high levels of debt and poor macro policy. But these are longer-term concerns, and French, Italian and Spanish equities have underperformed enough to warrant the same level of optimism as Germany.

My more positive view on euro-area equities is based on…

Jens Larsen
Macro Strategist

In late May, Japanese Prime Minister Shinzō Abe’s cabinet approved a second 2020 supplementary budget of ¥31.9 trillion (US$298 billion) to further combat the bruising economic impact of the COVID-19 crisis. This latest fiscal package provides financing help to struggling companies, subsidies to help firms pay rent, funds for health care assistance and support for local economies.

The headline ”business size” of the package — including assumed private-sector activity, loans from public financial institutions and actual new spending by the government — amounts to ¥117 trillion (US$1.1 trillion), matching the size of Japan’s first package delivered in April. All told, the nation’s fiscal policy response to the crisis thus far totals ¥234 trillion, roughly equal to 40% of its GDP.

The approval of the second package follows a May 22 joint statement issued by Haruhiko Kuroda, governor of the Bank of Japan (BOJ), and Tarō Asō, minister of finance, which read:

“The Government and the Bank are committed to making every effort to facilitate corporate financing and maintain stability in financial markets through the…

Paul Cavey
Macro Strategist
Hong Kong

COVID-19-related disruptions have impacted operating performance in the higher education sector of the US municipal market. However, we remain constructive on the sector overall, supported by balance-sheet strength across select issuers. 

Sector themes we are watching

Campus reopenings and student decisions will vary.
Campus reopenings will differ by state and the size of the institution. For example, California State University already decided to close all 23 campuses this fall, while smaller institutions such as Notre Dame and Boston College announced plans to reopen campuses.

Meanwhile, freshmen and returning students may weigh different options, such as taking online classes the first semester or staying closer to home — a benefit for public universities. Transferring to lower-cost or even “reach” schools could also be possible due to enrollment dislocations. Management teams say they are on track to meet…

Paul Ko
Fixed Income Credit Analyst

Recent global liquidity injections, a low but improving global purchasing managers’ index (PMI), and a weaker US dollar are all contributing to a supportive backdrop for emerging market (EM) equities. To the extent that these trends persist in the period ahead, I believe EM stocks can continue posting attractive relative performance. Now may be a good time to look beyond China for EM equity opportunities.

Recovery paths matter

One encouraging sign is that more cyclical sectors and regions (e.g., travel and bank stocks; Latin America, ASEAN, and Russia) have rebounded along with broader EM equities over the past several weeks, as we have seen…

Jamie Rice
Equity Portfolio Manager

US-China relations were already bad and getting worse before the COVID-19 outbreak. The pandemic and its economic effects have only accelerated the deterioration of the relationship. In the US, a growing cohort is calling for a post-pandemic decoupling from China.

What should investors do? Prepare for disruption across the global economy as more and more sectors and industries become geopolitically sensitive, with technology topping that list. At some point, nations may no longer be distinguished by their state of economic development, but rather by their level of digitalization (or at least those will become synonymous).

Which brings us back to the US and China, the world’s two superpowers. Their global domination extends to today’s digital economy, as shown in…

Given recent developments in the bad-to-worse US-China relationship, I’d like to share my latest views on what I see as the most consequential long-term geopolitical issue the world has faced in decades.

Lay of the landscape

  • The US-China relationship is in long-term structural decline, exacerbated in recent months by the COVID-19 pandemic and its domestic political fallout. Both the Trump administration and President Xi’s government have tried to divert blame away from their respective management of the severe health and economic crisis.
  • Recent polling data reflects this downward spiral in bilateral relations and suggests the “bash China” approach adopted by many US politicians has gained favor with the populace. According to the Pew Research Center, 66% percent of all Americans (and 72% of GOP voters) had a negative view of China as of March 2020.
  • US-China rhetoric will likely only heat up going forward as the November 2020 US elections draw near, potentially causing…
Thomas Mucha
Geopolitical Strategist

The US equity market (as measured by the S&P 500 Index) has staged a remarkable rebound over the past few months, gaining 40% from its COVID-19 low on March 23. Notably, the shape of the rally has shifted during that time. In mid-May, market leadership rotated from growth to value stocks, raising a provocative question: How sustainable is value’s outperformance going forward?

The case for value now

Longer term, I suspect the global economy is not set up for strong growth, given the accumulation of massive government debt, the demographics of an aging population, and increased costs associated with deglobalization. Therefore, I still prefer growth stocks overall. In the near term, however, here are four points to consider in favor of value:

  1. History — Value has typically outperformed growth coming right out of recessions.
  2. Fundamentals — The economy is in the early stages of recovery from the COVID-19 shock.
  3. Valuations — Value-oriented sectors are currently trading at potentially attractive valuations.
  4. Technicals — Value is “under-owned,” due in part to its underperformance over the past decade.

Understandably, many investors are gun shy about jumping into value when its performance has been so disappointing for so long. Ironically, this may be precisely why…

Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist

As of 5 June 2020, the COVID-19 new case count globally has continued to drift higher, approaching a seven-day moving average of 120,000 new cases/day. The total number of confirmed cases globally has reached approximately 7 million and counting (Figure 1). For the time being, the epidemic has shifted its ferocity to Latin America, pushing the new case count in emerging markets up to a seven-day moving average of roughly 70,000/day. The trend in new developed-market cases has stayed steady at just under 30,000/day, while the US new case count has ticked up marginally to slightly over 20,000/day.

Figure 1

Tracking the growth of COVID-19

The US is not out of the woods yet by any stretch. In fact, I believe a second wave of the pandemic is likely to…

Bob Deresiewicz
Global Industry Analyst
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